Real Estate Roundup by Sharon Alva: Should I stay or should I go?
In 2005, you bought a property for $600K and took one of those fancy 100 percent loans that let you pay a minimum payment smaller than “interest only.” So now your debt is well over $800K and the property is worth $650K. And you can’t meet the payments on the property once it adjusts in the spring.
What do you do now?
Option One: RENEGOTIATE THE LOAN
Some have succeeded and some have failed. Those who have succeeded have one thing to say: “Be persistent.” It takes literally dozens of calls and constitutes a half-time job pestering your lender and getting through to the right person. Stick with it.
Loan remodification can take two forms: principal reduction or interest reduction. Some combination is the most effective for reducing monthly payments, making it possible to keep your home.
The government did institute a plan to encourage banks to help homeowners stay in their homes, but the banks have been slow to implement it. In February 2009, President Obama unveiled a plan to help beleaguered homeowners just like you modify their loan if they had been faithfully making their paying and were underwater. The idea was to get payments for housing back to 38 percent of income rate, which is considered to be a sustainable about of debt.
The Home Affordable Modification Program (HAMP), funded at $75 million, was supposed to help as many as four million borrowers obtain mortgage workouts. But it was stymied by lenders big to small. By the end of 2009, it had produced fewer than 70,000 permanent modifications, with another 800,000 or so homeowners were in a trial-modification phase. But this year, the banks may be coming around. This past Tuesday, Bank of America Corp., the largest U.S. bank by assets, became the first mortgage servicer to agree to lower or eliminate payments on second mortgages. This federal initiative, called the Second Lien Modification Program, pays incentives to second mortgage holders to work closely with first mortgage holders under the HAMP.
First mortgage holders have been reluctant to lower payments when there was a second lien involved because they did not want to take on losses while leaving payments on the second mortgages intact. The lack of an agreement with second lien holders has been a major impediment to getting successful modifications done. It’s estimated that as many as half of at-risk mortgages are burdened with second liens.
Acting now and being persistent are key to making this option work.
Option Two: SHORT SALE
The short sale process can be torturous. But if for 18 months you have not slept and fear is gnawing at you night and day, the process may be easier than living with the knowledge that you can’t make your payments.
In a short sale, you, the seller, sign the purchase agreement. But using a short sale addendum the contract does not go into effect until the lender has approved the sale at the value on it. In a short sale, the lender absorbs the difference between the sale price and your loan. Add in closing fees and commission payments, and that amount can grow to vast proportions. It is still better than a foreclosure for the bank in many cases, but the processes the banks have in place for making decisions on short sales can take months.
As with renegotiating a loan, the process is rendered even more unwieldy if there is a second lien holder. Short sales are far more likely to work out if there is just one loan.
Some lending professionals I have queried tell me the hit on credit scores in a short sale are smaller than in a foreclosure, while others say it’s the same. The situation seems to be case-specific. In both cases, the borrower’s credit score will take a major hit of 100 to 300 points.
Option Three: FORECLOSURE
Walk away and let the bank foreclose. That seemed like a coward’s way out a year ago, but the reality is that banks were helped by the government to make it possible for people to keep their homes, and they have lagged on the job. Having a home foreclosed puts some of the responsibility back on the lenders who approved shaky loans, and then misused the government assistance garnered over the last 24 months.
Foreclosure would have carried a social taint a decade ago, but as the housing market reconstitutes itself you will not be the only homeowner to have suffered foreclosure.
If you ask me, the best option by far is loan renegotiation. But it is not always possible. And there is also a caveat (there always is). If modifying your loan still leaves you unable to make payments and just draws out the inevitable, it may be time to look at one of the other options. There are professionals who offer to take on the process of negotiating a new loan for you, but I would tread carefully and make sure that you are not paying upfront for a process that may fail. Your own calls can be as effective if you are persistent and provide your lender with all the documents they require.
A short sale is best handled by a proactive real estate agent who will manage expectations and doggedly pursue lender approval. And in both the foreclosure and the short sale situation you should check with a tax professional to see what the ramifications of debt forgiveness will be.
Sharon Alva is a real estate agent with Alain Pinel, living in Alameda. You can reach her at email@example.com.