Why I Think Short Sales Will Be Around For A Long, Long Time...I get asked that question probably more than any other... "Andy, how long do you think this is going to last?" And unfortunately, you won't like the answer.
Florida Realtors sends out a daily email with news updates... I don't know if you read it or not, but I like to. It keeps me up on the happenings. In today's, they had a really good article about loan modifications and how the majority of the homeowners that get a loan mod end up re-defaulting. They also talked about how most people that get a modification actually find their payments go UP and their balance go UP! How does that help? In an economy where people believe that it is going to get worse (notice I said they BELIEVE it to be true, not that it is!), we have probably just begun to see the modification/short sale/foreclosure iceberg. Here's a few reasons why I believe this:
FIRST: We can't deny the unemployment situation, and that doesn't take into account the people that have had overtime cut, hours cut, benefits cut, and other things that will take their toll on the family budget. Most homeowners burn through their life savings to keep current on the house, and we will see them default sometime in the future when the savings run out!
SECOND: We are just now facing the "Pick-a-payment/option arm" payment adjustments. When these folks have their mortgage payment go up $1,000 or more a month... they're a default waiting to happen!
THIRD: Almost all of the loan modifications that are being done are lowering the homeowner's interest rate, but not the principal balance. Here's why that might come back to bite them & us.
- If they haven't paid a mortgage payment for a while, then they also haven't paid into their escrow account. Even if their lender reduces the interest rate and lowers the payment, as soon as the escrow account gets reviewed and they find a shortage, they will increase the payment to cover the shortage... DING DING DING! Payment goes up! Maybe even higher than it was!
- Many of these loan mods are a temporary interest rate reduction. So they are lowering your payment &/or interest for 2, 3, or 5 years. What happens at the end of the term? That's right, your payment goes up! The banks are trying to stick a wad of gum in the leaky dam and hoping it will fix itself. In 5 years when their payment jumps up, they'll be calling me for a short sale.
- What happens if they lower the payment, but then next year they get laid off of work? Or what happens if they need to move out of the area? They're still upside down on the house (meaning they owe more than it's worth). Exactly! They call me for a short sale.
See a trend?
I'd love to get feedback, ideas, and even rants and raves from you about this situation! Let's see the comments!
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I agree with all of your assertions. In order to have significant home appreciation, there needs to be demand. That means qualified buyers. With all of those who have short sold their homes, been foreclosed, or even just been late on their payments, the percentage of people who will still qualify for a home loan, will be seriously depleted.