If I had a penny for every American’s sleepless night since this housing fiasco began, I could retire a wealthy woman.
We’re all in survival mode. My clients, colleagues, friends and family members are coping as best as they can with the unbearable stress and agonizing fear about their homes, jobs, and lives. It has gone on for so long now, that this has become a way of life it seems. The economy does not discriminate. An oral surgeon friend of mine is struggling to keep his doors open, the contractor we hired to remodel our house is out of business, and many an attorney that I know are unable to collect payments from their clients. We compare this year’s business to last year’s in terms of how “less” or “more” was our loss is, rather than how “less” or “more” our profit margins were. Many folks are just hanging on, taking it one day at a time.
These are the days that my mother’s words of wisdom come in very handy: “This too, shall pass,” is the mantra she has chanted throughout my life. My father always says life’s challenges are what build character; character is what distinguishes the mediocre folks from the legends. The survivor looks for the silver linings. Appreciation for the things/people/jobs that we do have is felt, rather than taken for granted. Weaning ourselves off of the credit drug is a necessity, and will give us security in the long‐run. Allowing possessions to be our identity is becoming an outdated pastime. Efficiency and cost‐effectiveness are the latest trend.
For the distressed homeowner, all four of their options come with potential consequence: foreclosures can have deficiency, tax and serious credit consequences; short sales have potential deficiency, tax and credit consequences; ditto for deeds‐in‐lieu, and loan modifications are temporary. For the homeowner who is not necessarily in distress, but underwater in their mortgage, they are trapped in their homes and cannot sell without it being a short sale.
In the Inland Empire, it is not uncommon to see a homeowner more than 50% upside‐down. Say someone has a mortgage for $600,000, but their home is worth only $300,000. Until their property appreciates to about $650,000 (enough to cover fees,) they will be forced to sell short. With experts predicting a slow rebound, that could be a decade….or more.
In short sales, we are seeing more and more lenders refuse to let the borrower off the hook for deficient balances. Typical short sale approvals nowadays have some sort of language in them clearly stipulating that the lender reserves the right to pursue the borrower for the remaining balance. Second mortgages are digging their heels in more than ever, requiring more money at the close of escrow, promissory notes for a portion of the balance, or payment arrangements for the entire balance after the close of escrow. A skillful negotiator is what is needed to mitigate the aftermath.
This means that after a short sale, many homeowners (former at that point) are left to hope they do not get pursued by lenders that could be vamping up their collection departments as we speak.
Too often, homeowners believe that a foreclosure will come without consequence. We are seeing second mortgages becoming even more aggressive towards borrowers who chose foreclosure, rather than short sell. The tax consequences can be even harsher, due to the greater loss incurred by the bank. The credit consequences are by far the worst in a foreclosure, preventing a foreclosure borrower from owning another home for 7 years according to today’s underwriting rules.
Loan modifications are a heaven‐sent solution, one would think. However, for an investment property owner or for an unemployeed borrower, a loan mod is almost never an option Further, the industry is so riddled with scandal that it is easy to become a victim of unscrupulous “professionals” who deliver unrealistic promises to those vulnerable enough to believe what they hear. The re‐default rate is over 50%, proving to the government and lenders that they do not work the majority of the time. And here’s the kicker: loan modifications are simply a temporary fix. The modified payments are typically for a 5 or 10 year period. Some have stair‐step payment increases after each year for 5 years. Does this not sound eerily familiar to what got us into this mess? Will we find ourselves right back where we are when the loan mod “adjusts?”
My client said to me a few months ago: “If I do a short sale, I still have to worry about a deficiency. If I do a foreclosure, I will worry about the second mortgage coming after me. There are tax consequences in both cases. Even if neither one ever does come after me, I will be plagued by my credit and not be able to buy again for 5‐7 years. This means I still won’t get a night’s rest – even after I get rid of the house. When will this end?” We don’t know.
The hope is that the beginning of the end is here. The truth is that the problem has to be diagnosed, in order to prescribe a treatment and eventually a cure. For now, we are in triage and we have no concrete diagnoses; just tourniquets. Thank goodness for triage and for the tourniquets.
Laurel Starks is a Divorce Real Estate Specialist with Keller Williams Realty, an author, lecturer, educator, and host of “Real Estate Matters with Laurel Starks” radio talk show on KTIE 590‐AM. She is widely regarded as an expert in real estate and short sales. Ms. Starks is not an attorney, and any of the information contained herein is not to be construed as legal advice.
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