Investors Save Homeowners From Foreclosure
With all the recent talk of strategic default, I thought it necessary to bring up alternatives. The use of strategic default, while in possibly in the best interests of the homeowner, clearly is a detriment to the community. Property values fall further and creates more homeowners who might consider defaulting on their loans.
Strategic default occurs when a homeowner makes a ‘business' decision to stop making payments on their home when they are capable of continuing to pay. The decision to stop is becoming more common as home prices have fallen significantly and homeowners recognize that they could, in many cases, live in a similar home for up to half the monthly expense if they stop paying the bank and go into foreclosure. It makes sense for many people because of the length of time it takes many lenders to complete the foreclosure process. It becomes very attractive to many people to live in their house for a year or more without making payments. This is more likely in non-recourse states, where the lender cannot seek repayment of the homeowner's obligation to pay. In these states, homeowners who default are not required repay the deficiency after the home is sold by the lender. In recourse states, where lenders can seek a judgment against the owners, many people are unaware of the consequence. Even in these cases the homeowner can just default on the payment plan they may or may not agree to initially. The only real consequence in many cases is a terrible credit score and an inability to own a home again for 7 or more years.
I completely understand why people choose to default on their loans. I myself have considered it, but think that the costs are simply too high and I have too much invested in my house, both in time and money. But lenders made it easy for many people when they wrote loans that required no down payment. It becomes easy to justify years of mortgage payments as rent paid.
How do we stop strategic defaults? This is a difficult question because of the varied causes of default. Many people do have a hardship that prevents them from making their payments. Unemployment, medical bills and divorce top the list of reasons to let the house go. The best alternative to foreclosure is a short sale, but that takes time, effort and a little luck. Many believe that only about 25% of short sales attempted close, leaving the other 75% of homes headed to foreclosure. The success rate of short sales likely leads many people to avoid putting forth the effort.
The government has come out with programs to help homeowners, namely Home Affordable Modification Program (HAMP) and Home Affordable Foreclosure Alternatives Program (HAFA). Most critics believe that these programs will help only a fraction of the people that they need to. Both programs aim to ease the number of foreclosures, which is expected to exceed 3 million in 2010, by making it easier for homeowners to lower payments or negotiate a short sale with the lender. They have strict guidelines making many homeowners ineligible. How do we help the rest of the people ?
Many investors have stepped up to help homeowners. Don't be misled by the use of the word ‘help' as the investors are in the game to make a profit. In many cases, they do have the potential to make a lot of money for themselves, but in many cases they make next to nothing. The role of the investor appears to be increasing as I have noticed more and more approved short sales in my local MLS. The investor approaches the homeowner headed for foreclosure and makes a cash offer to buy the home. The homeowner, looking to avoid foreclosure, agrees to sell the home to the investor. The investor then negotiates the best deal they can for themselves with the homeowner's lender. Once they have negotiated the short sale with the lender, they can then market the home as an approved short sale. This has two major benefits. First, the selling process has been cut from an uncertain timeframe (often at least 120 days, sometimes up to a year) to 30 to 45 days. Secondly, the short sale is approved and the amount the bank is willing to take is known to the investor. They then list the home for sale at a higher amount than for what the bank will take. This compensates them for their time negotiating the sale and transaction costs. The seller benefits because the home is far more likely to sell (investors I work with estimate 75-90% avoid foreclosure). The bank benefits because they avoid paying more fees in foreclosure, holding costs, and they don't ever have to take possession of the home. Buyers benefit because they still get a great deal on a short sale home, but without the uncertainty of when it will close. Most buyers are unwilling to wait more than 90 days or so for a short sale to be completed, and many buyers I work are unwilling to take the chance by even looking at homes that are short sales.
I believe that the banks are responsible for much of the current housing market. Their willingness to close loans prior to 2007 for no money down, with no documentation, with interest-only and adjustable rate products created an environment where too many people were able to borrow more money than they were capable of repaying. The banking industry has shown that they are incapable of fixing the mess they created on their own by repeatedly failing to get short sales processed, by not responding to requests in a timely manner and being unwilling to half the risk they willing took just 4 or 5 years ago. Without major help from the government, the housing market will continue to slide. The expired tax credit, rising interest rates, and a still too high unemployment rate will stifle demand for homes that may never close due to the difficulties in closing short sale homes. Investors are making progress in negotiating help for struggling homeowners and will make up a larger portion of the short sale transactions as we move into 2011.
For information on how to stop foreclosure please visit my website or contact me about finding help in Plainfield, Shorewood, New Lenox, Joliet, Lockport, Mokena, Frankfort, Orland Park, Homer Glen, Tinley Park or surrounding areas.