2012 - The year of the short sale?

To be clear, a real estate short sale is any sale where the net proceeds are not enough to pay off the mortgage completely. In other words, the bank is paid back “short.” That is where the name comes from. It has nothing to do with the amount of time involved. Short sale is most often used as an option to avoid foreclosure. Foreclosure is expensive for lenders and is often the worst option for borrowers.

Though short sales were almost unheard of 5 years ago, they have become more and more common in recent years. There are several advantages for both lenders and borrowers leading to an increase in short sales both nationally and locally. More and more Watsonville homeowners under financial duress are opting to attempt a short sale.  In 2011, 141 homeowners in zip code 95076 successfully completed a short sale compared with only 60 in 2008.

Forecasters are predicting that 2012 may see an even sharper increase in these transactions due to the following factors:

1. Foreclosure activity in 2012 is predicted to increase 25% over 2011 as banks work through their legal problems associated with the “robo-signing” scandal. An increasing number of homeowners, when faced with foreclosure, will choose a short sale instead.
2. New laws in 2011 granted greater protections to Californians who complete short sales. It is now illegal for any mortgage holder to pursue a short sale seller for any shortfall in paying off the mortgage.
3. Many banks, including Chase, CitiBank, and Bank of America are offering cash incentives for delinquent borrowers to do short sales.. These may range from $3,000 to $35,000
       
4. Perhaps the biggest motivator for homeowners under financial hardship to complete a short sale in 2012 is for tax reasons. The Mortgage Tax Relief Act, eliminating tax on mortgage debt forgiveness, expires Dec. 31, 2012.  Consider this example, if you owe $500,000 on your mortgage, but proceeds from foreclosure or short sale only net your lender $400,000 you may be liable for ordinary income tax on the $100,000 difference.  Especially in the Watsonville area, where home values have dropped 60% or more from the peak in 2005 - 2007, this may result in a huge tax consequence, just when you can least afford it.

If you are considering a short sale, it is extremely important to get advice from your lawyer and a qualified tax advisor.

 Resources:

 California Rural Legal Assistance Watsonville

 21 Carr Street
 Watsonville, CA 95076
 831-724-2253

 Government programs

www.FreddieMac.com/singlefamily/avoid_foreclosure.html

http://www.makinghomeaffordable.gov/pages/default.aspx

Fannie Mae Making Home Affordable Program Eligibility Address Check

Freddie Mac Making Home Affordable Program Eligibility Address Check

HAFA Program Information. Home Affordable Foreclosure Alternatives

HAFA Unemployment Program Information.

HAMP Program Information. Home Affordable Modification Program

Mortgage Forgiveness Debt Relief Act and Debt Cancellation

Homeowners Assistance Program (HAP Program) Information

Preforeclosure Sales Program through HUD

Department of Veterans Affairs Regional Loan Center Compromise Sale Program

Mike Young is a Realtor and advocate for the underwater homeowner based in Capitola, CA

mike@MikeYoungProperties,com

831-234-1545

Strategic Defaulters -Deadbeats or Survivors?

Is it wrong to stop paying your mortgage just because your home is worth less than the mortgage balance? My answer is not just, “No,” it is “Hell no!” It is time to stop blaming the victims of the real estate market meltdown and start moving toward solutions.

Having the 99% majority squabbling amongst themselves about how to respond to having your entire life savings ripped away suits the 1% perfectly.  That conveniently deflects attention from the warped financial system that got us into this economic quagmire in the first place.

Housing prices have declined on average over 50% in California since the peak in ’07.  Some communities have seen declines in excess of 60%.  Next year’s appreciation is predicted at 1.7%. It could be 20 years before prices return to 2007 levels.  At what point do you say, “Enough is enough?”

 
At what point is it moral to not pay? When your savings are depleted? When your retirement is gone? When the stress has ruined your marriage and your health? What are your true priorities, the bank or your family? The bank has no morality. It is a mindless, money eating machine.

Paying the mortgage on bloated mortgage debt makes no sense. The bubble has burst.  There is no way to put Humpty Dumpty back together again.  We are in a new reality where there is no shame in refusing financial servitude.  Don’t fall for their horse manure.  Don’t cling to the debt! Take advantage of your rights and protection under the law.  Some banks are actually paying you to do short sales.  Go ahead. Push the reset button. Declare a do-over. You will be able to rent right now for much less than your current payment and buy again in 2-3 years for way less than you owe now.

Are we at the bottom?

I would like to say that everything will get better soon, but have to advise caution. What concerns me most is the number of mortgages in default and the high rate of unemployment.

Right now more than 10% of all mortgage loans are delinquent, meaning more than 30 days late. In addition to that, 4.5% are already in some stage of foreclosure. This indicates a strong stream of foreclosures for at least 2 - 3 years. These 9 - 13 million foreclosed homes will sold on the open market over the next 3-5 years and will tend to depress prices. (National numbers)

Nationally we have lost 8,400,000 jobs since 2008. Even if the recession is technically over the recovery will take years. Todays Job Report showed 200,000 new jobs in April. That is great news, but if you do the math it will take 42 months with a very optimistic 200,000 new jobs a month every month, to get back to 2008 levels of employment.

But... this doesn't automatically mean prices will continue to go down. Prices have been pretty stable in this area for the last year or so in spite of record foreclosures and very high unemployment. It is an election year, we will see more government programs trying to deal with our problems. There is at least some recovery in jobs. My prediction is the market will hobble along about where it is now for a couple years.

Right now, the $500,000 and under market looks strong. Houses in this range sell quickly for the most part. You could even argue that prices have increased slightly at the very bottom from a year ago. Prices over a million are very soft. Supply is much greater than demand. Look for these prices to continue to slide for at least the next 6 months maybe year. My theory is that sellers in this price range may have been waiting for 1 to 2 years for conditions to improve before selling, but sooner or later they have to sell. We are also seeing more foreclosures and short sales creeping into the high dollar ranges.

I think San Lorenzo Valley, Watsonville and Salinas are good buys right now just because prices there dropped 60% and more. I think you will have a little appreciation bounce. I see both conservative investors paying cash and holding the property for rental cash flow and first time buyers that can afford to own for the first time in decades.

I would be careful buying in Santa Cruz with appreciation in mind, especially in the over $600K range. Remember also that property flaws get magnified in this intensely competitive market. If the view is not pleasant, if there is road noise, if the house doesn't have curb appeal, if there is work that needs to be done it makes it really hard to sell. Buyers expect big discounts.

Everybody has an opinion, this is just my two cents worth. Real Estate is still a great investment in the long term. Wherever there is a downturn there will eventually be an upturn. Just be mindful that cash flow is critical. That is your bridge to the next upturn.

The Underwater Homeowner's Dilemma:

Should I Stay or Should I go?

One out of three homes in California is worth less than the mortgage. We face tough decisions as we come to grips with the worst recession since the 1930s and the housing market at the center of it. Even though foreclosures destroy credit scores many borrowers are considering walking away from their homes. (A short sale may help, see below) It’s a difficult decision. It’s an upside down world. Confusion, anger and denial prevent many from moving forward.

The blame game doesn’t help the situation. Mortgage lenders, the government and borrowers all bear some responsibility. But that is old news. This article is about being proactive. We need to let go of the past, get our eyes off the rear view mirror and on the road ahead.

If you are struggling to make your mortgage payments, watching your reserves dwindle, maybe even borrowing from family or using credit cards to stay current, you need a plan right now.

There are lots of headlines about loan modifications, but unfortunately they only work for a small percentage of homeowners. Even if you are one of the few who qualify, it may not help. 42% of loan modifications offer less than a 10% payment reduction. Only 10% offer any principal reduction. The exception may be Wachovia. (Contact me for more information on Wachovia)

If your mortgage is more than 125% of the value of your home it is in your best interest to investigate a short sale now. (A short sale means selling for less than what is owed on the mortgage.) If you hang on to the house, you hang on to the debt. It will take you 5 to 10 years of paying that over value debt to get back to zero equity. It makes much more financial sense to push the reset button. Sell short now, rent a home and buy again in two years. You reduce your housing costs immediately. You get rid of the crushing debt. You may be able to buy again in two years. Prices will still be relatively low.

Over the past 2 ½ years I have guided many sellers through successful short sales. I won’t lie. It is a pain. It may take 6 months or more to complete the process, but if you can’t afford to stay it is definitely the way to go. There is a much softer hit to your credit score vs. the whammy of foreclosure, consult tax and legal advisors to verify. You avoid the publicity of your home being sold on the court house steps. You have more control of the timing, allowing a more graceful exit. In some cases, the bank will give you moving expenses. The bottom line is you move forward.

Here’s the plan:

1. Consult expert legal and tax advisors. (Contact me for references)

2. Call me to find out how much your home is worth today.

3. If you owe less than 125% of your homes market value, if you want to stay in the home and if you have income to support a mortgage payment that is 80% of what you pay now, pursue a loan modification with your lender.

4. If you owe more than 125% of your home’s value, have income loss, been denied a loan mod, loan mod isn’t helping enough, job loss, divorce, or medical bills it may be time to consider a short sale. Call me to discuss your personal situation.

5. Avoid foreclosure at all costs!

Caution! Short sales are not for everyone. Seek legal and tax advice before proceeding with any options discussed above.

Next weeks topic: "Anatomy of a Short Sale"

Mike Young is a Realtor, MBA and Broker Associate at Thunderbird Real Estate in Capitola, specializing in listing and selling distressed properties in Santa Cruz and Monterey Counties. For questions or more information go to www.mikeyoungproperties.com or contact Mike directly at (831) 234-1545 or mike@mikeyoungproperties.com