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Strategic Default: When is it Right for Homeowners?

Can clients get over the shame of defaulting on a mortgage?

Executives who improve a company’s bottom line by backing out of bad deals through strategic defaults on their commercial real estate loans often get bonuses. But when homeowners choose not to pay their mortgages because their homes have lost value, they are often vilified as deadbeats who are impeding the housing market recovery. Nevertheless, are there circumstances in which a financial advisor should recommend strategic default?

Executives who improve a company’s bottom line by backing out of bad deals through strategic defaults on their commercial real estate loans often get bonuses.

Some industry observers say yes. When the value of a property has fallen so much below what is owed that it would take years to recover the lost equity, it’s foolish to go deeper into debt to pay for it, according to Jon Maddux, CEO of YouWalkAway.com, a foreclosure company that charges a fee to help homeowners default. Rather, owners should use the laws to their advantage to forestall foreclosure while saving money to secure a better financial position in the future. James Surowiecki, a financial writer for The New Yorker, recently wrote that it’s time for owners who have no hope of recovering their losses to ignore the perceived stigma of default and do the “smart” thing rather than the “right” thing.

BIG STIGMA

But deciding to default is not simple, easy or painless. For homeowners, ignoring the stigma can be difficult, says Lee Munson, the founder and chief investment officer of Portfolio LLC, an asset management firm in Albuquerque, N.M. He says that while companies “don’t write nasty letters” when another corporation reneges on a debt, neighbors often do become incensed when a homeowner does. They’re angry because foreclosures lower neighborhood home values; meanwhile, defaulters who stay in their homes while the foreclosure process drags on often get months – and sometimes years – of a mortgage-free ride.

Default is also disastrous to the borrower’s credit rating, often knocking 100 points or more off a FICO score, and the hit can take years to remedy. Moreover, defaulters may not be able to get a traditional loan again for as long as seven years afterward (though that may not matter if a client is wealthy and already owns several other homes).

The downsides of default are serious enough that owners shouldn’t do it if their home has lost value but isn’t actually under water, or if the borrower still has the ability to pay, Munson says. Yet that’s not always the case, he adds, so planners should take a “holistic view” when a client reveals that he wants to default. “The first thing a planner should ask is, ‘What situation is prompting the client to do this?’” he says.

Typically, the answer has something to do with a problem, such as job loss or divorce, which has become financially and emotionally overwhelming. Rather than call the lender to work out a deal, the distraught and embarrassed homeowner simply stops paying. Munson says that’s an avoidable mistake, since most banks are willing to work with an owner to avoid the expense of foreclosure. And after several recent pushes from the federal government, lenders are now more willing than they have been for several years to restructure loans on more friendly terms, or to agree to a short sale, he says.

EXCEPTION, NOT RULE

For similar reasons, John LaPann, president and chief investment officer of Boston-based Federal Street Advisors, says he would be “unlikely” to recommend that a client walk away from a mortgage under most circumstances. “The exceptions are few and would involve truly extraordinary situations,” he says. Among them are catastrophes that sharply reduce the value of a home and fall outside an owner’s insurance policy, and structural problems in a condominium that association members are unable or unwilling to cure.

But sometimes default just can’t be avoided. In those cases, it may make more financial sense to stay in the home while the case works its way through the foreclosure process rather than simply giving the bank the keys, especially if a lot of money is owed. A recent analysis by Lender Processing Services for The Wall Street Journal found that nationally, banks allowed homeowners with loans topping $1 million to stay in their homes for an average of about six months longer than those with loans less than $250,000. The wait is even longer in states where judges must approve foreclosures before banks repossess properties, such as New York, Florida and Connecticut.

If foreclosure is inevitable, Munson says it’s smart to hire a good real estate lawyer who can comb through documents for improprieties. Clients who have already gone through foreclosure should also hire counsel, since so many lender abuses have allegedly occurred over the past few years that compensation is being offered to consumers who can prove they were harmed.

Miami-based attorney Douglass Lodmell says legal help is important so clients don’t inadvertently give up any rights during the foreclosure process or get socked with a deficiency judgment that requires them to repay the defaulted amount later on. Before they get to the point where they stop paying the mortgage, clients with substantial assets other than their distressed home should also look into establishing protective trusts so that creditors “can’t just go in and grab them,” he says.

PAST THE PEAK

Although headlines predicted a tsunami of strategic defaults once housing prices began to fall, so far it hasn’t come to pass. Defining a strategic defaulter as someone who doesn’t pay the mortgage but does pay other non-housing debt, credit bureau Experian and consulting firm Oliver Wyman figured that strategic defaults peaked at about one in five foreclosures at the end of 2008. But such numbers are squishy because it’s impossible to know from the data whether someone can’t or just won’t pay debts. After all, even when a financial situation seems desperate, there may be other ways to raise funds, such as borrowing money from a friend or relative, raiding the kids’ college funds or taking a second job.

Borrowers are more likely to make the effort to keep paying if the amounts owed are relatively small; if they’ve amassed a large amount of equity in the home; or they expect the housing market to perk up soon, according to Michael Seiler, founder and director of the Institute for Behavioral and Experimental Real Estate at Old Dominion University in Norfolk, Va. They’re also highly influenced by what their peers do.

Seiler says that while most people denounce defaulters because it violates their deep-seated beliefs that we all should pay our bills, in a few cases the group-think works the other way. One woman he interviewed for his research said she had been paying the mortgage faithfully on her Florida home, even though her community’s home values had tumbled over the last few years. Yet many of her neighbors – who had defaulted – kept constant pressure on her to reverse her choice. “They talked to her as if she was an idiot to keep paying,” he says.

Lodmell contends that letting go of an underwater home allows the market to establish true prices and converts a bad “speculation-prone” loan into a good long-term asset. “It’s morally just to strategically default,” he declares.

But such attitudes are troubling to Seiler, who says strategic defaults create broader problems for society. He says it’s up to “mavens” like financial planners to guide their clients so that the interests of society, as well as individuals, are protected. “They can help cure the disease,” he says.

SOURCE: Financial Planning

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Bidding Wars Catch Buyers Off-Guard

Home buyers are unexpectedly finding more competition this spring in landing their dream home. Bidding wars are increasingly being reported in markets across the country, from California to Florida, The Wall Street Journal reports.

“It’s a little surprising because we thought bidding wars were done with,” Andy Aley, a home shopper in Seattle, told The Wall Street Journal. Aley says he was outbid on a home earlier this year, even though he offered to pay $23,000 above the listing price and also waive inspections and other closing conditions.

Home buyers are frustrated and caught off-guard about the bidding wars re-emerging, real estate professionals report.

In recent months Hallmark Idaho Properties has had several properties sell for more than the listed price in the Sun Valley area.

“We’re writing a record number of offers, but we’re not seeing a record number of closings and that’s because it’s so competitive,” Glenn Kelman, chief executive of Redfin Corp., told The Wall Street Journal.

Why are things getting so competitive? Many housing markets are seeing a drastic decrease in the number of homes listed for-sale, leaving home buyers with fewer options and more bidding on the same house. Housing analysts say the shortage in supply is from sellers unwilling to take much less for their home than what they originally paid for it and pulling their homes off the market. Also, a surge in investors has made the market more competitive, as investors snatch up homes in bulk in all-cash deals.

“The bidding wars caused by tight inventory provide the latest evidence that housing demand is starting to pick up after a six-year-long slump,” The Wall Street Journal reports.

Indeed, the National Association of REALOTRS® reported late last week that pending home sales in March reached their highest level in nearly two years and are up 12.8 percent from a year ago.

SOURCE: Realtor Daily News

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Now on sale at Costco: Chicken, Toilet Paper & Mortgages

After a year of testing, Costco is rolling out a full-service mortgage lending program on its website.
Not only can Costco shoppers find bulk-packs of chicken wings, 24-rolls of toilet paper and large-screen TVs at a discount, they can now land themselves a mortgage.

After a year of testing, Costco  is rolling out a full-service mortgage lending program on its website in partnership with First Choice Bank, a New Jersey-based community bank, and 10 other lenders.

Costco’s partners have issued more than 10,000 mortgages to members under the program. But Lauren Kutschka, Costco’s manager of financial services, expects that number to swell as the warehouse retailer markets the service more aggressively to millions of members in its stores and in its weekly publication Connection.

“I went in to buy some bottled water, big bags of chips, cereal and some Nutri-Grain bars that I eat on my route,” said Ray Sheets, a FedEx courier from Canton, Ga. “I saw a home loan brochure on my way out and picked it up.”

Sheets went onto Costco’s site, put in his information and quickly accessed offers from four lenders. The rates, closing costs and terms were listed up front. And the closing costs — of about $2,500 — were about a third of what he would have had to pay through other lenders, he said.

Within a few weeks, Sheets refinanced his $170,000, 15-year fixed mortgage carrying a 4.25% rate into a 30-year loan with a rate of 4%. The move lowered his monthly payment by nearly $500 to $811 a month.

Mortgages are just one of several financial products available to Costco’s members. The warehouse club also offers health and auto insurance, as well as stock brokerage services, said Kutschka.

“We’ve always known that our members wanted more financial services,” she said. “Right now, we offer recreational vehicle and boat loans and we’re going to add auto loans to that. We’re also looking to offer student loans.”

Costco had started offering mortgages a couple of years ago but the service provider it was using didn’t share enough details about how it was dealing with Costco’s members, said Kutschka. So Costco started over from scratch, partnering with First Choice Bank to build a new mortgage lending portal.

Much like LendingTree, the site gathers quotes from various lenders. However, there is one key difference. Under the Costco program, the borrower’s identity is revealed only after they officially select the lender, said John Alexander, business development director at First Choice.

With many other lead-generation sites, the consumer fills out an application and any lender can make an offer and begin sending marketing communications to the applicant without restrictions.

Costco members will still need to do their homework and compare offers, though, said Keith Gumbinger of mortgage information company HSH.com. Even after a year of testing, Costco’s service is still new.

First Choice said it will police the other lenders to ensure they comply with Costco’s policies, which include giving accurate rates and terms and following up quickly on questions and requests. The technology enables Costco to monitor individual applications and make sure they are handled properly and expeditiously.

Costco takes no profit on the lending itself, but it does get paid to market the service.

In Sheets’ case, his lender, Bank of the Internet, sent a representative — an attorney — to his home to close on the loan, he said. She answered all his questions and explained all of the legal terms in the contract.

“There were no surprises,” he said.

Gumbinger said the service may prove better for people like Sheets, who are refinancing than those who are purchasing homes.

“The mortgage origination process is still a hands-on, face-to-face process,” he said. “It involves a comfort level and you don’t get that with an online service.”

That may be true in the initial stages of the borrowing process, but once a Costco borrower has chosen a lender the level of service steps up, as Ray Sheets’s lender did for him.

Given the size of Costco’s footprint and its ability to squeeze great deals out of vendors, Costco members should at least “include the site in their search plan,” said Gumbinger.

SOURCE: CNN Money

Idaho’s Sun Valley Resort opens nine holes on Trail Creek Golf Course

Sun Valley Resort has now opened the front nine holes of its Trail Creek golf course.

Trail Creek’s back nine holes and sister course White Clouds’ nine holes is scheduled to open this weekend. Elkhorn Golf Club, Sun Valley’s newly-acquired 18-hole course, is scheduled to open in early or mid-May.

The driving ranges and practice facilities at the courses opened this past weekend for the entire golf season. Hours of operation from April 14 to April 21 are 10 a.m. to 6 p.m.

Mild weather this spring season allowed for one of the earliest openings in recent memory.

“We’re thrilled Mother Nature is affording golfers a head start to the golf season,” says Rick Hickman, Director of Golf Operations at Sun Valley. “The courses’ conditions are pristine and golfers’ adrenalines are high as they shoot for their personal best scores.”

Part of the excitement is that of the iconic Sun Valley Resort grew to 45 holes last summer with the acquisition of Elkhorn that is within walking distance of Trail Creek and White Clouds.

This spring, traveling golfers in record numbers are booking Sun Valley’s unlimited golf package. It includes sun-up to sun-down rounds on all three courses, preferred tee times, free play on the resort’s renowned 18-hole Sawtooth Putting Course, complimentary transfers to and from the courses and nightly accommodations.

Other golf packages start at $119, including lodging. Season golf passes are available as are privileges for meetings and convention groups.

Sun Valley courses are lauded as “must plays” on Conde Nast Traveler’s esteemed “Top Golf Resorts” list with exceedingly high ratings from magazine readers for course design, speed of play, accommodations, service, food and dining, and other facilities.

SOURCE: World Golf

Gallup Poll: Home Ownership Rate Reaches Decade Low

Sixty-two percent of Americans own a home, which is the lowest percentage in more than a decade, according to a new Gallup poll. Home ownership rates soared to 73 percent during the housing boom years in 2006 and 2007 but since that time have continued to drop.

A flood of foreclosures has wreaked havoc in many communities in recent years, forcing some former home owners to become renters while also pulling overall home prices down leading to more underwater home owners. The mix of fallen home values and record low interest rates, however, has pushed housing affordability at record levels, making the average house more affordable to the average family.

So while the home ownership rate has fallen in recent years, Americans haven’t lost their thirst for home ownership.

Seventy-percent percent of Americans surveyed in the recent Gallup poll say that now is a “good time” to buy a house, which is up from 53 percent in 2008.

Trend: Good Time or Bad Time to Buy a House, 2003-2012 Trend

While more view home buying as attractive nowadays, some potential buyers are still being kept on the sidelines due to more stringent lending standards by banks in recent years.

“Potential home buyers can take advantage of today’s low mortgage interest rates only if they can meet significantly more stringent down payment and underwriting standards than was the case prior to the financial crisis,” writes Dennis Jacobe, Gallup’s chief economist, wrote about the survey results.

The U.S. Census, which also tracks the home ownership rate, has calculated that the home ownership rate reached its highest point in 2004 at 69.2 percent and dropped to 66.4 percent by the end of 2011.

More Americans Expect Local House Prices to Increase Than Decrease

Americans are much more positive about the direction of housing prices this year than they were last year. They are significantly more likely to expect the average price of houses in their area to increase over the next 12 months than to decrease, 33% vs. 23%. Last year, Americans were about evenly split, 28% to 30%.

Trend: Expectations for Average House Prices

Today’s housing price expectations differ sharply from those during the housing price boom. In 2005, 70% of Americans expected house prices in their area to increase, while 5% expected them to decrease. Expectations moderated as prices hit record levels in 2006-2007. Expectations became more negative during the recession and financial crisis. In 2010, price expectations were similar to those anticipated today.

SOURCE: Real Estate Today, Gallup

Pending Home Sales Rise 4.1% in March

More buyers signed contracts to buy existing homes in March than the previous month, according to a monthly survey just released by the National Association of Realtors.

The Pending Home Sales Index rose 4.1 percent from February and is now 12.8 percent higher than March of 2011.

Contract activity was strongest out West, with the index jumping nearly 9%

“The housing market has clearly turned the corner,” said NAR chief economist Lawrence Yun in a release. “Rising sales are bringing down inventory and creating much more balanced conditions around the country, which means home prices will be rising in more areas as the year progresses.

Contract activity was strongest out West, with the index jumping nearly nine percent.

Both the Northeast and Midwest saw declining activity.

The bulk of distressed properties are in the West, with California, Arizona and Nevada still leading the nation in foreclosure activity.

A recent spike in short sales, where the bank allows the home to be sold for less than the value of the mortgage, could be lifting the numbers in those states. Distressed sales accounted for 29 percent of all sales in March, according to the Realtors and a much higher share of sales out West.

Final sales of existing homes (closings) fell unexpectedly in March, leading many to blame the unusually warm winter for pulling demand forward. First quarter home sales saw their highest quarterly volume in five years. This bump up in new contracts, though, may be a sign that spring isn’t a complete wash. Contract cancellations, however, have been running unusually high, upwards of 30 percent, due to low appraisals and a still-tight credit market, but Realtors claim those buyers have been staying in the market, offering other contracts.

SOURCE: CNBC

VIDEO: Beware of Foreclosure Rescue Scams!

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Foreclosure rescue and mortgage modification scams are a growing problem that could cost you thousands of dollars – or even your home.

Scammers make promises that they can’t keep, such as guaranteeing to “save” your home or lower your mortgage, usually for a fee, often pretending that they have direct contact with your mortgage servicer – which they do not.

Tips to Avoid Scams:

  1. Beware of anyone who asks you to pay a fee in exchange for counseling services or the modification of a delinquent loan.
  2. Beware of people who pressure you to sign papers immediately or who try to convince you that they can “save” your home if you sign or transfer over the deed to your house.
  3. Do not sign over the deed to your property to any organization or individual unless you are working directly with your mortgage company to forgive your debt.
  4. Never make a mortgage payment to anyone other than your mortgage company without their approval.

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25th Month Distressed Sales Have Topped 40% of Market

Buyer traffic is strong, supply of homes for sale is low, and yet home prices continue to defy the usual formula, falling again in March. Prices usually rise as supply shrinks, but demand is still too low to make those historical “norms” compute, not to mention that the type of supply available is largely distressed.

Short sales have been ramping up of late, as banks attempt to comply with the so-called “robo-signing” mortgage settlement.

Foreclosures and short sales (when the home is sold for less than the value of the mortgage) accounted for 47.7 percent of sales, in a three month running average measured by Campbell/Inside Mortgage Finance. That’s the 25th month in a row that distressed sales have topped 40 percent of the market.

“With nearly half of the market being distressed, we’re a long way from a return to a normal market,” said Thomas Popik, research director at Campbell Surveys. “Agents responding to our survey say that homeowners with well-maintained properties in good locations are very reluctant to list at today’s prices. That’s why inventory is low—and also why forced REO and short sales are such a big proportion of the remaining market.”

Home prices for non-distressed properties fell 5.7 percent in March year-over-year, according to the survey. Prices for “damaged” REO (bank-owned properties) fell 5.7 percent and for move-in ready REO fell 2.5 percent during the same period. The real sticker shock is in short sales. Prices of those homes fell 14.3 percent from March of 2011.

Short sales have been ramping up of late, as banks attempt [Read more...]