SubscribeWhy Borrowers Default – Interesting Reading
June 5, 2009
I saw this on a blog on the Wall Street Journal, but a recently released paper by the Federal Reserve Bank of Atlanta looked at loan defaults on loans with a high mortgage payment to income ratio, and found that rising interest rates DID NOT significantly correlate to default rates.
The two main indicators of a borrower’s likelihood of defaulting were (drumroll please . . . ):
- Unemployment
- Declining future home prices
Uh, oh, that sounds familiar here in Silicon Valley where unemplyment is 10.9%, and home prices in even the most resilient neighborhoods are off 10%. The article goes further to quote some numbers from the study:
“The Fed paper estimates that a 1-percentage-point increase in the unemployment rate boosts the chance of a 90-day delinquency by 10%-20%, and a 10-percentage point fall in house prices raises the probability of a default by more than half. A 10-percentage-point jump in the debt-to-income ratio, meanwhile, increases the chance of a 90-day delinquency by 7%-11%.”
So, the 5% increase in unemployment over the last 18 months translates to a 50% increase in the likelihood of default. The 10-20% drop in local housing prices translates to a 14% – 22% increase in the likehood of default. Wow . . .
Thursday’s announcement that delinquencies and foreclosures have hit all time highs underscores the relevance of this study. The authors of the Fed paper recommend programs to assist borrowers who have lost their jobs get through their temporary economic challenge. The WSJ authors have an alternative solution; boosting short sales to get borrowers out of their homes.
Which do I think will come to pass? Well, I have been getting training on short sales the last couple of months, and I have already seen two short sale listings in Los Altos this month.
Read it at the source. Here is the WSJ blog article, and HERE is the Fed paper. Read ‘em and weep.
Thanks for reading . . .
How to Avoid Foreclosure, Part 1 of 3
March 19, 2008
More and more these days, it seems I’m hearing good people say, “What are my options if I’m facing foreclosure?”
In the last few years, so many people bought homes with either 100% financing or risky loans that have negative amortization and/or an interest-only payment for a couple of years which adjusts after the initial period. God forbid if your loan has all of those characteristics! Consequently, lots of those loans are now resetting to a higher interest rate and therefore a much larger payment. As home values decline in some areas, lots of people owe more than their home is worth. This can be best illustrated with a quick story.
There’s a man here in the Willow Glen area of San Jose who bought a beautiful, newer home at the end of 2005 for $940K with a 100% financing, 2 year interest-only option ARM loan. His payment, between the 1st and second mortgage, was about $6,000 per month. “Don’t worry,” Mr. Sub-Prime Lender told him at the time, “since property values are going up at more than 20% per year, in two years you can simply refinance your house with a more stable, long-term loan and you’ll have plenty of equity to get an 80% 1st mortgage.” Yeah right.
Fast forward to a month ago. Mr. Homeowner-Been-Screwed gives me a call and says that in December, his payment jumped from $6K per month to over $9,000 per month! Not only that, but the house across the street from him which is the same age, about the same square footage, is of similar design, features and construction has been sitting on the market for the past 6 months at a list price of $850K. Ouch.
He tells me that he lays tile for a living, and has been working a second job over the past couple of months to try and make his new $9K mortgage payment, but he just can’t seem to make ends meet anymore and is going to miss this month’s payment, so he’s afraid that his lender is going to foreclose on him. He says he feels angry, betrayed, helpless and stuck between a rock and a hard place and doesn’t know where to turn. I tell him that he actually does have options, 11 options in fact. So I offer to sit down with him and show him a new report I just wrote entitled “11 Options for Homeowners Facing Foreclosure.” He was delighted to know that there are things he can do to avoid foreclosure.
So in this first part of a three part series, I’ll share with you the first set of options in my new report, which break them into three categories:
- Things you can do to try and keep your home,
- Things you can do to sell your home,
- And finally, some “last resort” options.
Lets look at the first category and review a summary of the options. First of all, if you want to try and stay in your home, then you need to open a dialogue with your lender. Ask them if the will do a loan modification. This is where the terms of your loan are changed to make the mortgage payments more affordable. If you are behind in your payments, then you may be able to work out a payment plan, where the missed payments are either added to the loan balance or simply divided up and paid over time. This option will usually go in hand in hand with a forebearance agreement where the bank agrees to postpone taking further foreclosure action, particularly if you can prove that your setback is temporary.
At any time during the foreclosure process, you have every right to cure, or reinstate your loan by paying it off. This can be done with a conventional refinance, however many times, a conventional refinance is out of the question, because a new bank will require at least 10% equity in your home, and if you’ve missed payments, then your credit is likely suffering enough to prevent you from getting that new loan anyway. Another option might be an equity loan or what is know as a hard money loan. Hard money lenders don’t really care about your credit, they are just concerned that your property can secure the loan. These loans usually have incredibly high interest rates and all kinds of up-front fees, so they should only be used as a short-term solution, usually buying you enough time to stop the foreclosure and sell the home. Again, these types of lenders will need to see significant equity in your property.
If you would like more detail on each of these 6 options to stay in your home, as well as all the other options I will be discussing in part 2 & 3, you can download a full copy of my report, “11 Options for Homeowners Facing Foreclosure” right here on my Website.
In part 2 of this three part series we will examine the three options to stop the foreclosure by getting out of your property and the loan. Stay tuned!
