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McCain’s debate night bombshell

Did you see the debate last night?

During one of the questions about the economy and the financial crisis, McCain dropped a bombshell!

When Tom Brokaw asked about what needs to be done to help the housing market, McCain suggested that Government should buy back all these defaulted loans and then give these people new loans at the current market value of the home. Hmmmm. Will this work? I think not. Why?

Well, let’s see how this would work…

1. Joe Homeowner has a house that he bought for $500,000 with a loan from Fly-By-Night Subprime Lending, Inc.
2. The house is now worth $400,000
3. Joe, like everyone else, has lost a lot of equity in his home
4. Unlike other Americans who are responsible and ARE paying their mortgage, Joe qualifies for the Government to buy back his subprime mortgage, because he’s NOT paying his mortgage.
5. The Feds buy his mortgage for $500,000 and immediately give him a new mortgage at $400,000, which he may or may not be able to afford
6. So now Joe is happy, but only until he can’t make his payments again…
7. Good ole’ taxpayers absorb a $100,000 loss
8. Multiply by millions of upside-down loans.

So let me ask one simple question - Does this make sense to you??  I suspect there will be a lot of responsible homeowners who are diligently paying their mortgage who will be awfully pissed off that they won’t be getting THEIR mortgage bought by Uncle Sam and reset to current market value.

Don’t get me wrong - I am not against McCain, and this isn’t about one presidential candidate or another.  I’m simply saying that this plan does not make sense.  However, I haven’t heard either candidate or anyone in congress or the treasury or the federal reserve or the private sector suggest something that might actually work to solve this mortgage mess.  Although today, Barack Obama rejected McCain’s plan, and his economic adviser said that McCain’s plan would cause the U.S. Government “to massively overpay for mortgages in a plan that would guarantee taxpayers lose money, and put them at risk of losing even more if home values don’t recover. The biggest beneficiaries of this plan will be the same financial institutions that got us into this mess, some of whom even committed fraud.”

Let’s hope that someone is smart enough to figure out how to use that $700,000,000,000 to get the housing market back on track.

In the meantime, I’m proceeding under the assumption that for the forseeable future, people will need to do a short sale and get their lender to take the loss.  So if you know of someone who is underwater and stuggling to keep up with their higher payments as their loan resets to a higher interest rate, tell them you know a foreclosure consultant who can help.  I’d be delighted to talk to them.

Tags: bailout plan, financial crisis, mortgage bailout, short sales, subprime

Mortgage Mania 17 - Foreclosures Inside The Bubble

Long-time Mortgage Mania readers, (aka Mortgage Maniacs) know that I’m an avid reader of the New York Times, so it should come as no surprise that I would have some comments on this article in the Friday June 6 edition regarding the continuing foreclosure crisis affecting consumers across the country.

Authors Bajaj and Grynbaum review some recent statistics on foreclosures, and then go on to predict another wave of foreclosures as the economy continues to slow and more consumers fall victim to layoffs and job cuts.

It’s easy to ignore these rumblings here in wealthy Silicon Valley where the local economy is still vibrant, even with nearly $5 a gallon gas, as it is still a minor impact on a budget with a $5,000 a month mortgage. It’s easy for us living in The Bubble of Unstoppable Real Estate (which I define as: Palo Alto, Menlo Park, and Los Altos, your mileage may vary) to say “it can’t happen here”.

Not so fast there pardner. A Short Sale in Atherton you say? It’s almost enough to make you drop your Grey Poupon.

This little number at 199 Selby Lane in Atherton recently listed by Lanny Dannenberg of Keller Williams is a short sale at $1,795,000. It has been on the market with a couple of different brokers for over two years, starting at $2,495,000 in March of 2006.

The good news is that the local market continues to be pretty strong, especially at the upper levels, above $3 million. Don’t take my word for it, check out this market data for the latest facts and figures on Palo Alto and surrounding communities.

Thanks for reading . . .

Tags: 4---mortgage-mania, Atherton, economy, foreclosure, new york times, short sales

What is a short sale?

A “Short Sale” is a sale of real property in which the outstanding obligations (loan balances) are greater than the amount that the property can be sold for.  This is typically the case when home prices are falling, and the seller has financial distress from either a reduction in income or an increase in monthly loan payments such a re-casting of the existing rate. Successfully completing a short sale may have a far less negative impact on the seller’s credit and tax circumstances than a foreclosure would.  A foreclosure will severely damage the borrower’s credit score for the next 7-10 years, and rates on any future loans they apply for during that time will have interest payments based on about 3 times what prevailing interest rates are.

A short sale is typically done during the foreclosure process, after a Notice of Default” has been filed. A short sale will stop the Trustee Sale which concludes the foreclosure process.

At this point, you may be thinking to yourself, “Why in the world would a bank agree to a short sale?” The answer is fairly simple:

Banks are in the business of lending money and not owning real estate. If a home is in foreclosure because the borrower is in default, that’s called a non-performing loan. Federal Reserve guidelines state that the bank must put aside two to eight times the amount of the non-performing loan to cover the bad debt. If this money is sitting in reserve, it obviously can’t be loaned out to new customers to make the bank more money. As a matter of fact, there are strict federal guidelines as to how many bad loans a bank can even have on their books at any given time. If a certain percentage of their outstanding loans are considered bad debt, they can be fined, sanctioned and even federally regulated.  So you see, they are quite eager to get rid of a property before they have to take it all the way to a Trustee Sale and possibly take it back as an REO (which by the way stands for Real Estate Owned.)  Not to mention the fact that the foreclosure process is long and expensive for the lender involved.

A short sale is accomplished by sending the lender a “Short Sale Package” which includes many documents supporting the fact that the borrower can no longer pay their mortgage and must sell the property at a loss to the lender, and the only other alternative is foreclosure.  Things included in the short sale package include: financial statements, pay stubs, medical bills, divorce decree, etc.  Also included will be a detailed letter from the homeowner, called the “Hardship Letter,” explaining why they can’t make their mortgage payments anymore.  The most important part of the package will be… <drum roll please> an offer!  True, the lender will most likely not even look at a short sale package if it does not have an actual written offer from an interested buyer.

A short sale is an often complicated process, and can be lengthy, sometimes taking upwards of 3-4 months to get the whole thing done, especially if the real estate agent doesn’t know what they’re doing. Therefore, much of the success or failure in accomplishing a short sale depends on the real estate agent involved.  I specialize in foreclosures and short sales and have many unique methods for getting short sales approved quickly.  I also work with a large number of homebuyers and investors who are ready to make offers on properties immediately.

I know that being in the middle of the foreclosure process can be very stressful and frightening, and that understanding the process and what your options are can shed some light on the situation and help you feel better about it.  My goal is to truly help people get out of this terrible predicament and move on with their lives.

If you have any questions about your particular situation, or about foreclosures and short sales in general, please don’t hesitate to contact me.

Tags: default, foreclosures, how do I avoid foreclosure, Lenders, short pay, short sales, under water sale

Tax break for mortgage debt forgiveness

President Bush signed into law today a new measure giving tax breaks to homeowners who have mortgage debt forgiven. Under preexisting law, the debt forgiven by a lender, such as for short sales and refinances, was generally taxable to the borrower as debt discharge income. With the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence.

This tax break applies to debts discharged from January 1, 2007 to December 31, 2009. Qualified principal residence indebtedness is debt incurred in acquiring, constructing, or substantially improving the residence (up to $2 million for refinances).

For purposes of calculating capital gains, any debts discharged excluded from income under the new law must be subtracted from the basis of the taxpayer’s principal residence (but not below zero). However, taxpayers may generally exclude from capital gains income up to $250,000 (or $500,000 for married couples filing jointly) for properties owned and used as their principal residence for at least two of the last five years.

This is great news for homeowners who have gone through either a short sale or deed-in-lieu of foreclosure. Prior to this act, it was a double-whammy — not only did the homeowner not have enough equity to sell their home and took a big hit on their credit score, but they were taxed on the differential between what they owed on the house and what it sold for (because it was treated as income).  Now they can at least know that Uncle Sam will not come after them to pay taxes on that differential.

For a copy of the Mortgage Forgiveness Debt Relief Act of 2007, go to http://www.govtrack.us/congress/bill.xpd?bill=h110-3648.

Also, keep an eye out for my upcoming article that will explain “What is a short sale?”, in the coming days.

Tags: capital gains, forgiven mortgage debt, income taxes, Mortgage Forgiveness Debt Relief Act of 2007, refinancing, short sales

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