Foreclosure Reality

There is an interesting article about a Cleveland based activist group called, East Side Organizing Project (“ESOP”). Yahoo reported that members of ESOP decided to literally take Foreclosure Prevention to the Streets. They organized 2 buses and drove to the house of a Countrywide executive. They marched throughout the neighborhood and placed thousands of “plastic sharks” (loan shark) all over the execs’ lawn. What where their demands? ESOP wanted Countrywide to sign a written pledge to negotiate with homeowners in foreclosure. When ESOP asked for a written pledge two years ago, Countrywide promptly blew them off. NOT NOW IN ‘08. This time Countrywide signed the pledge faster than…well you know faster than the Road Runner. Beep. Beep. ESOP declared victory. Yet another step forward in the march to helping people in foreclosure. Click here to read the entire article.

Now, in no way am I advocating going to the house of a banking executive to stop your foreclosure. I am simply pointing out that the dynamics are continuing to change. There is this TUG of WAR going on. On one side are millions of property owners who are in foreclosure. They will do anything to reduce or eliminate loan payments so they can keep their house. On the other hand are the lenders who can’t afford to lose money. The lenders will do anything to squeeze every last dollar from a home owner and from the property. In the middle are the non-profits, the pundits, the US congress, the President, the Feds, the investors holding collateral backed paper, the homeowners who never missed a payment, real estate professionals, counselors, and the multitude of others who will either gain or lose from this whole mess.

It appears to me that home owners are gaining more “muscle”. Years ago, if someone was in foreclosure they hid behind a rock while Big Bad Lender-Bear had their way. Now, property owners are biting back. They are also getting help from powerful supporters. It’s important to get a clear picture of this.

We are witnessing significant changes in attitude. The Tug of War is not just between home owner and lender. It involves communities witnessing the destruction of communities because of foreclosure. Row and rows of empty houses. Empty houses attracting negative elements including crime and drugs. Significant drops in property values. Middle income families on the street, desperate to survive. Lower tax revenues for towns and cities meaning fewer services for tax payers. The psychological toll on children and adults.

Community organization and housing advocates are now adding more muscle behind the home owners in the TUG OF WAR…and guess what IT’S ON.

If you are in foreclosure, be Thank Full for the extra hands.

It has never been a better time for a distressed home owner to take control of their life and discover the way out of foreclosure.

There is no question that you have heard about the widespread foreclosure problem in United States. Furthermore, there is constant talk of an economic slowdown. Many people are financially squeezed because of heavy loads of debt. Many of these “many people” have taken out “bad” mortgages and have made poor real estate investments decisions. They took out loans that, on paper, were unaffordable. They obtained 100% or 106% financed loans, where they put down $10,000 to buy a $700,000 house. There are loans that people refinanced once or twice a year, for several years and took out hundreds of thousands. Property owners obtained “negative-am” loans that caused the principle balance to increase each time they made a payment. There are loans where the payment can go up $200 or more EVERY MONTH. Oh yeah, let’s not forget my favorite: Stated Income Loan where you get to “state your income” and that’s all the lender needs. The conversation went something like this:

“Uh, Mr. Lender do you need a copy of my tax returns, pay stubs, or any other proof of income” said Mr. Property Buyer.

“Mr. Property Buyer, don’t worry about those documents. This is a STATED INCOME loan remember. All you got to do is tell me how much you make. We will believe you. So how much do you make”. says Mr. Lender with a wink.  

A little confused, Mr. Property Buyer asks “Well, um, how much do I need to make to get a loan with you Mr. Lender?”

“Well Mr. Property Buyer, you need to make $1,000,000”

“OK, I make $1,000,000” Mr. Property Buyer says with a look in his eye.

“Oh, you say you make $1,000,000 a year, Great, let me just write this down on your mortgage application. We’re done. I’ll get you a loan in two weeks.” Says Mr. Lender.

“Thanks” says Mr. Property Buyer

Yes. It’s all true and it doesn’t end there. Most properties in foreclosure are worth less than the mortgage owed to the lender. That’s right. Property values have dropped so much that people have ZERO equity in their homes. This means property owners are trapped. They can’t pay. They can’t refinance. They can’t sell. The boom days are over. The end of the “property cash machine” has arrived.

So what is the solution? I say The real solution is to lower everyone’s mortgage payment so it’s affordable. Everyone’s mortgage payments are too high. So…lower the payments.

Of course, lenders are not excited about this option. I don’t blame them. Lenders are losing more than past due mortgage payments, lenders are losing BILLIONS & BILLIONS because:

LENDERS used PEOPLE’s PROPERTIES & MORTGAGE PAYMENTS as COLLATERAL for TRILLIONS of DOLLARS in SECURITIZED INSTRUMENTS which were created and sold by THE BIGGEST INVESTMENT BANKS to SUPER WEALTHY INVESTORS. Yes, it’s a big mess. So remember, when Mr. Property Owner is in foreclosure then Mr. Wealthy Investor losses a BILLION DOLLARS. Mr. Wealthy Investor is really mad at Mr. Lender. Get the drift. But I diverge.

As stated, the solution to the foreclosure problem is to lower everyone’s mortgage payments. Or GIVE PEOPLE MORE INCOME which we will not happen any time soon. So believe me when I say, “we will soon see lenders agreeing to lower mortgage payments.”

Now what about all of this negative equity? Basically, many property owners are “upside down”. They own a house worth $500,000 with a $600,000 mortgage. Negative equity shouldn’t matter if the homeowner is only concerned about shelter and stability for his family. However, negative equity is a NIGHTMARE to all of those investors, players, and property owners who wanted to make money on the property as if it were a casino. Negative equity means that these folks are just going to walk away from the property and mail the keys to the lender. In other words, these property owners will be sending “jingle mail.”

Do the investors, players and property owners who were in it for the cash, deserve lower mortgage payments? Why not. At the end of the day lower payments are the most cost effective solution for all of the parties in the equation.

For homeowners who want to live in their house, lower payments allows them to keep a roof over the head of their family. They will continue to be productive and not fear being thrown out on the street or having to make an unplanned move. They will continue to take pride in their home because they own it. And even though they may have negative equity, the market may change 5 years from now.

For lenders, even with the lower payments, they will continue to get cash flow. Cash flow is better than NO CASH FLOW. Plus, lenders don’t have to foreclose and take the property, which, by the way, is the last thing a lender wants to do. Even though the SUPER WEALTHY INVESTORS are steaming mad, at least the INVESTORS will get something. A partial return on investment is better than NO RETURN ON INVESTMENT.

For the small investor, players and property owners who were in it for the money, even though they will not make as much as originally planned, lower payments will give them the incentive to keep and maintain the property. This is better than walking away from a property. When a property owner walks away from a property just because it is more cost effective to them, it becomes very costly to the community where the property is located. Once the property is abandoned it becomes unsafe and unclean. It brings down property values because it's an eyesore. It contributes to the reduction of the quality of life in a community. Not a good scenario.

So what do you think. Can I get a cheer for Lowering Mortgage Payments?

During the last week of Jan, 2008, national T.V. shows CBS’ 60 Minutes had a special on the “subprime loan crises”. Basically it went like this. Property owner decided to stop paying his mortgage loan. Why? Because the value of their property dropped so much and the payments were high, it made GOOD BUSINESS SENSE to stop paying the mortgage and taking a hit on their credit. In addition, they get to stay in the property to gather save money and regain their financial footing. Hey, since they are not paying the mortgage loan, might as well use the savings to get their life together.

Now let’s talk about the REAL POINT of the 60 Minutes special. Since the property owner initially agreed to borrow the money (remember he signed loan documents, HE SIGNED A CONTRACT), he made a promise to PAY the LENDER. “Hey, I am a multibillion dollar lender. Let me tell you something, you PROMISED to pay your mortgage loan. You signed the papers. Yeah I know I collected a whole bunch of fees from you when you took the loan. Yea it’s true, the first ten (10) years of your mortgage payments went to interest payments, not reduction of principle. C’mon man, it’s AMORTIZATION. Didn’t you get it? Yeah, you can’t make your payment. WELL WE DON’T CARE. You promised. You promised. You promised us you’d pay. I am going to tell the judge.”

So many people probably feel guilty when they don’t pay their mortgage loan. Even when it makes NO ECONOMIC SENSE, they feel obligated to pay.

What can we say? Well, when you are in DIRE STRAITS, your only option is to find the most successful way out. If you have the ability to pay your mortgage and it makes financial sense to do so, then you should honor your agreement.

When any business in the world can’t make its payments GUESS what the business does? It stops paying and get legal protection, more specifically filing BANKRUPTCY. Why? Because it makes business sense. Yeah so what, the business signed an agreement to make its payments. It promises too. Just like YOU.

Just imagine if any serious business person was in your shoes. Do you think they will feel guilty if they stop paying a debt they can’t afford? Do you think any serious investor would continue to put money into something that does not increase in value and “sucks up” all of your interest up front before reducing principle?

Do you think?

Remember the relationship a Lender has with you and you have with the Lender is a written contract. It is not a marriage ceremony. It is not a coming of age initiation. It is not a blood pact among members of your tribe. It’s an agreement on paper AND sometimes agreements get broken.

So remember “how we do”. We do what is right for ourselves and our family. During foreclosure, always make decisions based on BUSINESS sense, never EMOTIONAL. It’s all business and never personal.

Well - President Bush and the US Congress are ready to announce the so-called ECONOMIC STIMULUS PLAN. What's the Plan? Well, the government will give YOU back $600 to $1200 of YOUR OWN TAX PAID MONEY so you can SPEND THE MONEY and PAY TAXES ON YOUR TAX REFUND. In any event, it really doesn't work. Well this part of the Plan doesn't. You know, c'mon. The government can pass out hundreds of billions of dollars of YOUR OWN TAX PAID MONEY for OTHER PROJECTS, but only give the Taxpayer $600 to $1200.  

ANYWAY, let's talk about the most interesting part of the bill. The government intends to raise the limits on Federal Housing Administration loans and home mortgages that Fannie Mae  and Freddie Mac can purchase. Currently the cap for a single family home loan purchases is $363,000 for FHA and $417,000 for Fannie Mae and Freddie Mac's. Keep in mind, a lender will make MORE loans to BUYERS if the government will agree to purchase these loans.

During the lending boom years from 2000 to 2006, just before the current SUBPRIME MORTGAGE crises, lenders would provide a loan and SELL that LOAN to a group of INVESTORS. In the old days a lender made money by making a loan and collecting the interest. In other words the lender kept the loan “on its books”. Then when the New Days appeared, some “smart one” figured out that the lender did not have to keep a loan “on its books”. Instead the lender could sell the loan (now “off its books”) and get more money. If you went to Countrywide and got a loan, Countrywide would sell that loan the next day. Who purchased these loans from Countrywide? Well it was big INVESTORS, who spent BILLIONS for these loans. Why did INVESTORS’s pay BILLIONS? Because WALL STREET INVESTMENT BANKS and RATINGS AGENCIES (Moody’s, FITCH, S&P) told INVESTORS that these LOANS were worth tons of money. Well why were these LOANs worth lots of MONEY? Because INVESTORS were told that these mortgage loans were secured to appreciating properties and taken out by PEOPLE with great income and credit. HMMM…all of a sudden everyone is in foreclosure and property values are losing value. What does that due to the value of mortgage LOANS bought by the INVESTORS for BILLIONS. Well it turns their BILLIONS into THOUSANDS. Get the drift. Not only are property owner’s big losers but so are INVESTORS. And by the way, if you didn’t know, some of these big INVESTORS are PENSIONS FUNDS, CITY AND STATE MONEY, YOUR IRA MONEY, YOUR INVESTMENT MONEY, YOUR MONEY. Now all of the INVESTORS have gotten smart. They will not buy any more LOANS. Uh Oh!!!

When INVESTORS lose money than LENDERS lose money which means you do not get a loan or refinance. Yes, LENDERS sat in the middle of it all. They made a loan and collected fees and interest. Then they sold the loan to an INVESTOR and collected more fees. Well EVERYONE knows the real estate market has lost its steam. Lenders are in big trouble. Property owners are losing their properties. AND the GOVERNMENT is getting involved. Well why NOT. It’s ELECTION Season. Who wants to lose votes to people losing their property? Who wants to lose big donations from Lenders losing money?

So we have an ECONOMIC STIMULUS PLAN that replaces what has been lost by Property Owners and Lenders. Now Lenders will make more loans because the government will BUY the loans. Now Property Owners can sell their property because more people can get loans. Maybe a Property Owner can get a refinance. Yes, it’s true, under the ECONOMIC STIMULUS PLAN, YOUR OWN TAX PAID MONEY will be used to buy mortgage loans from Lenders that use YOUR OWN TAX PAID MONEY to lend you money. Yea it’s not perfect.

If it can help YOU then USE it. Now is not the time to fuss about the imperfections of the system. Now is the time to find a solution to your problem. The inevitable result of the ECONOMIC STIMULUS PLAN (if it becomes law) is that there will be more loans made by Lenders and more people buying or refinancing out of problems. Whether it can work out for you is another question. The ANSWER is you must make any OPPORTUNITY work for YOU.

Keep your eyes wide open. We will look closely at the ECONOMIC STIMULUS PLAN when more details emerge.

RECESSION, RECESSION, RECESSION, HOW DOES THIS EFFECT FORECLOSURES?

Well, it seems that the News is full of the recession talk. The seeds of recession have been planted in our minds. What do you think when you hear recession. By the way, a recession is a decline in a countries GDP, or negative growth, for 2 or more successive quarters in a year. SO...what does that mean for the property owner in foreclosure. NOT MUCH. The reason being that most people in foreclosure don't have any equity in their property or they would have sold it all ready. Also, others who do not have enough income are unable to pay the mortgage anyway.

A recession does not change the fundamentals of a foreclosure strategy from the perspective of a property owner. A property owner must continue to take action to stop the foreclosure or get rid of the property. However, a recession does effect a buyers and a lender's perspective.

For the prospective buyer, a recession can mean getting a property really cheap. There were many buyers priced out of the property buying mania of the last few years because of high property prices. Now that property prices are dropping it has created a BONANZA of buying opportunities for well positioned buyers.

A recession is BAD NEWS for Lenders. The problem Lenders have come from opposite sides. First, more property owners will not pay their mortgage during a recession. So less money for the Lenders. Second, most Lenders have their businesses tied to mortgage backed securities. In other words, lenders made most of their money selling mortgages to investors that were backed by PEOPLES HOUSES. Yes that's right. All the properties now in foreclosure were used as collateral for "stocks, bonds, and other investment vehicles." which were sold for hundreds of billions of dollars. Lenders went beyond the normal reasons for using a mortgage to secure a property in exchange for a loan. NO, NO, the BIG money was using a $100,000 mortgage to get $1,000,000. Now you wonder, how could they do that? I mean, all you got was $100,000. Well, let's just say thaht the Lenders, Wall Street, Big Ratings Agencies, Hedge Funds, Well Heeled Investors and other "players" created securities that leveraged the $100,000 mortgage into a $1,000,000 payout. So you gave your bank a $100,000 home mortgage to secure their loan to you and the bank gave your $100,000 home mortgage as security for a $1,000,000 loan from an investor. THUS if a $100,000 mortgage is not getting paid then the $1,000,000 will not be paid. Big Big losses for the bank. ANYWAY....a recession is really bad for lenders.

It is so ironic. As a property owner there has not been a better time to get out of a foreclosure. You have the opportunity to call your lender and ask for an affordable mortgage payment option. You may be able to refinance into a lower monthly payment loan. You can get a short sale. The long and short of it all... people in foreclosure have more options to keep their property or walk away with less consequences.

When your in foreclosure everyday seems like a recession. So don't get caught up in the recession hype. Exercise your options and take immediate action to solve your problems.  

On December 27, 2007, President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648,) into law Thursday.

This law places a 3 year moratorium against the IRS from counting as income any debt forgiven by a lender. Basically, if a homeowner negotiates a short sale or any other type of debt forgiveness with a lender, the homeowner will not be liable for any taxes on the forgiven debt.

For example, if a homeowner in foreclosure gets a bank to agree to take $400,000 for an original loan amount of $500,000, then the homeowner will not have to pay any taxes on the forgiven $100,000 ($500,000 minus the $400,000).

As it stands the Mortgage Forgiveness Debt Relief Act only applies to a primary residence. So second homes and investment properties are out. Still, even with a second home or an investment property you may not have to pay any tax on the forgiven debt, so long as you can prove to the IRS that you were insolvent at the time. Which may or may not be tough to do.

With the Mortgage Forgiveness Debt Relief Act of 2007, as long as it’s your primary residence, you don’t have to prove anything to the IRS.

If a short sale is the best option, then this is the time to negotiate one.

Thus is it begins the Homeowner Rescue Political Parade.

On August 31, 2007, President Bush announced the creation of FHASecure. Basically, homeowners who have adjustable mortgages can refinance into a secure and affordable FHA loan. This applies to homeowners who have not missed any payments on their mortgage BEFORE the mortgage adjusted to a higher rate BUT have missed payments AFTER the mortgage adjusted higher. Does this make sense? Who knows, the bottom line is the government is offering something for people in foreclosure.

Then in December 2007, President Bush announced with Treasury Secretary Paulson, the HOPE NOW alliance. This is an alliance “between counselors, servicers, investors, and other mortgage market participants....[to] maximize outreach efforts to homeowners in distress to help them stay in their homes and create a unified…plan to reach and help as many homeowners as possible.” Will this really help homeowners? Can’t tell you. The bottom line is another government solution for the foreclosure crises. To learn more check out www.hopenow.com.

Let’s not forget, Presidential hopeful Senator Hillary Clinton’s December 2007 demand for a 90 day moratorium on foreclosures and a delay on any mortgage reset.

This list goes on with politicians announcing foreclosure relief solutions. Hmmm. Where have they been for the past several years? Let’s face, the prime motivations for government intervention is Political Season 2008. If you want to ensure election success, you better have sympathy and solutions for homeowners in foreclosure. Let’s not forget the hundreds of billions being lost by local government, banks, investors, and Wall Street finance. Theses guys are campaign contributors. Can’t get them upset.

So as a distressed homeowner there has never been a better time to negotiate a solution to your foreclosure. 2008 is the year of the homeowner in foreclosure and the heavily indebted American consumer.

If you have a 2^nd home or own an investment property, there may be help from the government but don’t count on it. You never know.

There is no doubt about it. While many would say Brooklyn real estate is suberb (I agree), there will be certain neighborhoods experiencing high foreclosure rates. One such neighborhood...Bedford Stuyvesant. A neighboorhood with the biggest housing stock of well built Brownstones. The true wealth of Bed Stuy will be discovered. For many it will be a tough road to leave the roots because it's not affordable. It is becoming a diverse community.   

There is more to Bed Stuy. There are the many people living in over-leveraged homes. Basically, their mortgage is greater than the value of their home. There are many who cannot afford it because of non paying tenants or an increase in their mortgage payments. The fact. It was (and still is) easy to get a home and even easier to get MONEY from a home. 

So many owners are experiencing adjustable rate mortgages kicking in...All of s suddent their interest rate jumped up and so did their monthly payment. Most people probably did not know the exact amount of their higher mortgage payments. All they knew was at the time they could afford the monthly payment.  They didn't realize that there is not a single person on this planet who understands all of the words in a mortgage document including the adjustable rate rider.  Let’s face it folks most people’s wages are not going to increase as much as the interest rate on an adjustable.

Think about all of the people with 100% financing. How about 106% financing. Yes, the lender will give you 106% which means more money on top of what you pay for the house. So basically it does not cost you a dime to buy a property. So let’s see… if you bought a property 1 or 2 years ago with 106% financing and the value of property did not appreciate by at least 6%, you have a problem. Then if you got an adjustable rate mortgage that increased in 1 or 2 years, you have a BIG problem.

Let’s face it…Bed Stuy is a Prime Place for Sub Prime Loans. That’s right. The bulk of 100% and 106% loans in Bed Stuy are considered Sub Prime. You know…Sub Primal…Sub Primitive…Less than Good. Anyway, it was easy to sell these loans in a neighborhood many people on the outside did not pay attention too.

From this there will be a great many foreclosures. In effect, causing a large shift of middle class people out of Bed Stuy. This will create a price drop in the area. And the people on the side lines, with cash in hand will do VERY WELL.

For the savvy investor or long term homeowner, it is their paradise to make money or to create their neighborhood.