When It's Ok to Walk Away From Your Home

Millions of Americans are now deeply underwater on their mortgage. If you're among them, you need to stop living in a dream world and give serious thought to walking away from the debt.

No, you shouldn't feel bad about it, and you shouldn't feel guilty. The lenders would do the same to you—in a heartbeat. You need to put yourself and your family's finances first.

How widespread is this? More than 11 million families are in "negative equity"—that is, they owe more on their home than it is worth—according to a report out this week by FirstAmerican Core Logic, a real-estate data firm. That's a quarter of all families with mortgages. And for more than five million of those borrowers, the crisis is extreme: They are more than 25% underwater—the equivalent of having a $100,000 loan on a property now worth just $75,000 or less. That's true for a fifth of mortgage holders in California, nearly a third in Florida and an incredible 50% in Nevada.

Are you in this situation? Are you still battling to pay the bills each month, even when it may make little financial sense to do so?

It's time for some tough talk.

Stop trying to chase your lost equity. That money is gone. Don't think like the gambler who blows more and more cash trying to win back his losses. That's how a lot of people turn a small loss into a big one.

And do the math. Even if you hope the real estate market is near the bottom—it's possible, but by no means certain—it may still take years to see any meaningful recovery. If you are 25% underwater, your home will have to rise by 33% just to get you back to even.

Is that likely? And over what time period? Even if home prices rose by 5% a year from here, that would still take six years. And during that time you could instead be building fresh savings elsewhere.

Bloomberg News

A real-estate agent moves a torn "Lender Foreclosure" sign outside a foreclosed home in Reno, Nev., last Monday.

If you are reluctant to give up on "your" home, realize that it isn't "yours." If you are in negative equity, it's the bank's home. You're just renting it. And right now you may be paying way above market rates. You need to be ruthless about your cash flow.

Are you worried about the legal consequences of walking away? Certainly, you should check with a lawyer before doing anything, but the consequences will probably be more limited than you think.

In "non-recourse" states, the mortgage lender may have no right to come after you for any shortfall. They may have no option but to take the home, sell it and eat the loss. According to a survey last year by the Federal Reserve Bank of Richmond, such states include negative-equity hot spots California and Arizona. Even in "recourse" states, lenders may have limited ability to come after you. Often they'd have to jump a lot of legal hurdles, and it's just not worth it for them. They're swamped with cases anyway.

"In my experience, right now they're not really going after anyone," says Richard Nemeth, a bankruptcy attorney in Cleveland. "They just don't have the resources."

If you've taken smart steps to protect your money, you may be safer still. For example, money held in a 401(k), Individual Retirement Account or pension plan is sheltered from creditors.

Sure, a strategic foreclosure may hurt your credit score. But if you're in financial difficulties, it's probably already suffered. And your credit score is not the only thing in life that matters.

Still, when it comes to the idea of walking away from debts, many people are held back by a sense of morality. They feel it's wrong to abandon their obligations. They don't want to be a deadbeat.

Your instincts, while honorable, are leading you astray.

The economy is fundamentally amoral.

Sometimes I think middle-class Americans are the only people who haven't worked this out yet. They're operating with a gallant but completely out-of-date plan of attack—like an old-fashioned cavalry with plumed hats and shining swords charging against machine guns.

Do you think your lenders would be shy about squeezing you for an extra nickel if they thought they could get away with it?

They knew what they were doing when they wrote your loan. Many were guilty of malpractice, but they pocketed good money and they've gotten away with it. And if they thought your loan was "risk free," how come they were charging you so much more than the interest on Treasury bonds?

If you're only a small amount underwater on your mortgage, it's probably the case that you're going to be better off staying put. But if you are deeply underwater, it's a different matter.

Whether we like it or not, walking away from debts is as American as apple pie. Companies file for bankruptcy all the time, and their lenders eat the losses. Executives and investors pocketed millions from the likes of Washington Mutual, Lehman Brothers and Bear Stearns when the going was good. They didn't have to give back one cent of that money when the companies went into bankruptcy.

Limited liability, after all, is one of the main reasons every business from your local dry-cleaner to a major multinational gets incorporated in the first place. They're not shy about protecting themselves if things go wrong. You shouldn't be either.

For Landlords, the Numbers are Starting to Look Better

By MP McQueen

Home prices are falling, rents are tumbling, and apartment vacancies are rising. So why are thousands of small investors becoming landlords?

Because real-estate prices have fallen much faster than rents, the math of buying a rental has actually improved substantially in most parts of the country. Money invested in an apartment complex today typically generates annual returns of 7% to 8% right off the bat, up from less than 6% at the peak of the housing bubble in 2006.

If your property appreciates in value or rents rise, you could end up with double-digit annualized returns when you sell it. But higher returns usually come with higher risks. If you overpay for a rental property or you buy in the wrong market at the wrong time, you can lose a lot of money.

In general, landlords should pick communities where real-estate prices and rents appear to have nearly bottomed out, and jobs are stabilizing. Some of the best deals are in places like Fort Worth, Texas, or Columbus, Ohio, where prices never went wild. Markets like Las Vegas and Phoenix, both plagued by overbuilding, and Detroit, hurt by auto-industry woes, still look dicey.

But other markets like San Francisco or Chicago can still be attractive for landlords who find the right neighborhoods. Fred Bertucci, 50 years old, has been investing in small apartment properties in the Chicago suburbs since 1990. In August, he and his business partner, Kevin Moriarty, 54, bought a six-unit apartment house out of foreclosure for $280,000. It brings in about $25,000 per year in net operating income, he says, or about a 9% yield on the dollars invested. That's up from roughly a 5% yield several years ago when prices were higher, he says.

Being a landlord now isn't easy. You need good credit and plenty of cash—as much as 50% of the purchase price—because banks are still skittish about lending. You need extra cash for handling repairs and vacancies, and you must have the patience to deal with difficult renters.

If you buy an investment property, you should expect to hold it for three to five years or more. Much of the big money from quickly flipping properties already has been made, and conditions now favor long-term owners who want an investment that will throw off income and slowly gain value over time.

"It's a great time for someone who is focused on increasing his net worth, rather than doubling his money in a short period of time," says John Burns, a real estate consultant in Irvine, Calif.

Geoffrey Koblick, 55, who has been investing in residential and commercial real estate for many years, recently scooped up two apartment buildings in Northern California. He didn't buy any properties from 2003 through 2007, when "prices were too high based on the income the properties were generating," he says.

Mr. Koblick says he and his partners paid $3.3 million in May 2009 for a 23-unit building in Berkeley that generates $199,500 in net operating income, for a 6% return. They are upgrading the property, and Mr. Koblick expects its value to increase dramatically over the next seven to 10 years, when he hopes to sell it. Since they bought the building with a 33% down payment, he projects the partners will end up with an annualized return of 15%.

Of course, things often don't go as planned in real estate. J.P. Botha, 33, bought a new one-bedroom condo in Manhattan for $775,000 in 2007. Property values were rising, and he figured he'd sell it for a profit. Instead, its value on completion fell more than 25%. So he rented it out. His first tenant bailed after five months when she lost her job. He had to make a price concession to find and keep a second tenant.

"I'm hemorrhaging over a grand a month," said Mr. Botha, who took out a 30-year mortgage to finance his investment. Still, he says he is taking the long view on his investment: "Once I pay off the loan I will have an income-generating property for the rest of my life."

Clearing up confusion regarding tax credits

Tax credit resources

To read more about the tax credit and find other materials, visit floridarealtors.org here.

TAMPA, Fla. – Jan. 26, 2010 – Federal tax credits for homebuyers have certainly boosted the Tampa Bay area real estate market.

The incentives have prompted nervous buyers to get off the fence, and that has helped the area shed thousands of homes from the region’s inventory of unsold properties.

But as these buyers prepare to cash in on their purchases by filing their tax returns, many are finding they may not qualify after all or don’t know how to file.

“There’s a lot of confusion,” said Greg Armstrong, a Coldwell Banker broker in Pasco County. “It’s so complex that if you’re not living it every day, like a CPA, you’re not in a position to direct someone.”

Even if the case seems straightforward, Armstrong encourages clients to seek guidance from an accountant.

There have been so many changes to the credit that IRS spokesman Michael Dobzinski had to consult his notes often to answer questions. Here are some helpful things the IRS wants you to know about the credits.

• The credits are available only to buyers purchasing primary residences. The IRS defines this has the residence where you spend most of your time.

• There are two credits available. One is for first-time buyers, or those who have not owned a home in the past three years. The maximum for this credit is $8,000 and, unlike a previous credit, this one does not have to be paid back. It applies to purchases made this year between Jan. 1 and April 30.

• The government broadened the credit in November to include some buyers who already own houses. Those buyers are eligible for a credit worth up to $6,500 for purchases made between Nov. 7 and April 30. In order to qualify, the buyer must have owned a primary residence for at least five consecutive years out of the past eight years. This credit also does not need to be paid back.

• There are income and price requirements. If the home was purchased after Nov. 6, it can cost no more than $800,000. Also, if purchased after that date, individuals cannot earn more than $125,000 and married couples filing jointly cannot earn more than $225,000.

• You don’t have to wait until 2010 to claim your credit, even if you buy this year. Purchase a home before the April 30 deadline and the credit can be claimed on this year’s taxes.

• If you’re claiming the credit, a paper filing is necessary. Only taxpayers not claiming the credit can file electronically. Dobzinski said buyers can still use electronic forms, but must print them out and mail them in, along with form 5405.

• Unlike last year, buyers claiming the credit must prove they are eligible. This is because some people filed for the credit last year, even though they had not purchased a home. You’ll need to send the HUD settlement statement along with the tax form. If you’re claiming the longtime owner credit, also include proof, such as copies of mortgage interest statements, property tax records or homeowner’s insurance records.

• Keep in mind that the credit is for your primary home. If you decide to rent or sell the home within three years, the credit must be repaid.

• Buyers claiming the credit will have to wait longer than usual to get the credit because of the need to file by paper. Expect to wait four to eight weeks, instead of the typical two weeks when filing electronically.

Copyright © 2010 Tampa Tribune, Fla., Shannon Behnken. Distributed by McClatchy-Tribune Information Services.

FHA Seasoning Rules Lifted! Great News For Investors!

HUD TAKES ACTION TO SPEED RESALE OF FORECLOSED PROPERTIES TO NEW OWNERS
Measure to help bring stability to home values and accelerate sale of vacant properties

WASHINGTON - In an effort to stabilize home values and improve conditions in communities where foreclosure activity is high, HUD Secretary Shaun Donovan today announced a temporary policy that will expand access to FHA mortgage insurance and allow for the quick resale of foreclosed properties. The announcement is part of the Obama administration commitment to addressing foreclosure. Just yesterday, Secretary Donovan announced $2 billion in Neighborhood Stabilization Program grants to local communities and nonprofit housing developers to combat the effects of vacant and abandoned homes.

"As a result of the tightened credit market, FHA-insured mortgage financing is often the only means of financing available to potential homebuyers," said Donovan. "FHA has an unprecedented opportunity to fulfill its mission by helping many homebuyers find affordable housing while contributing to neighborhood stabilization."

With certain exceptions, FHA currently prohibits insuring a mortgage on a home owned by the seller for less than 90 days. This temporary waiver will give FHA borrowers access to a broader array of recently foreclosed properties.

"This change in policy is temporary and will have very strict conditions and guidelines to assure that predatory practices are not allowed," Donovan said.

In today's market, FHA research finds that acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.

The policy change will permit buyers to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales. This will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.

"FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties," said FHA Commissioner David H. Stevens. "This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity."

The waiver will take effect on February 1, 2010 and is effective for one year, unless otherwise extended or withdrawn by the FHA Commissioner. To protect FHA borrowers against predatory practices of "flipping" where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:

• All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
• In cases in which the sales price of the property is 20 percent or more above the seller's acquisition cost, the waiver will only apply if the lender meets specific conditions.
• The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.

Specific conditions and other details of this new temporary policy are in the text of the waiver, available on HUD's website.

Fannie, Freddie Suspend Foreclosures

WASHINGTON (AP) – Dec. 18, 2009 – Mortgage finance companies Fannie Mae and Freddie Mac are suspending foreclosures and evictions for about two weeks in a temporary break for borrowers during the holiday season.

The suspension, announced Thursday by the government-controlled companies, runs from Saturday through Jan. 3. “No family should have to face the prospect of being evicted during the holiday season,” Michael Williams, Fannie Mae's chief executive, said in a statement.

Earlier Thursday, Citigroup Inc. announced a 30-day suspension of foreclosures and evictions, affecting about 4,000 borrowers. Fannie and Freddie did not estimate how many homeowners would get this grace period.

Last winter, most major lenders suspended foreclosures while the Obama administration developed its $75 billion loan modification program. But foreclosures picked up again after those suspensions lifted.

RESPA 2010 Rules, Changes to HUD-1 & GFE

This week I attended a training seminar held by SAR to learn the changes on the new HUD-1 (Settlement Statement) and GFE (Good Faith Estimate) RESPA 2010 Rules. This new form will go into effect January 1, 2010.

This is the most far reaching change that RESPA has initiated in many years. It's purpose is to protect consumers (borrowers) from surprises at the closing table, lower consumer costs, and making shopping for a loan easier. The 2 forms will have to match and must be no more than 10% above the final aggregate amount of certain sections.

The new HUD-1 is a three pages and have new rules about what goes where. The best one I see is no longer seeing various line items for title charges including wire fees, document storage and other "junk fees". Title companies will have to charge you one flat fee that will include everything.

I am so glad to have attended this presentation to better serve my clients in the confusing times ahead. Here is a link to the new form if you are interested in seeing it. This is far reaching and will change the way different service providers work together.

• New HUD-1
• New GFE
• Frequently Asked Questions

If you are confused about all this, rest assured I got you covered. Call me.

Dill

The Drawbacks to Buying Foreclosures

Price-conscious home buyers are lured by the low prices advertised for properties in foreclosure. They hope to show up at the auction and win the lowest bid. However, many of these homes are not available for inspection prior to purchase. Is it smart to buy a home that you cannot inspect? Could be if the price was low enough to compensate you for the amount of work that might be required to bring the condition of the home to market standards.

Before you rush forward to buy a foreclosure, stop to think about some of the drawbacks and repercussions if you can't get in the house to inspect the interior.

Who Is Living at the Property?

If the property is occupied, the successful bidder is typically responsible for removing the occupants, who may not be the previous owners. They could be relatives or friends of the owners, renters or squatters. You might have to evict them.

• If you are unfamiliar with eviction processes, you should hire a lawyer to handle it for you.


• Be aware that tenants who are sued for eviction sometimes retaliate.


• A better solution might be to pay or bribe the occupants to leave.
  (In the business we call this "Cash For Keys")

Non-Owner Occupied Homes

Here's an example, a house, was rented to a dubious couple: a former convict recently released on parole and his partner with sketchy credit, who flinched at loud noises like a domestic abuse victim.

The seller, unaware that his deed of trust contained an "assignment of rents" -- meaning the lender had a right to collect the rent if the owner did not make his payments -- stopped paying on his piggyback loans and didn't much care who he rented to as long as they paid him. Fully intending to pocket the rents and forget about his mortgage loans, the seller listed the rental for sale. His agent made an initial attempt to gain access to the home. The ex-con, a neo-Nazi with a shaved head, massive tattoos and holding back a barking pit bull, peeked through the door and then slammed it in the agent's face.

Soon as the For Sale sign was planted in the lawn, the tenants stopped paying rent. Neither the lender nor the seller could collect any money from the tenants. The agent could not show the property. This was an ugly situation. The lender (who held both the first and the second loan) filed for foreclosure and vowed to file a deficiency judgment against the seller, which junior lenders can do in California if the loans were not purchase money.

Condition of Foreclosed Homes

Because these homes are purchased "as is" from the lender or HUD, there is no guarantee of condition. Sometimes it is possible to inspect these homes prior to making an offer but sometimes, as in the above example of the home, access is not granted.

When sellers realize they are about to lose their homes through foreclosure, it's not uncommon for them to stop caring about the home.

• If something breaks or malfunctions, they aren't going to fix it.


• If they are angry or desperate enough, it's possible they might actually destroy the house. An effective way to flood the home is to turn on all the water faucets, plug the drains and leave. Others smash out walls, then pull out the copper pipes and wiring to sell as scrap metal. Owners will also sell the appliances and kitchen cabinets.


• Some horrible-excuse-for-human beings even leave animals behind, locked inside without food or water.

Buying foreclosures is not for the faint of heart. It's best handled by the pros and is not recommended for first-time home buyers. I don't care what seminar you attended -- if it's not giving you this information, it's not preparing you for reality.