Strategic Defaults

Strategic defaults may be the next challenge to a housing recovery. Investopedia defines ‘strategic default’:

“A deliberate default by a borrower. As the name implies, a strategic default is done as a financial strategy and not involuntarily. Strategic defaults are commonly employed by mortgage holders of residential and commercial property who have analyzed the costs and benefits of defaulting rather than continuing to make payments and found it more beneficial to default.”

A new foreclosure is created every time a seller voluntarily decides to stop making their mortgage payment. Obviously, an increase in foreclosures puts downward pressure on the values of other homes in the community. We believe there are several reasons this could be another headwind to any recovery in housing.

There Are 11.4 Million Homes in Negative Equity

According to CoreLogic’s most recent Negative Equity Report, there are over 11.4 million homes where the value of the home is less than the value of the mortgage(s) on that home, a situation know as negative equity or being ‘underwater’.

Negative Equity Is the Primary Reason Baby Boomers Default

According to a survey by web site You Walk Away, 68% of baby boomers who walked away from their homes (strategic default) listed ‘property value’ as the main reason. 88% of the defaulters did not access any of their retirement savings before walking away and 97% would advise family members in the same predicament to also default.

The Moral Objection to Not Default is Diminishing

In the past, homeowners felt a moral obligation to repay their debts. That is beginning to change. Dr. Andrew Jennings, chief analytics officer at FICOexplains:

“After five years of a brutal housing market, many people now view their homes more objectively and with less sentimentality. Regardless of legal or ethical issues around strategic defaults, lenders must account for this risk when they evaluate mortgage applications in declining markets. Many homeowners who find themselves upside down on mortgages in the future are likely to consider strategic default as an acceptable exit strategy.”

Prices Could Soften Again Over the Next 6 Months

As we reported Monday, many experts feel that prices might falter again before they finally stabilize in 2013. Every time prices fall more homes fall deeper into negative equity. The CoreLogic report mentioned above also states that 2.3 million homes had less than 5 percent equity, referred to as near-negative equity.

We will continue to keep our fingers on the pulse of this issue to monitor whether or not it begins to slow the momentum the housing recovery is currently experiencing.

Do You Shred?

How many of you Shred your sensitive information before discarding it?  If you don't, you should.  Why?  Your personal information in the hands of a savvy thief could result in major identity theft resulting in a nightmare for you.  Correcting our accounts causes hours of lost time and creates major frustrations and headaches.  Thieves rifle through trash and do dumpster diving to retrieve your personal information and commit fraudulent activities such as establishing a false identity, obtain credit cards,  establish bank accounts, and commit other crimes.  A portable Shredder is a MUST in all households and can be purchased at any office supply store.  the Federal Trade Commission estimates 5 to 10 million people suffer every ear from some form of identity theft or fraud.  Listed below are items the should be shredded:
*Pre-approved credit card applications & reports.
*Obsolete financial records including loans and credit reports
*Cancelled & voided checks
*Employment records, personal resumes & pay or pension stubs.
*Old driver's licenses, passports, visas & credit cards
*ATM receipts
*Personal medical records
*Tax preparation worksheets & tax forms
*Investment transactions including IRA, stock, & property transactions
*Mailing labels from all mail & packages
*All legal documents including insurance forms
*documents containing a social security number (even if only the last 4 numbers), birth dates, your mother's maiden name, passwords, PINs, signatures, & account numbers

The best types of shredders to purchase are the crosscut, confetti cut, or diamond cut.  The strip cut does not adequately shred documents because they can be easily re-pieced.  You want a shredder that cuts documents into the smallest pieces possible.  Don't think "identity theft will never to me."  It can and will likely happen unless you protect yourself.

When Adjustable Rate Mortgages Make Sense

When an adjustable-rate mortgage makes sense
When the housing market began declining, many people claimed that adjustable-rate mortgages (ARMs) were the cause.  However, recently they’ve been making a comeback, especially among affluent borrowers.

Making sense of the story

• An ARM offers an introductory period in which the borrower pays a lower interest rate than with a fixed loan; after that, the rate can fluctuate up or down.

• With rates near historic lows, the safety of locking in a fixed-rate appeals to many borrowers.  But these borrowers are paying a premium for that security.  The spread between rates on 30-year fixed-rate mortgages and the most-popular ARMs now stand at about one percentage point, more than double the difference just five years ago.
  
• That means that homeowners who are planning to either move or pay off their mortgage over the next few years can save big with an ARM.
  
• Borrowers can determine if an ARM is the right loan option for them by looking at their financial situation and the terms of the ARM. ARMs carry risks in periods of rising interest rates, but can be cheaper over a longer term if interest rates decline. An ARM may be a good option to consider for borrowers who plan to own the home for only a few years, expect an increase in future earnings, or the prevailing interest rate for a fixed-rate mortgage is too high.
  
• Before deciding to apply for an ARM, borrowers should consider if their income is likely to rise enough to cover higher mortgage payments if interest rates increase; whether they will be taking on other sizable debts such as car loans or school tuition in the near future; how long they plan to own the home; and whether their mortgage payments can increase even if interest rates generally do not increase.

How Is National Mortgage Settlement $ Being Spent?

Mortgage Debt Relief Act running out of time?

By Stephen Fishman
Inman News®

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Ordinarily, if all or part of a home loan is forgiven by the lender, either in a short sale or foreclosure, the amount forgiven is taxable income. Thus, for example, a homeowner who had $100,000 in mortgage debt forgiven through a short sale would have to pay income tax on the $100,000.

However, Congress adopted the Mortgage Debt Relief Act of 2007 to save millions of underwater homeowners from this tax disaster. Under the Act, homeowners can exclude from their taxable income up to $2 million of debt forgiven on their principal residence during 2007 through 2012. The Act applies to debt reduced through mortgage restructuring, as well as forgiven in connection with a foreclosure.

But the Mortgage Debt Relief Act expires on January 1, 2013. Any mortgage debt forgiven after that date will be fully taxable, unless the Act is extended. To avoid this deadline, a home must not only be sold before the deadline, but the lender must formally forgive the loan in a letter issued before January 1, 2013.

Will the Mortgage Debt Relief Act be extended past 2012? No one knows. In its 2013 budget, the Obama Administration asked that the Act be extended for two years. Several bills have been pending in Congress to extend it as well, but so far nothing has happened. No one has any idea what Congress will do, and it likely won't act until after the election on November 8, if then. It may depend on who wins the election.

Homeowners who want to take advantage of the Mortgage Debt Relief Act must sell their homes before the end of the year. It may already be too late for most homeowners, since short sales often take many months to complete. But some homeowners may be able to complete a short sale before the deadline if they act now -- it all depends on the property and lenders involved. There will likely be a deluge of sellers trying to meet the end of year deadline.

Keep in mind, however, that even if the Mortgage Debt Relief Act is allowed to expire, many homeowners will still be able to avoid paying income tax on their forgiven mortgage debt.

One way to do this is for the home to file for bankruptcy and have the debt discharged by the bankruptcy court. Debts discharged through bankruptcy are not considered taxable income.

Alternatively, if the homeowner is insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable. You are insolvent when your total debts are more than the fair market value of your total assets. For these purposes your assets the value of everything you own. This includes things like your interest in a pension plan and the value of your retirement account.

For details, see IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments

How to Improve your FICO Score

First and most obvious is to pay all your bills on time.  Check your credit report for accuracy.  You can get a free annual report by writing directly to the credit bureaus.  Dispute any inaccuracies immediately.  You may dispute with creditors and with the bureaus.  Even neutral information should be disputed.  for example if a credit limit is reported lower than it really is, it will appear that you are using more of your available credit than you really are and this will lower your score.  Negotiate with collectors and businesses to remove any late payments. Sometimes creditors will remove negatives in exchange for a prompt payment.  Be sure to get any promises in writing before making a payment, once the account is paid the creditor has little incentive to live up to any promises.  When nothing else works, pursue legal action.  Collectors and businesses do not want to go to court, it is costly and they have nothing to gain by reporting negative information about you.  Decrease your ratio of how much credit you use vs. how much credit you have.  This can be done by paying off your balances of by increasing your credit availability, and not using it.

California Homeowner Bill of Rights

The Homeowner Bill of Rights prohibits a series of inherently unfair bank practices that have needlessly forced thousands of Californians into foreclosure. The law restricts dual-track foreclosures, where a lender forecloses on a borrower despite being in discussions over a loan modification to save the home. It also guarantees struggling homeowners a single point of contact at their lender with knowledge of their loan and direct access to decision makers, and imposes civil penalties on fraudulently signed mortgage documents.  In addition, homeowners may require loan servicers to document their right to foreclose.

The laws will go into effect on January 1, 2013, and borrowers can access courts to enforce their rights under this legislation.

The Homeowner Bill of Rights builds upon and extends reforms first negotiated in the recent national mortgage settlement between 49 states and leading lenders. Attorney General Harris secured up to $18 billion for California homeowners in that agreement, and has also built a Mortgage Fraud Strike Force to investigate crime and fraud associated with mortgages and foreclosures.

“The California Homeowner Bill of Rights will give struggling homeowners a fighting shot to keep their home,” said Attorney General Harris. “This legislation will make the mortgage and foreclosure process more fair and transparent, which will benefit homeowners, their community, and the housing market as a whole.”

“Californians should not have to suffer the abusive tactics of those who would push foreclosure behind the back of an unsuspecting homeowner,” said Governor Brown. “These new rules make the foreclosure process more transparent so that loan servicers cannot promise one thing while doing the exact opposite.”

The Homeowner Bill of Rights consists of a series of related bills, including two identical bills that were passed on July 2 by the state Senate and Assembly: AB 278 (Eng, Feuer, Pérez, Mitchell) and SB 900 (Leno, Evans, Corbett, DeSaulnier, Pavley, Steinberg).

The California Homeowner Bill of Rights also contains a variety of bills outside of the conference committee process. These will enhance law enforcement responses to mortgage and foreclosure-related crime, in part by empowering the Attorney General to call a grand jury in response to financial crimes spanning multiple jurisdictions. Additional elements will help communities fight blight related to foreclosure, and provide enhanced protections for tenants in foreclosed homes. Please see the attached fact sheet for the status of these bills.

The California Homeowner Bill of Rights was introduced February 29, 2012 at a press conference featuring Assembly Speaker John A. Pérez and Senate President pro Tem Darrell Steinberg and bill authors from the Assembly and Senate.

More details about the California Homeowner Bill of Rights are found on the attached fact sheet. To learn more about how the bills impact California homeowners, review the slideshow at: www.oag.ca.gov.