STRATEGIC DEFAULTS – RIGHT OR WRONG?

A recent article by Ken Harney at the LA Times cited a study done by Experian (one of the 3 major credit reporting bureaus) that highlighted some very interesting information about foreclosures.  Think foreclosures only happen to people with bad credit?  Think again!

Traditional thinking indicates that foreclosures happen to people who are “down on their luck”, maybe they lost a job, maybe they got sick or maybe they were careless, overspent and are getting foreclosed on because they are in over their heads.  There is typically a pattern that appears in their credit history, late  payments, missed payments delinquencies on other debts.  A growing trend over the last few years has been contrary to this pattern.  People with great credit scores and no other “warning signs” or “life changing events” such as a job loss are being foreclosed on in record numbers.

The study done by Experian looked for answers to that question and using data from 24 million credit that they were able to review over time to look for patterns, they found some interesting trends.  Here are some of the things they found:

• The number of strategic defaults is far beyond most industry estimates — 588,000 nationwide during 2008, more than double the total in 2007. They represented 18% of all serious delinquencies that extended for more than 60 days in last year’s fourth quarter.
• Strategic defaulters often go straight from perfect payment histories to no mortgage payments at all. This is in stark contrast with most financially distressed borrowers, who try to keep paying on their mortgage even after they’ve fallen behind on other accounts.
• Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006. In California last year, the number of strategic defaults was 68 times higher than it was in 2005. In Florida it was 46 times higher. In most other parts of the country, defaults were about nine times higher in 2008 than in 2005.
• Two-thirds of strategic defaulters have only one mortgage — the one they’re walking away from on their primary homes. Individuals who have mortgages on multiple houses also have a higher likelihood of strategic default, but researchers believe that many of these walkaways are from investment properties or second homes.
• Homeowners with large mortgage balances generally are more likely to pull the plug than those with lower balances. Similarly, people with credit ratings in the two highest categories measured by VantageScore — a joint scoring venture created by Experian and the two other national credit bureaus, Equifax and TransUnion — are far more likely to default strategically than people in lower score categories.
• People who default strategically and lose their houses appear to understand the consequences of what they’re doing. Piyush Tantia, an Oliver Wyman partner and a principal researcher on the study, said strategic defaulters “are clearly sophisticated,” based on the patterns of selective payments observable in their credit files. For example, they tend not to default on home equity lines of credit until after they bail out on their main mortgages, sometimes to draw down more cash on the equity line.

Also, the study found that people with high credit scores at the time of loan application are 50% more likely to strategically default than people with poor credit scores.

So what does it all mean, who is doing this?  Well, for starters, there are some people gaming the system.  They bought to high, they speculated, they bled out their equity and now rather than make good on the debt they are just walking away, kinda like stealing.  Then there are people who legitimately intended to make good on the debt, had wanted to build equity, own a home, live the dream.  These people, as the survey indicates, are typically in markets where there is a significant amount of negative equity.  They have no missed payments, no problems making payments, they just take a hard look at their situation, decide that they will never recover the loss in equity (buying a home for $400,000 and it being only sellable for $200,000 and yes, in California and Florida that really happened) and just walk away.  They know their credit will be damaged and here is the problem with this whole scenario, why walking away is more attractive than sticking it out and making good on their debt: in 3 years, if they treat their credit reports right and rebuild those scores, they could get a brand new mortgage on another home.

There are many legal implications here that I won’t go into since I am not a lawyer, walking away does not always make the debt go away. Let’s not forget either the ethical problems associated with taking a mortgage, promising to pay it back and then just breaking your word and walking, there by making the rest of us pay for it in higher interest rates and bail outs, but let me ask you, is a strategic default right or is it wrong?  If you were in this situation, what would you do?

I’d like you to be part of the conversation here, so please, comment, forward this to your friends, subscribe and as always, if you have questions, need real estate advice or want to buy or sell a home, you can call or text me at 717-371-0557, email me at Jason@JasonsHomes.com or contact me at the office at 717-490-8999!

Your Friend in Real Estate,
Jason Burkholder

Search for Lancaster County Homes for sale by clicking here!

Want to see local real estate values and home prices?  Go to www.RealEstateCrystalBall.com !

HANDS OFF THE TIL!

Recently, some changes were made to Regulation Z and RESPA that affect lenders and their requirements to disclose fees for their services and the total cost of the loan. The changes affect specifically how lenders are required to deliver the Truth in Lending (TIL) statement and what they are/are not able to change once they have quoted you/your client fees on the Good Faith Estimate (GFE).

Since I’m not a lender, I’m going to keep this simple and cover the basics as they apply to the average residential transactions.

· Lender must provide the initial TIL disclosures (GFE) no later than 3 business days after receiving a completed loan application.

· Until you receive the disclosures (GFE), lenders cannot collect any fees other than the appropriate fee for a credit check. This means in most cases the lender cannot collect application or appraisal fees until 3 days after application, assuming a GFE is issued. After a loan applicant receives the GFE and indicates that they wish to proceed with the loan, the lender may collect additional fees.

· A final TIL disclosure is due 3 days prior to closing.

· The lender must provide a copy of the appraisal to the borrower 3 days prior to closing.

· The lender cannot close the loan for at least 7 days after the borrower receives (or the lender has mailed) the initial TIL disclosure.

· If there is any change to the TIL disclosure that increases the APR beyond “allowable tolerances”, the lender must issue a new TIL disclosure reflecting the changes and allowing an additional 3 days for review prior to closing. Also, the regulation assumes a 3 day delivery period so that if the lender mails the new TIL disclosure, the lender must allow 3 days delivery time and 3 days review time for a total of 6 days.

· Lender must implement and use revised GFE and HUD 1 settlement forms effective January 1, 2010 (For details on the new forms go to this link:http://www.parealtor.org/content/upload/AssetMgmt/Publications%20News%20and%20Research/2009PARealtor/AprilREALTOR-4PageInsert_new.pdf)

· Failure to implement and use the new GFE and HUD1 forms as required is a violation of Section 5 of the real estate Settlement and Procedures Act (RESPA).

· Any and all charges typically paid by the borrower must be stated on the GFE. The new rules make it unlawful for lenders to add additional undisclosed charges. Items cannot be listed as POC in an effort to avoid stating the fees, all fees to be collected must be stated on the initial TIL disclosure (GFE).

· The GFE and its associated fees must be valid for at least 10 business days after issuance. If the borrower does not express intent to continue with the loan, the GFE is allowed to expire at the end of 10 business days. Until then the lender is bound to honor the offered terms.

· Fees stated in the initial TIL disclosure may not change beyond certain specific tolerance limits unless a “substantial change” has taken place, such as borrower qualifications changing, appraisal issues, etc. If the fees do change outside allowable limits, the lender must initiate a cure (as in correct the fees to match those originally stated or rebate the borrower accordingly within 30 days after settlement). It is considered a violation if the lender asks other settlement service providers to reduce fees so that total costs fall within the tolerance limits.

So, what does this all mean for you? Well, to start it’s a good thing; the regulations require lenders to proceed in such a way that buyers getting whacked with last minute fee and rate changes are a thing of the past. The not so good part? Well, it takes time. This process, providing no changes, lengthens the time required for an average settlement, which along with the new HVCC regulations regarding appraisals; pretty much makes 30 day closings a thing of the past to. Oh, and that last minute change that requires the re-disclosure and mandatory 3 day waiting period? Well, if lenders don’t get it right from the start, there will be delayed closings that no amount of yelling by unhappy clients or agents will fix. We’ll be stuck, waiting, if the lenders can’t keep their hands off the TIL.

As always, if you have questions, need real estate advice or want to buy or sell a home, you can call or text me at 717-371-0557, email me at Jason@JasonsHomes.com or contact me at the office at 717-490-8999!

Your Friend in Real Estate,
Jason Burkholder

Search for Lancaster County Homes for sale by clicking here!

Want to see local real estate values and home prices?  Go to www.RealEstateCrystalBall.com !

DOING YOUR PART TO HELP HOUSING RECOVERY

The National Association of REALTORS® (NAR) is asking its 1.2 million members to write to Congress to extend the successful homebuyer tax credit into next year.  NAR has a great system email system to reach all of it’s members allowing massive responses to these “Call to Actions”.  According to realtor.org, the $8,000 first time buyer tax credit has encouraged  350,000 people to realize the dream of home ownership, buyers who otherwise could not have bought.

“Now is the time for Congress to keep this recovery going by extending the tax credit through 2010 and making it available to more homebuyers. We have all seen how the credit has been a spur to bring homebuyers into the market, and have seen the beginnings of a real recovery in the housing market. Housing has always led this nation out of economic downturns, and can do so again,” said NAR President Charles McMillan, “The credit needs to be available for an additional period of time in order to sustain the progress that’s been made so we can continue to see our markets fully recover. Uncertainty about the future of the credit will dampen consumer demand. The only way we can assure that the progress we’ve made can continue is to extend the credit and to do that now.”

How can you help? Write Congress Now. REALTORS® responding to the Call to Action will be doing this en masse and your letters will help.  Write to your Senators and Representatives to tell them of the successes with the tax credit thus far, and press them to extend and expand it now.  With the deadline of November 30, 2009 fast approaching, buyers are running out of time.  if you or someone you know wants to take advantage of the existing tax credit, you need to have a home under agreement in the next 20 days or you will risk losing your chance to claim the credit.

As always, if you have questions, need real estate advice or want to buy or sell a home, you can call or text me at 717-371-0557, email me at Jason@JasonsHomes.com or contact me at the office at 717-490-8999!

Your Friend in Real Estate,
Jason Burkholder

Search for Lancaster County Homes for sale by clicking here!

Want to see local real estate values and home prices?  Go to www.RealEstateCrystalBall.com !

CONSUMERS WERE TOO OPTIMISTIC? REALLY?

The last few years have brought some significant changes to the real estate world.  If you’ve been watching the media coverage, by now you probably think there was only one possible cause to this mess….. the evil mortgage companies taking advantage of consumers!

Well, a recent study (yes, apparently they really needed a study for this, they could of just called me, I would have told them!) by the New York Federal Reserve found that consumer confidence that made people think they could afford higher housing prices, not easy mortgage money.  The study concluded that all the way until 2007, when the economic conditions started convincing people otherwise, that consumers believed the “good times” would continue and their paychecks would increase as they had.  It appears that the lax lending standards may have come about because of the optimism by consumers, simply put, because people were buying, lenders put forth more products to help them buy.

Now don’t get me wrong, there was some predatory lending, there were people taken advantage of and lenders are partly to blame but seriously, the amount of “damage” being done to the real estate markets by foreclosures nationwide didn’t all come from lenders.  Also, if you are in foreclosure right now, I don’t want to be unsympathetic, it is a horrible thing to go through and I would not want anyone to be homeless.  But seriously, sometimes, consumers are too blame to.  Yes, that’s right, I said it. Sometimes, it really is your fault.

No one wants to hear this, let alone say it, not politicians, they want someone to blame so they can score political points, not mortgage companies, they would look even worse if they blamed consumers and certainly not the consumers themselves.  In our current culture, where Governors can abandon their duties (yes Sanford, I’m talking about you), disappear for a whole week without telling anyone where they are going (I guess when you leave the country to cheat on your wife you don’t want to tell anyone, imagine that!) and then hold a press conference embarrassing themselves (and their family, and their state, of and the ENTIRE COUNTRY) in which they apologize for their adventure and then expect everything to be just fine, in this culture, NO ONE can accept the blame they deserve.  It is never their fault.

In good ole Sanford’s case, he was a helpless, star crossed romantic, unable to resist the call of fate and his true love.  In the real estate world, it is the mortgage companies fault, they made it so easy, the deals were just so good, we couldn’t resist! It can’t be their fault, it couldn’t be a poor decision on their part, it had to have been the lenders!

I could come up with tons of other examples, examples of adults making poor choices then blaming the companies that provided those services (tobacco, alcohol, McDonald’s,any of those fit the argument here?), but everyone seems to forget that these bad mortgages were selected by adults, no one forced them to make a bad decision.  No one said they had to trade up their 3 bed, 2 bath,  2000 sq ft home worth $200,000 for a 3 bed, 2 bath, 2000 sq ft home in a fancier gated community selling for $400,000.  They didn’t have to do it.  But they did.  Not all of the folks saddled with bad mortgages are in this predicament, but let’s go back a minute and look closer at the point raised by this study, the fact that consumer confidence bears part of the blame.

A lot of the people who took out risky mortgages shouldn’t have done it, but in their defense they were lulled into thinking they could swing those payments by a “irrational exuberance”, by the optimism everyone had, by thinking the good times would keep on trucking because they had for so long.  Many of them expected that when the time came for their adjustable rate mortgage to adjust, they would have gotten that raise or promotion they were expecting (instead they got a pink slip) or that worst case scenario they could sell if they couldn’t afford it, because 2005 brought some people 10-30% appreciation, and that would save them (instead they found a slower market where in some areas people lost value instead of appreciating).  What they found, is that the one thing they counted on to save them, the one reason that made them place their bets and gamble, our solid economy, wasn’t there when they needed it to be.  They knew what they were doing.  They gambled.  They lost.

We can find plenty of places to lay blame for this, but consumers need to realize that they had just as much of a part in creating this mess as did the builders, lenders, politicians, agents, everyone.  This “crisis”, this issue, doesn’t tie up into a tidy little package, there is no one “bad guy” to prosecute and make it all better.  The time to put it all on Red number 6 and spin the wheel for your payday is long gone.  Consumers cannot sit back and wait for someone else to fix this, lamenting all that has gone wrong, blaming everyone but themselves.  Don’t get me wrong, the system is flawed, there are still numerous problems, still many things wrong, but consumers need to step up, take their medicine, sell if they have to sell, buy if they have to buy and make smart, rational decisions based on fact.  Once we start doing that, once we stop letting emotion (whether it is fear or exuberance) guide our financial decisions, we can begin the process of re-building what we once had, a solid foundation of home ownership supporting the country.

As always, you can call me Direct at 717-371-0557 or at the Office 717-490-8999, email me at Jason@JasonsHomes.com or send me a text message using the tool to the right of this page!

Your Friend in Real Estate,
Jason

Search for Lancaster County Homes for sale by clicking here!

Want to see local real estate values and home prices?  Go to www.RealEstateCrystalBall.com !

WEICHERT FINANCIAL PROVIDES ACCESS TO THE FIRST TIME BUYER TAX CREDIT BEFORE SETTLEMENT TO USE AS CLOSING COST $$

Weichert Financial is pleased to announce the release of the Pennsylvania Housing Finance Agency’s Tax Credit Advance Loan Program (TCA) now available throughout Pennsylvania.  TCA provides an interest free loan of up to $6,000 (for newly constructed homes and $5,000 for existing homes, with a minimum loan amount of $500) to use towards down payment and/or closing costs.

TCA Product Highlights:

• Buyer must invest a minimum of $1,000 of their own funds for conventional loans.
• If TCA is repaid by June 30, 2010, the borrower pays no interest for the loan.
• Any portion of the TCA not repaid by June 30, 2010, becomes a ten year loan at the same interest rate as the PHFA first mortgage; with monthly payments beginning on August 1, 2010.
• You must be a first-time homebuyer.
• You must fall within the Federal First Time Homebuyer Tax Credit income guidelines and PHFA s income and purchase price limits.
• Cannot be combined with other PHFA down payment and closing cost assistance programs.
• The homebuyer files for the Federal First Time Homebuyer Tax Credit with their 2009 federal income tax return and uses their tax refund to repay the Tax Credit Advance Loan.
• Loan must close prior to December 1, 2009 (and be occupied, in the case of custom construction).
• Funding is limited; therefore, loan availability is on a first come, first served basis.
• For underwriting purposes, the lender must include the tax credit advance loan payment in the borrower’s housing to income (front end) ratio. The payment is calculated using the full amount of the advance at the same interest rate as the first mortgage and with a ten year term.
• At closing, the lender is to disburse funds only for the actual amount of credit needed to pay for the minimum required down payment and/or closing costs.
• A second Mortgage and Note/TIL are to be completed at closing. The Mortgage is to be recorded at the same time as the PHFA first mortgage.

Please feel free to contact Laura Weidner with any mortgage questions you may have, here is her contact info: Laura Weidner, Weichert Financial Services Gold Services Manager Cell:  (717) 808-3656         eFax:  (973) 630-3574                 Email: LWeidner@WeichertFinancial.com

Great News for first time buyers who may be short on cash to close, if you want to know how to structure this program into your home purchase, as always, you can call me Direct at 717-371-0557 or at the Office 717-490-8999, email me at Jason@JasonsHomes.com or send me a text message using the tool to the right of this post!

Your Friend in Real Estate,
Jason

Search for Lancaster County Homes for sale by clicking here!

Want to see local real estate values and home prices?  Go to www.RealEstateCrystalBall.com !