Tag Archives: California

Strategic Foreclosures

Recently a story was aired on the news about the housing market in Patterson, CA and the dramatic decrease in median home values due to a high rate of strategic foreclosures. Also known as buy and bail, strategic foreclosures is the act of borrowers who have negative home equity in their homes – typically in the hundreds of thousands – qualifying for a loan on a second home, purchasing the second home and then defaulting on the first home mortgage.

Given the current housing market borrowers are able to purchase an equally sized home, sometimes larger and often within close vicinity of their current location for hundreds of thousand dollars less than what they paid for their current home. At a high level this makes financial sense. Why pay more for a home which you can buy down the street for half the price?

The downside to this process is that the people who “buy and bail” face seven years of bad credit with the inability to purchase a home for five years. However, in many cases borrowers face foreclosure on their first home anyway so they have little to lose. What I don’t understand is how people who face foreclosure on their first home qualify for a mortgage on a second home.

Apparently the process is perfectly legal although there are some ethical issues behind it. Some say it is fraud to buy and bail. However, I think home owners who face foreclosure have a different opinion. Many have begged and pleaded with lenders for loan modifications to avoid foreclosure with no results. Basically they are met with the response that unless you are in a “hardship” situation there is nothing they can do to assist you. What’s the definition of a “hardship” situation? Basically it means you have missed payments on your existing loan.

How are borrowers supposed to interpret this response? It seems clear to most borrowers in this situation that lenders are implying missing payments to receive help. Nobody wants bad credit and most borrowers have made legitimate efforts to work with lenders to work out an agreement which allows them to keep their home and repay their mortgage obligations with no avail. Lenders are simply not willing to help unless they are seeing a loss through missed payments.

In general, I think lenders are gambling that most borrowers who contact them about loan modifications are not willing to voluntarily take the plunge into foreclosure. However, the increased activity of buy and bail is evidence that borrowers are less concerned about their credit rating and more concerned about crawling out from underneath a mound of negative equity and high mortgage payments.

As a result, lenders are taking note and responding with stricter lending guidelines which require borrowers to show sufficient income to make payments on both properties without considering any rental income from the first property in the approval process.

So, what’s your opinion? Is buy and bail fraud or is it just the public response to a housing market that banks and lenders created in the first place?

Sluggish Real Estate Market Leaves Little Options for Responsible Borrowers

I’m glad I’m not the only one facing this dilemma (tongue in cheek)… Geithner faces sluggish market, rents out NY home – Yahoo! Finance

In my continued efforts to upgrade from my townhouse to a single family residence I am facing the same issues as Mr. Geithner. I cannot sell my townhouse for an amount any where close to the purchase price and refinancing my existing loans is impossible according to all the mortgage brokers I’ve spoken to. It seems the only options are to sit tight for the next five to ten years and hope the market rebounds or try to buy a second home and rent out my current place.

I’ve contacted the lenders for both my first and seconds loans trying to obtain loan modifications to lower and/or fix my rates so I can lower the mortgage payment on the townhouse with no luck. Actually, the rate on my first loan is pretty good at 5.5%, it’s the rate on my fixed rate second loan at 7.25% which I’d like to get lowered. I’m finding that I am penalized for being a responsible borrower in the first place. When I bought the townhouse in 2004 I made sure to take a loan I could afford to pay back and not overextend myself. Now when I ask for a little help in the form of rate conversions to lower my mortgage payments so I can buy a house to accommodate my growing family I am told that I am not a “hardship” case and they can’t do anything for me.

It’s really frustrating that I have to take this on the chin because thousands of irresponsible borrowers got themselves in a shitload of debt and lost their homes, along with all the boats, RV’s, and other luxury items purchased with false “equity” the exploding real estate market created. I’m doubly screwed because of all the people who had the foresight on the initial decline to buy a second home and then walk away from their first set of loans. Today there are a bunch of rules and regulation in place to control this type of activity which makes it harder for legitimate borrowers like myself to obtain loans for second homes.

Even if I can qualify for a loan on a second home financing two mortgages is a huge financial obligation that would eat up the majority of our income. In addition, the expected rental income of the townhouse only covers about 60% of the current monthly payment (mortgage, HOA, and property taxes). Although the rental income helps I would still incur a loss. I’ve been thinking about this a lot and haven’t determined if attempting the purchase of a second home it is worth it or not.

I really need to sit down and calculate the cost, and potential investment returns (if any) on keeping the townhouse. I don’t expect to see the value of the townhouse return to it’s original purchase price for a very, very long time. On the other hand, home prices are down and it’s a good time for me to buy. I think I can find a great deal on a nice home. Prior to making a decision I need to commit to the following and see where I stand financially:

  • I must max out my 401(k) contribution.
  • I must maintain saving 10% of income at minimum, preferably 15%.
  • I must pay off my remaining auto loan balance.
  • I must pay off all outstanding credit card balances.
  • I must save and set aside 3 months worth of mortgage payments on the townhouse as padding in case it does not rent quickly.

If after the above steps I still think I can swing a second mortgage payment I may consider moving forward. Otherwise, I must hold off for a while longer.

Troubled borrowers are walking away from their homes

More and more often I am being told that walking away from my mortgage might be a feasible option to getting myself into a single family home in the near future. With the housing market turned upside down I am falling into negative territory on the value of my home. I’m lucky that I am not in a position where I am struggling to make my existing mortgage payments but the downturn in the housing market is keeping me from selling my town home and upgrading to a single family home.

It’s a great time to buy right now with the surplus of foreclosed homes and low interest rates and I want to take advantage of that. But if I cannot sell my current home now for atleast what I paid for it I am going to be stuck here until the market turns around. That’s a depressing thought considering that is at least 2 years out from now. Apparently, living in California has an upside if you haven’t been to much of a credit criminal and refinanced your original mortgage. It’s a scary concept but one that may make sense for some people.

The following excerpt is from an article on CNNMoney.com, the link to the full article follows:

California is a bit of a safe haven for these borrowers, since banks that repossess and then sell a foreclosed property for less than the mortgage that was owed on it cannot come after borrowers for the difference – as long as it’s the initial mortgage, one that has not been refinanced. So if a borrower owes $200,000 and the bank sells the house for $170,000, the borrower comes out of it debt-free.

Full article: Troubled borrowers are walking away from their homes – Feb. 6, 2008