Friday, July 10, 2009

it's a fine mess we've gotten ourselves into...

an article on the probable next phase of the housing meltdown resulted in a pretty long string of comments; lots of crass and ignorant pricks chimed in, but there's quite a few that ring true with personal experience and hit pretty close to my own heart, so although i never jump into these frays, i made an exception in this case to make a personal point about how this whole deal has made victims even of those who did their best to do everything my daughter's family.

there is no doubt that homeowners with good credit who purchased homes during the bubble will begin to walk away from mortgages that are not currently in default or even delinquent as short-fuse mortgages reach reset dates.

my daughter and her husband, who are fiercely protective of their credit rating and the honorable fulfilling of their obligations, purchased a modest home in new port richey, fl in july '05 for $171,000 with 100% financing arranged through e-loan that involved an 80% first mortgage and a second mortgage for the remaining amount...100% financing, interest only for five years, with the expectation that the increase in value would allow them to refinance into a new first mortgage for the full amount when the two notes come due 07/10. they have struggled but have maintained their payments in full and on-time because that is what they agreed to do.

in today's market, that home would probably sell for about half of the original purchase price...about $80-90,000. what are they to do? if the bank would give them a new fixed-rate mortgage for the full amount, they would no doubt accept it, continue to live in their home and make the payments on time -even though it would be a struggle- because they want to keep their commitment. but of course refinancing will require an appraisal, and the bank will no doubt want to finance just 80% of the current value, and they have no way to pay the huge difference, even if they were dumb enough to do so.

i have always advised them on their purchases and finances, and even helped them choose their current 80/20 mortgage which has a good rate and was within their ability to pay, so it is not as if they were irresponsible in buying more home or taking on more debt than they could afford. they are innocent victims of the boom and bust cycle that was orchestrated by a broken and corrupt system.

it breaks my heart to tell them they should do so, as they have done everything right, and it is so important to them, but i am advising them to place their home on the market as a short sale at the current value as an alternative to allowing the mortgages to fall into default and allowing a foreclosure. sadly, even a short sale that is accepted by the lenders will have a serious effect on their credit which is so important to them, could result in the banks asking them to pay the shortage, and no doubt will affect their ability to purchase another home in the future.

why on earth is it not possible for the banks to reduce the principle on their debt to the amount that the house would sell for today and have them continue to pay their obligation, keep their home, and retain their good credit rating? the banks would get the same amount they will get anyway in a short sale, and save the costs involved with selling and financing the home to someone else. this is a situation that is beyond any reason, and as this article points out, i'm afraid the effects of it are only beginning, as homeowners who have kept up their payments face the prospect of having no choice but to give up their homes and mortgages as the thousands of sales and mortgages done with five-year terms come home to roost.


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