Short Selling your home could be the win-win-win alternative to loan modifications. Loan modifications can be expensive for lenders and borrowers. Foreclosures are even more expensive costing lenders billions of dollars. According to a study carried out by the congressional Joint Economic Committee (www.jec.senate.gov) each foreclosure can cost lenders as much as $50,000. Homeowners naturally don’t appreciate foreclosures either as they often end up causing borrowers to file for bankruptcy besides losing their home.
The other players in the foreclosure game are the neighbors of the homeowners that lose their home. The empty homes that are dumped on the market bring down the prices of all the homes in the neighborhood.
Short Sales can be a win-win-win situation for the lender, borrower and everybody else.
Why?
Well short sales are not without disadvantages but they do carry three great advantages:
1) The seller gets out of the mortgage liability without having to face bankruptcy.
2) The buyer gets a home for a reduced price.
3) The lender gets rid of the house at a relatively minimal loss without having to waste money, time and energy on a foreclosure.
So what is a short sale exactly? Short sales are a process by which a home is sold quickly for a reduced price. Typically the lender agrees to “forget” the difference between the debt and the price the house is sold at. It does seem strange that a bank or private lender will be willing to sell a house at a loss and forgive the outstanding debt. However the case is that even though lenders don’t make a profit short selling can be a much better (i.e. cheaper) solution than foreclosing or even modifying a loan.
Let’s illustrate a scenario where a short sale might make sense. Imagine you own a house that is worth $100,000, you owe $120,000 on your mortgage. You approach your mortgage provider and explain you have lost your job and are unlikely to be able to find a good enough job to continue repaying your $2000 a month mortgage. The ank agrees you are unlikely to be able to pay in the future and accepts your proposal of short selling your home. You sell it at $75,000 and the bank absorbs the $50,000. Obviously the key part is to convince your bank that paying the difference of your mortgage and the price of the home is going to be cheaper or better business than foreclosure a full bankruptcy.
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Loan Modifications do not seem to be the solution Government hoped it to be. It is having some success, over 650,000 trial loan modifications, but the floodgates of foreclosure risk homes are not even close to being closed. Of the 650,000 trial loans only 1,711 borrowers got a permanent loan modification. Many experts predict that few of the trial loan modification will work long term and that most troubled borrowers will ultimately foreclose on their homes.
This bleak outlook has made Government and Federal Agencies look elsewhere to provide alternative options to loan modifications. One of these options, Deed for Lease, we mentioned last week and we are going to take a second look at it.
This option which has been kicked around in the nationwide housing crisis debate was finally taken on by Fannie Mae which has started to offer leases of up to 12 months when other avenues to keeping families in their homes, like loan modifications are unsuccessful. Some like Dean Baker, co-director of the Center for Economic and Policy Research see it as a great step forward in Government policy.
So will Dead for Lease, renting your own home be a viable option for struggling homeowners?
It is certainly an interesting idea. On one level it could be seen as a win-win option for pretty much everybody, at least in certain circumstances.
Win-win, because struggling homeowners get a chance to stay in their home when it has been settled that they can’t afford their mortgage but can afford the market rent of their home. It would also be good news for the neighborhoods struggling homeowners live in as it would avoid the drop in house prices foreclosed ridden neighborhoods are characterized by.
Even lenders may find this option appealing as an alternative to selling properties at cut rate prices. Lenders could turn landlords for as long as the market takes to turn around when they could sell the properties.
However few are predicting an avalanche of copy cat programs following Fannie Mae’s Deed for Lease program. Why? Two main reasons stand out.
1) Legal liability. Once a bank turns landlord he acquires responsibilities towards his tenants, the previous homeowners. The tenants could demand work being carried out on their home if there are cases of mold, Chinese drywall or other hazards in the home.
2) Banks are lenders not landlords. Most business like to stick to what they do best and not get into others types of business. As Chase spokesman Tom Kelly is reported to have said: “We’re not really equipped to be landlords”. Lenders in the U.S are sitting on nearly half a million repossessed homes. The operation required to manage leases on such a volume of homes does not seem attractive to many lenders at this moment. Most prefer to dump the properties on the market even if it is a buyer’s market and prices are very low.
Fannie Mae has subcontracted landlord management duties to another country but it is doubtful other companies will follow suit.
3) Leasing properties is often not as profitable as selling, especially when your business is not geared to managing a rental operation.
These reasons would indicate that Deed for Lease will not be a big deal in the mortgage market, at least for now. However there is no reason it won’t take off later on. There are many examples of housing policies starting small with federal housing agencies (like Fannie Mae) and then exploding to take nation and industry wide importance. A good example of this are loan modifications.
Many economists predict that loan modifications will not stop the avalanche of foreclosures caused by an ever increasing rate of unemployment and a nationwide drop in home prices. This might provide a chance for more attention to the idea of renting homes back to previous owners if the market is so saturated selling is no longer a viable option.
Related posts:
Loan Modifications do not seem to be the solution Government hoped it to be. It is having some success, over 650,000 trial loan modifications, but the floodgates of foreclosure risk homes are not even close to being closed. Of the 650,000 trial loans only 1,711 borrowers got a permanent loan modification. Many experts predict that few of the trial loan modification will work long term and that most troubled borrowers will ultimately foreclose on their homes.
This bleak outlook has made Government and Federal Agencies look elsewhere to provide alternative options to loan modifications. One of these options, Deed for Lease, we mentioned last week and we are going to take a second look at it.
This option which has been kicked around in the nationwide housing crisis debate was finally taken on by Fannie Mae which has started to offer leases of up to 12 months when other avenues to keeping families in their homes, like loan modifications are unsuccessful. Some like Dean Baker, co-director of the Center for Economic and Policy Research see it as a great step forward in Government policy.
So will Dead for Lease, renting your own home be a viable option for struggling homeowners?
It is certainly an interesting idea. On one level it could be seen as a win-win option for pretty much everybody, at least in certain circumstances.
Win-win, because struggling homeowners get a chance to stay in their home when it has been settled that they can’t afford their mortgage but can afford the market rent of their home. It would also be good news for the neighborhoods struggling homeowners live in as it would avoid the drop in house prices foreclosed ridden neighborhoods are characterized by.
Even lenders may find this option appealing as an alternative to selling properties at cut rate prices. Lenders could turn landlords for as long as the market takes to turn around when they could sell the properties.
However few are predicting an avalanche of copy cat programs following Fannie Mae’s Deed for Lease program. Why? Two main reasons stand out.
1) Legal liability. Once a bank turns landlord he acquires responsibilities towards his tenants, the previous homeowners. The tenants could demand work being carried out on their home if there are cases of mold, Chinese drywall or other hazards in the home.
2) Banks are lenders not landlords. Most business like to stick to what they do best and not get into others types of business. As Chase spokesman Tom Kelly is reported to have said: “We’re not really equipped to be landlords”. Lenders in the U.S are sitting on nearly half a million repossessed homes. The operation required to manage leases on such a volume of homes does not seem attractive to many lenders at this moment. Most prefer to dump the properties on the market even if it is a buyer’s market and prices are very low.
Fannie Mae has subcontracted landlord management duties to another country but it is doubtful other companies will follow suit.
3) Leasing properties is often not as profitable as selling, especially when your business is not geared to managing a rental operation.
These reasons would indicate that Deed for Lease will not be a big deal in the mortgage market, at least for now. However there is no reason it won’t take off later on. There are many examples of housing policies starting small with federal housing agencies (like Fannie Mae) and then exploding to take nation and industry wide importance. A good example of this are loan modifications.
Many economists predict that loan modifications will not stop the avalanche of foreclosures caused by an ever increasing rate of unemployment and a nationwide drop in home prices. This might provide a chance for more attention to the idea of renting homes back to previous owners if the market is so saturated selling is no longer a viable option.
Related posts:
Home sales got a needed boost because of the Obama administration’s $8,000 tax credit for first-time buyers. With the national economy and housing market still fragile, the government recently decided to extend the tax credit through June 2010.
The government also rolled out a new tax credit aimed at existing homeowners. Currently in effect, the $6,500 “move-up” tax credit would apply for eligible homeowners who purchase a new permanent residence in the coming months.
Housing experts hope the two tax credits can help the struggling housing market rebound in 2010.
“The new version of the tax credit has the potential to stimulate the housing market even more than the old version due to the fact that more people will qualify under the new rules,” Gibran Nicholas, chairman of the CMPS Institute, an organization that certifies mortgage bankers and brokers, told CNN after the bill’s passage.
Thousands of Americans have already taken advantage of the first-timers program, which defines “first-time” buyers as those who haven’t purchased a home in three years. There are also income restrictions — individuals who make more than $75,000 and married couples who clear $150,000 are not eligible for the first-timers program.
Meanwhile, existing home buyers who have considered upgrading or downsizing can take advantage of the new $6,500 tax credit. Purchasers need to have owned their current home for a stretch of at least five consecutive years in the last eight.
Individual buyers can’t have an adjusted household income exceeding $125,000; for joint filers, the threshold is $225,000. There are also a few other key components of the new $6,500 tax credit:
To learn more about the $8,000 first-time home buyers tax credit extension and the new $6,500 tax credit for existing homeowners visit our blog.
Learn more about mortgage loans at Mortgage Loan Place. We specialize in educating consumers on all types of loans with an emphasis on FHA home loans and FHA refinancing.
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