Loan Modification programs like HAMP were set up with the goal of providing financial stability to the housing industry. A crippled Real Estate market affects everyone, even people who are not struggling with their mortgages. Neighborhoods get run down, house prices drop, and house service provides like builders, plumbers, electricians and pool cleaners also feel the pinch.
The numbers show that loan modifications and the programs that promote them are not providing the solution hoped for. Could house flippers provide the stability that lenders, servicers and the government have failed to deliver?
First, what is a house flipper? It is an investor that buys a home with the sole purpose of quickly reselling it. This practice is often restricted on homes that have received some kind of government subsidy. House flipping is an industry in its own right. Investors are always looking out for bargains they can quickly resell. During the housing boom everybody was doing it. Even rookies that had never bought a house before were making a profit from buying a house making some small (or large) improvements and selling it again. Now, deep in the financial and housing crisis it is certainly not a game for amateurs. However, professional are doing just great, in fact they are making more of a profit than ever before.
House flipping is one of the few housing sectors that are still booming. On a national level the number of flipped homes increased by 19%, and there is still time for this figure to grow even more before the end of the year.
House flipping has often been considered a scourge of the housing industry, made up of ruthless investors out to make a profit from troubled borrowers. Now, many hail them as financial heroes that are injecting much needed cash into homes and neighborhoods hard hit by the crisis. This practice is also helping to clear out properties from moribund housing markets that are suffering from the raise in foreclosures.
House flipping also generates business for carpenters, builders and other home service providers that are contracted to clean up old homes in need of maintenance. It has also created new jobs like that of a “runner” or a “driver”, who are used to check out homes that are going to be auctioned off and inform potential buyers if they are occupied, what condition they are in, what the neighborhood is like, and other relevant information.
Such are the benefits of house flipping to the housing market that the Federal Housing Authority is considering a one year waiver on anti-flipping regulations. This will allow buyers to purchase foreclosed homes form owners that have owned the property house for less than 90 days. This will help first time buyers get their hands on renovated properties at lower prices.
Could this be a case of digging our way out of a financial crisis by helping people make money instead of just passing on handouts? Granted house flipping will not help troubled borrowers keep their homes, but it might help the housing market recover faster and reduce the negative effects of the current housing crisis.
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Last week I received a very interesting comment on one of my articles on loan modifications. The comment claimed that for most underwater borrowers (homeowners that owe more on their property than it is worth) a “strategic default” is smartest way to go.
I had some months ago written an article claiming along similar lines that in many cases foreclosure is the only logical conclusion when homeowners had overspent on their homes and could no longer afford the overpriced luxury homes they had unwisely bought at the crest of the housing boom.
Readers response ranged from claims that greedy buyers had it coming and deserved to lose homes they should never had bought to angry comments from people that felt my cold perspective was detached from the real plight of homeowners.
Opinions on the issue of loan modifications typically polarize to these two opposite views. 1) That loan modifications are an unwelcome intervention to the “natural” forces of free market and 2) that “saving” troubled homeowners is the responsibility of Government and the god given right of homeowners.
The comment I mentioned above intertwined these two views in an arguably “immoral” but very pragmatic perspective that you will hate or love.
The proposition is that if done smartly a foreclosure can provide a clean slate for troubled homeowners that can’t realistically save their homes. Banks won’t like this option but homeowners need to care for themselves, banks certainly do so. These are the steps our anonymous commentator suggests, with some gentle editing:
1) Let the lender foreclose. During this time you will of course not have to pay your mortgage payments. 2) Just before your property is to be sold declare bankruptcy. This will wipe out all liability for the mortgage debt, if this is an issue in your state, eliminate all other unsecured debt and in the process buy you a few more months to move and during which you can save your mortgage payments towards your move. 3) Start rebuilding your life. The market is a mess now anyway and most likely will continue like this for several years. Your credit will be destroyed by the bankruptcy and will appear on credit reports for 7 to 10 years but during this time you can rent while your credit scores improve. In two to three years you could have a decent credit score if you don’t get into more trouble. After only 2 years of a bankruptcy you can qualify for loans that allow for persons who have had a foreclosure/bankruptcy, like FHA for example.Editors note: Bankruptcy laws have tightened up a bit so this “advice” might be underestimating how many years you will be unable to take a loan and the annoying detail that the government will be pretty much running your financial life for you for years after declaring bankruptcy.
This option is not a great one for loan modification agents, as they don’t get any money out of it but might be a good option for some troubled homeowners.I must say that I don’t feel this option is a responsible or moral way of dealing with debt but it is another option. Unfortunately the credit culture we live in moves people to spend money they don’t have on things they don’t need. The idea that all that waste can be made to disappear with a convenient bankruptcy does not seem fair. However there are many homeowners that have fallen into dire straits without being irresponsible because of unemployment and the drop in house prices.
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Big Banks are in trouble as more and more families are unable to pay their mortgages. The problem is that troubled homeowners are no longer the “typical” borrower with subprime loans with high interest rates. High unemployment is creating a whole new demographic of troubled borrower with “good” loans they can simply not afford anymore.
Another problem is the existence of billions of dollars in option-adjustable rate mortgages which are a totally different ball game to subprime mortgages or prime mortgages.
Wells Fargo & Co. the fourth largest U.S bank is a good representative of this situation with over $107 billion in option adjustable mortgages. This loan product is as typical as it gets in housing boom “crazy” products. Option adjustable mortgages allow (or allowed, not many are sold anymore funnily enough) borrowers to make small monthly payments in return for increasing their mortgage balance. This effectively allowed borrowers to choose how much to pay as their monthly mortgage payment. The result was that many of us fell for the belief that the housing boom would never end and that our homes would continue to increase in value offsetting any increase in mortgage balance due to small monthly payments below the cost of interest.
The problem now, of course, is that many Pick-A-Pay borrowers own homes that are worth much less than what they owe in mortgage debt and just about as many can’t afford a monthly payment that will pay off any of the mortgage principal.
What can banks do? Wells Fargo is taking one big gamble by issuing interest only loans in the thousands. These interest only loans will defer borrower’s balances for up to 10 years. The gamble is that housing prices and consumers income will rise, especially in the hardest hit parts of the country, and cover the billions of dollars in underwater debt.
Although borrowers that are struggling to pay their mortgages and fear losing their homes will probably be happy to take anything that will keep them afloat during these hard times it is hard not to see this measure as a very high risk one. One newspaper compared this “solution” as a game of kick the can down the road where the “problem” is kicked into the future hoping it will disappear. However with loan modifications hardly making a dent into the number of homeowners facing foreclosures it is hard to see many better alternatives to these extreme measures.
If you own a Pick-A-Pay mortgage and are struggling to pay enough to reduce your mortgage principal it is paramount that you get good personalized advice. The best advice comes from the government and they have a vested interest in your success. You can call HUD for approved housing counseling at 239 434-2397 or visit www.hud.gov.
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