Alternatives to Foreclosure: The Hidden Power of Property Owners
We are facing an unprecedented rise in foreclosures in the United States that threatens our financial security and the stability of our communities. Today every homeowner is acutely aware of the rapid decline in property values. The real estate euphoria that took place during the “boom” years at the beginning of this decade has vanished. Prices have plummeted and home equity has simply evaporated. For many owners this loss of equity poses a grave threat. Owners, who bought or refinanced a home during the boom, now find themselves “underwater” owing more on their mortgage than their house is worth. Those with adjustable mortgage rates may discover that their monthly payments have risen and are now out of reach. For others the steep economic decline and dramatic job losses have cut income, leaving them no longer able to afford their monthly payments.
One in every eight Americans is now late on a payment or in foreclosure according to the Mortgage Bankers Association, (MBA). About half of the new foreclosures were in four states: California, Florida, Arizona, and Nevada. While 11 percent of all mortgages in Florida were in foreclosure, the Massachusetts foreclosure rate was 2.8 percent with 12,000 foreclosures in 2008.
This foreclosure crisis though is more than a national crisis. It is a community problem that affects our town’s neighborhoods. Middlesex County leads Massachusetts with 1,741 foreclosure filings so far this year. In Billerica there have been 61 foreclosure filings since the beginning of the year, giving it the 23rd highest foreclosure rate in Massachusetts ahead of 335 cities and towns across the state. Even though there are powerful market forces that are driving this, foreclosures can almost always be stopped.
Foreclosure can be stopped because property owners have a great deal more bargaining than they realize. Taking a property back through foreclosure is always the last resort for banks. The fact is banks do not want to own property. Rehabbing, managing and selling homes are not what banks do. In fact, foreclosure is very expensive for banks. Analysis from Freddie Mac and large banks show that the average cost of foreclosure is $60,000. That is in addition to the loss incurred on the sale which often amounts to 20 percent to 25 percent of the loan’s value. Because of this, banks have a strong incentive to work out the problems with the loan and try to find an accommodation with the borrower.
In order to access their negotiating power, owners who are concerned about foreclosure must take two immediate steps, (1) understand and evaluate their options, and (2) take immediate action. The first step in this process is for the borrower to contact their lender. By simply notifying the bank, the borrower is opening a dialogue and beginning the negotiating process. It gives the bank the good news that like them, the borrower wants to do all they can to work out an alternative to foreclosure.
While there are several strategies a borrower can use to avoid foreclosure, there are three that are primary, (1) refinance, (2) loan modification and (3) short sale. The new government Home Affordability and Stability plan offers incentives for all three. Borrowers who are current on their payments, but owe more than their house is worth may be eligible to refinance, lowering their monthly payments. Owners who are behind may seek to modify the terms of their loan by extending the length of the term, lowering the interest, or both.
Borrowers who owe more than their house is worth, want to move, or do not qualify for other options can sell their property through a "short sale.” A short sale enables an owner to sell their property for less than the amount they owe on their mortgage. In almost all cases this allows the owner to sell their property quickly, free themselves from mortgage debt completely and take advantage of the Mortgage Debt Relief act to not pay taxes on any forgiven debt.
Foreclosure has a direct, negative effect on both the borrower and the lender. More importantly though, foreclosures drive down property values for the entire community. Homes currently on the market become less sellable, more owners are put at risk and foreclosure becomes more likely, creating a negative, downward spiral in the housing market that affects us all. It does not have to be like this though. A property owner who arms themselves with information and takes action has the power to stop foreclosure in its tracks.
One in every eight Americans is now late on a payment or in foreclosure according to the Mortgage Bankers Association, (MBA). About half of the new foreclosures were in four states: California, Florida, Arizona, and Nevada. While 11 percent of all mortgages in Florida were in foreclosure, the Massachusetts foreclosure rate was 2.8 percent with 12,000 foreclosures in 2008.
This foreclosure crisis though is more than a national crisis. It is a community problem that affects our town’s neighborhoods. Middlesex County leads Massachusetts with 1,741 foreclosure filings so far this year. In Billerica there have been 61 foreclosure filings since the beginning of the year, giving it the 23rd highest foreclosure rate in Massachusetts ahead of 335 cities and towns across the state. Even though there are powerful market forces that are driving this, foreclosures can almost always be stopped.
Foreclosure can be stopped because property owners have a great deal more bargaining than they realize. Taking a property back through foreclosure is always the last resort for banks. The fact is banks do not want to own property. Rehabbing, managing and selling homes are not what banks do. In fact, foreclosure is very expensive for banks. Analysis from Freddie Mac and large banks show that the average cost of foreclosure is $60,000. That is in addition to the loss incurred on the sale which often amounts to 20 percent to 25 percent of the loan’s value. Because of this, banks have a strong incentive to work out the problems with the loan and try to find an accommodation with the borrower.
In order to access their negotiating power, owners who are concerned about foreclosure must take two immediate steps, (1) understand and evaluate their options, and (2) take immediate action. The first step in this process is for the borrower to contact their lender. By simply notifying the bank, the borrower is opening a dialogue and beginning the negotiating process. It gives the bank the good news that like them, the borrower wants to do all they can to work out an alternative to foreclosure.
While there are several strategies a borrower can use to avoid foreclosure, there are three that are primary, (1) refinance, (2) loan modification and (3) short sale. The new government Home Affordability and Stability plan offers incentives for all three. Borrowers who are current on their payments, but owe more than their house is worth may be eligible to refinance, lowering their monthly payments. Owners who are behind may seek to modify the terms of their loan by extending the length of the term, lowering the interest, or both.
Borrowers who owe more than their house is worth, want to move, or do not qualify for other options can sell their property through a "short sale.” A short sale enables an owner to sell their property for less than the amount they owe on their mortgage. In almost all cases this allows the owner to sell their property quickly, free themselves from mortgage debt completely and take advantage of the Mortgage Debt Relief act to not pay taxes on any forgiven debt.
Foreclosure has a direct, negative effect on both the borrower and the lender. More importantly though, foreclosures drive down property values for the entire community. Homes currently on the market become less sellable, more owners are put at risk and foreclosure becomes more likely, creating a negative, downward spiral in the housing market that affects us all. It does not have to be like this though. A property owner who arms themselves with information and takes action has the power to stop foreclosure in its tracks.
If you would like free information on what action you can take please visit our web site at www. ConcordRiverGroup.com or call us at 800- 494–4971 ext 106.
