Explore your options before considering foreclosure—you’ll likely be surprised.
“If all your friends jumped off a bridge, would you do it too?” Surely every person in the world has heard this phrase (usually uttered by a parent at some point during the listener’s teenage years, when succumbing to peer pressure was the thing to do—even if it meant following outrageous fashion trends, acting inappropriately or basically going against anything that anyone over 30 was doing).
It seems succumbing to peer pressure every now and then isn’t just a vice for the young, but one that adults can fall into just as easily. However, at times, “keeping up with the Joneses” doesn’t just mean getting more expensive cars, homes or belongings. Sometimes it can work in the opposite direction, with individuals putting themselves into dire circumstances needlessly.
Such is the case with the current foreclosure situation, which is seeing many families defaulting on their mortgages simply because the neighbors ran into trouble or, even more likely, the amount of negative media attention on the “mortgage crisis” has made everyone feel ready to give up, declare bankruptcy and go live in a cave.
And, while foreclosure will obviously have a huge, negative impact on one’s family, lifestyle and credit standing for the next 10 years, it’s important to remember that it also impacts the community as a whole.
The snowball effect
“As more people panic and short sell their house or default on their mortgage for reasons that aren’t overly compelling—they do it because the neighbor’s doing it, because everyone’s doing it, because it’s the easy way out—the more people who do that, the more the snowball grows,” says Trish McLean, a realtor for Century 21 Alliance in Santa Rosa. “That’s what we’re dealing with now. We have a lot of inventory on the market, and we have a lot of people who lost their homes, who I, honestly, don’t think needed to do so.”
And this problem hasn’t only affected those who are foreclosing, but everyone else involved—both directly and indirectly—in the real estate market.
“With realtors, you’ve seen a ton of people who didn’t have a built-up portfolio of clients they’ve been working with for 10 years or longer getting out of the business,” says Kelly Buckley, a loan consultant with Mission Hills Mortgage. “Plus, a lot of the higher-end properties are sitting on the market because they have more to lose. People are listing their homes but will only settle for so much loss. Then they pull them off the market and decide it’s not time to sell. So, realtors are missing out on those transactions as well, as are the lenders, title companies, appraisers, roofers, painters…everybody involved in a real estate transaction. It’s taken a dramatic cut into all the real estate professionals’ income.”
Of course, there are many people who got into loans they probably shouldn’t have, either because they weren’t properly educated on the technicalities of the loan, they didn’t understand the ramifications, or simply chose to look the other way and were banking on their equity exponentially increasing every year (as it had for so long).
“I think it started, in big part, because of the adjustable rate mortgage (ARM) loans and the way people got them,” explains Buckley. “Often they were putting nothing down, doing 100 percent financing, interest-only loans with a low initial fixed rate for either three or five years. Maybe they had substandard credit or did a stated income loan because they had cash coming in on the side. Stated income is for people who can’t document their income, but who do earn it.
“Well, maybe they lost that second source of income. And now their interest rate is converting from an interest-only loan to a fully amortized loan and going up, all the while the value has started coming down. Put all those together, and you not only have a pragmatic bottom line numbers issue, but you also have the emotional piece to it. People fulfill their American dream, get their home and, all of a sudden, they’re faced with losing it. They’ll struggle, scratch and bite to try to keep it, but the money only lasts so long before they can’t make payments.”
The statistics are daunting. According to MLS (Multiple Listing Service) sales data, in the first half of this year, 91 percent of the closed home sales in Southwest Santa Rosa were “distressed” properties, meaning either pre-foreclosure (the period between when a borrower becomes delinquent and when the property is seized by the bank) or foreclosed properties; about 70 percent are distressed in Northwest Santa Rosa. Countywide, that figure stands at about 45 percent, though certain areas, such as Healdsburg, have seen very little foreclosure activity.
While the foreclosures have spanned across the board—affecting people of all ages, ethnicities and socio-economic backgrounds, and every industry and job title—those who have the fewest alternatives have been affected most.
“It’s affected everyone,” says McLean, “but certainly, looking at the statistics, there’s no doubt it’s affected the entry-level price range the most. And typically, that’s where you’re going to see the first-time home buyer, maybe those who are more marginally employed and also the first time-investors. So, we’ve seen the people with the fewest choices being hardest hit—those who don’t have any other alternatives but to lose their house.”
Know your options
Although for some, foreclosure will, unfortunately, be the only option, many others have more choices and alternatives than they may realize.
“I had clients who had purchased a home a few years ago, when values were still relatively reasonable,” says McLean. “But, they’d both lost their jobs and were having trouble making their mortgage payment. They called me somewhat in a panic, thinking their only solution was to, as they said, ‘give the house back to the bank.’ But they actually had equity in their house…It made me think, if their first reaction was to give the house back, when they were actually in a situation with other options, how many more people were thinking the same thing and panicking because they’d read headlines in the newspaper about people losing their homes?”
This conversation gave McLean the idea to start a workshop that could help people evaluate their options and determine where to go next.
“Instead of trying to come up with a solution to the problem, many people just have a knee-jerk reaction and decide the only option is to lose their house,” explains McLean. “That was the impetus for the workshop. I talked to my broker and said, ‘We do these first-time homebuyer seminars, but it seems what we really need to be doing is a seller’s seminar to educate homeowners on whether or not they really do need to sell and, if they do, if this is the right time for them to sell or if they have other options. And if they’re going to sell, what realities they’re going to face in the market.”
Shortly after, the “Smart Home Choices Workshop: Strategies, Solutions and Alternatives to Keep Your Home” was born. It’s a cooperative effort between a plethora of companies, including: Bank of America Mortgage; Century 21 Alliance; Chase Home Finance; Countrywide Home Loans; Financial Title Company; Fountain Grove Mortgage; Houghton & Freitas CPAs, LLP; Mission Hills Mortgage; the National Association of Hispanic Real Estate Professionals; the Press Democrat; Redwood Credit Union; Residential Pacific Mortgage; the Santa Rosa Chamber of Commerce; WaMu Home Loans; and Wells Fargo Home Mortgage.
The first workshop took place in December 2007 and, despite it being right after the Thanksgiving holiday and in the midst of Christmas shopping season, more than 120 people attended. Since then, there have been two more workshops with turnouts just as large.
“Our goal with this workshop wasn’t to reach out to those who truly had no options—those who were really upside-down on their mortgage and unable to make their payments,” says McLean. “It wasn’t a ‘Let’s help you keep your house’ seminar. We were trying to help people think differently and look long-term, because what may be extremely painful today—if you can manage through it (and that’s a big if, we have to help you figure that out)—five years, 10 years from now, you’ll be so thankful you did. Because despite our recent glitches in the market, over time, the value of the property is going to go up. So, if we can help you stay in that house, you’ll be richer 10 years from now than if you let your house go, even though you’ll be paying a mortgage that isn’t comfortable for a while.”
Inform yourself
So, if you’re in a mortgage situation that’s uncomfortable at best (or, perhaps, downright painful), what can you do?
The very first thing that everyone who’s not in a fixed interest, fully amortized loan should do is to read their loan documents and make sure they completely understand what loan they have: Look at what percentage they’re currently paying, when the loan will adjust and what it will adjust to. Is it tied to the index? What will the new payments actually be? How long until it may readjust? All these answers can be found by looking through your documentation or calling your lender.
“A lot of people just know they have a loan. They know they’re making this payment every month because the statement comes, and they write the check for whatever it says, but they don’t really know exactly what type of loan they have,” says McLean. “By that, I mean, if it’s an adjustable loan, when does it adjust? Are they still in a fixed period for that loan? They need to know this first, just so they can start planning ahead, and second, so they can look at what that adjustment means. Figure out the worst-case scenario of the coming adjustment.”
It’s also important to know both what your current situation is, as well as where you want to be down the road. Figure out not only what type of loan you have, but also what your big picture mortgage situation is. Do you still have equity in the home? How much? Do you have negative equity? How much? You can get a general idea without having to pay for an appraisal (although you’ll need to get a professional appraisal prior to refinancing), simply by looking at comparable homes in your area. Look at what homes were listed for, what they sold for and how long they were on the market. Also, determine what your future plans may be. Do you plan to stay in the house until you retire? Do you plan to move in a year or two? The amount of time you plan to stay in the home can make a big difference in determining what type of loan you should get—or even if you should refinance at all.
After you’ve determined what your current situation is, as well as where you want to be, immediately contact your lender and communicate your circumstances, as well as what you expect in the near future. Statistics show that at least 50 percent of all borrowers don’t call their bank when they stop making payments.
“I’ll tell you, the bank doesn’t call you [to find out what’s going on],” says McLean. “The first communication you’ll have from the bank when you stop making payments is 90 days later, when you get a notice of a default that’s been filed with the county. The banks are too busy.”
An upside is that banks are now more prepared to deal with these situations, and most have developed new departments and procedures to address them. While many banks won’t work with you regarding adjustments to your payments until you’ve missed a few (so they can be really sure you can’t make them), it never hurts to ask and to explain your situation.
“The first thing to do if you’re struggling with your loan payment is to contact your bank and try to negotiate alternative terms,” says Buckley. “The bank will either work with you or they won’t. But you can’t be sure until you ask. If you’ve paid on time and have a good track record, but you have a five-year ARM [for example] and the home’s value came down while the loan’s interest rate jumped up by 4 percent, and now it’s principal and interest instead of interest-only, the bank may decide to freeze your interest rate rather than increase it. It may decide to let you to make interest-only payments. Or it may go ahead and slip you into a negative amortization loan.
“A lot will depend on your past payment history. If you’ve paid on time, the bank will more than likely work with you so it doesn’t have to take the expensive foreclosure. It takes a long time to foreclose. There are a lot of legal expenses, and once it has the property, the bank may have to fix it up before putting it on the market. Every day it owns that property, it’s losing money, because there’s no one making any payments.”
Most people in the mortgage industry agree that, if at all possible, it’s best to try to keep your house. The market will inevitably turn around, and even if it takes years, if you’re planning to live in your house long-term, you’d be financially better off keeping it.
“I deliberately don’t pay attention to the [foreclosure] stats, because I operate really well by keeping a very positive outlook,” says Roberta DiPrete, broker associate with Corte Madera-based Vision Real Estate. “Of course, there’s a lot of negative talk right now, but I have a unique perspective in that my grandparents both came over from Italy and, as new immigrants, invested in real estate. So, my perspective doesn’t just go back over the last 10 or even 20 years; it goes back three generations. I’m very bullish on real estate, knowing that any depreciation will, before long, be offset by the gains. In other words, I’d suggest doing everything possible [to keep the house], because eventually, it’s going to turn around, you’re going to regain equity and you’ll keep your credit score intact and save all the costs associated with selling.”
Explore all solutions
This information may be all well and good, so far as it goes, but what’s a homeowner to do who’s having trouble making monthly mortgage payments? Obviously, it’s a great long-term investment to keep the home, so in many situations, it’s worth becoming proactive to save it—even if that means a difficult short-term outlook.
“If it’s a budget question to make that mortgage payment, what are your options?” says McLean. “Are you able to get a second job? Can you rent out a room? Can you borrow money against your 401(k) or other retirement plan? Do you have a relative who wouldn’t mind either loaning you money and taking a second or a third deed of trust against your property, or who might be interested in becoming a co-owner with you? You could actually sell them a percentage of the ownership of the home.”
This last option would need to be considered a long-term investment by the investor, but it’s a win/win. The investor will earn a much higher return than they would on, say, a CD, and the homeowner can obtain the relief needed.
As DiPrete says, “It’s better to share the equity with somebody down the road than to lose it all now.”
Make hard choices
With all of these ideas, it’s of course, wise to consult your personal banker, tax adviser or investment consultant. However, don’t give in to foreclosure until you’ve looked at all alternatives. Lenders urge homeowners to simply start thinking a little differently instead of taking the “easy” way out—to foreclose.
Other ideas include cashing in on other investments and, of course, budgeting. It’s amazing how much money you can free up by limiting purchases on other items and/or downscaling other fixed costs, such as switching cell phone providers or replacing your gas guzzler with a fuel-efficient car that costs less to insure.
While these may be tough choices to make, McLean reminds homeowners that they need to remember their priorities.
“We still see it…they’re losing the house, but they still have the boat,” says McLean. “It’s sad but true.”
“Part of our message is, what are your priorities? It’s fine if your priority is, ‘I want the boat.’ Great, but don’t complain about losing the house. It’s fine if those are your priorities, but don’t blame the bank. You’ve made the choice of what’s more important to you. If you don’t have any of those things and you’re still losing the house because you can’t make the payments, then that’s a different story. But if you’re losing the house and you still have all this other stuff, then let’s get real here.”
Although you may feel like one of the unlucky ones, having to perhaps get a second job or ask friends and family for help, it might help you see the glass as half full if you consider that many people don’t have these options, have had to foreclose and have no investment at all to fall back on in the future.
If you need additional help, there are many more resources than even just a year ago. Some websites to check out include the Homeownership Preservation Foundation (www.995hope.com) and Consumer Credit Counseling Service (www.cccservices.com). To find out about upcoming “Smart Home Choices Workshops”, check out www.homechoicesworkshop.com.
