Can Home Buyers Get Help When Still Making Their Payments?

Must a Borrower Stop Paying in Order to Get Help?

by Jack M. Guttentag
Inman News

“Is it true that mortgage servicers will not help borrowers who are in trouble until they stop making their payments? I am a home retention counselor, and I keep hearing from people referred to me that they have received no response from their servicer because they have not yet missed a payment. I would hate to advise people that they have to stop paying if they expect to get any help if it is not true.”

There is certainly much truth to this because I have heard the same story from numerous people I have counseled, whose stories I have no reason to doubt. The most common thing I hear is that they were told by the servicer to come back when they were two payments behind.

There are understandable reasons why borrowers who are delinquent on their payments receive more prompt consideration than those who are current. To the degree that servicers are faced with more requests for help than they can handle at one time, they have to set priorities. The number of borrowers in trouble has ballooned over the past year, outstripping the efforts of servicers to expand their capacity to deal with them.

Setting Priorities

A plausible way to set priorities is in terms of the degree of urgency of the problem. A borrower 60 days behind in his payment is closer to foreclosure, and if he is going to be saved, he needs faster action than a borrower who is current. So borrowers who are current get placed at the bottom of the list of borrowers requiring special treatment, if they are even placed on the list at all.

This tendency is reinforced by the fear of free-riders. All borrowers would like to get a better deal on their mortgages, whether they have trouble making their current payments or not. If loans are being modified to help borrowers, some borrowers who are not in financial distress will try to take advantage of the situation by pretending that they are. But potential free-riders may not be willing to become delinquent because that would hurt their credit. By only considering modifications for borrowers who are already delinquent, the servicer reduces the number of potential free-riders.

In addition, the practice of dealing only with borrowers who are delinquent keeps loans in good standing for longer periods. Consider the borrower who loses her job but has savings sufficient to cover the payments for some months. Investors would prefer that the borrower make the payment out of savings for as long as possible, since she might find another job during this period, avoiding the need for any modification of the mortgage.

Moving Up on the List

If I were a borrower with reduced income but with good prospects of recovery, I would make the payment out of savings, avoiding the hit to my credit. If I considered the prospects of recovery to be poor, however, I would stop paying and husband my savings. This would move me up on the servicer’s priority list for special treatment. While it also moves up the hit to my credit, that is something that would happen anyway as soon as my savings were exhausted.

If I did not have a problem making the current payment but would have a problem dealing with an anticipated payment increase, I would handle it differently.

First, I would determine exactly how large the payment increase would be. If the increase stemmed from an interest-only loan reaching the end of the interest-only period, the new payment could be found using any monthly payment calculator (including calculator 7a on my Web site) inputting a term equal to the remaining life of the loan. If the increase stemmed from an ARM (adjustable-rate mortgage) adjustment, the new payment wouldn’t be known exactly until a month or two before the adjustment, but an estimate based on the current value of the rate index would provide a good estimate.

A Detailed Budget

Step two is to develop a detailed budget which documents the point that the expected payment is not affordable. Use the form provided by Genworth to show your income, expenses, and assets.

Submit your document to the servicer well in advance of the anticipated payment increase. There is no guarantee that it will lead to a contract modification before the payment increase materializes. However, it gives you a good shot to move up in the servicer’s queue by providing the concrete detailed information that servicers require. It also keeps you out of the hands of the modification hustlers who want to be paid upfront for doing what you can do yourself.

CAROL PERDEW
Prudential California Realty
(209) 239-7979
wwwCentralValleyHomes.com

U.S. Housing Market Slides Further Downhill

Hardest and Easiest Places to Sell a Home

Francesca Levy
Forbes.com

As the dismal U.S. housing market slides further downhill–home prices in July posted a 16.3% annual drop–some sellers are unloading their homes to bargain-hunters.

But in cities like Seattle, Jacksonville, Fla., and St. Louis–the hardest major cities in which to sell a home–even sellers who have substantially lowered their prices aren’t finding it easy to move their houses.

In others, including Philadelphia, Sacramento, Calif., and Las Vegas, plummeting home prices spurred by high foreclosure rates have added more reasonably priced houses and condominiums to the market and sparked a rise in buying and selling.

Factors like banks’ reluctance to lend, the slow movement of foreclosed homes through some state systems and gun-shy buyers in others have restricted selling in many cities. In others, income-squeezed households have a better chance of turning their homes to cash, even if it’s not as much cash as they’d like.

In the second quarter of 2008, the median price of a single-family home dropped 23.6% in Las Vegas from the previous year, to $235,300, according to National Association of Realtors reports. In Washington, D.C., prices fell 16.8% to $370,300, and in Chicago that number went down 9%, to $257,600. 

Behind the Numbers

Radar Logic, a New York City-based real estate data and analytics company, today released housing sales transaction numbers for a sampling of homes in 25 of the country’s major metropolitan areas. This story is based on these numbers.

Of the cities measured, Philadelphia has had by far the steepest increase in home sales, with transactions more than doubling from the same time the previous year. Seattle marks the other end of the sales spectrum, having seen its transaction numbers drop by 43.7% from the previous year. Radar records transactions for sales where complete data were provided.

Although Philadelphia made the top of Radar Logic’s transaction count list in July, Michael Feder, Radar’s president and CEO, warned against interpreting too much from the sharp rise in percentage of transactions for that city.

“It can mean that there’s a more stable market in Philadelphia,” he says. “But sometimes a county will go dark for a month and not file any data from public records sources. Philadelphia is not wonderful in terms of this. So there are not necessarily a lot more transactions there.”

Sacramento, which saw swift sales in July, also had the greatest second-quarter drop in home prices from the previous year of any metropolitan area, with the median price of single-family homes down 35.6% to $229,500. There, and in other nearby cities hardest hit by the subprime disaster, houses have started to move in part because the effects of the foreclosure crisis have had more time to set in.

“In the places hardest hit a year and a half ago, prices have come way down,” says Glenn Kelman, CEO of online real estate broker Redfin Corporation. “In San Diego, Los Angeles, Las Vegas and Sacramento, they have all acknowledged the reality of home prices.”

But in Miami, also a foreclosure-rich area, buyers seem to be holding out for a better deal. Here, the number of sales has dropped 23.2%.

“Miami has a significant oversupply, and people are somewhat waiting it out,” says Rachel Drew, a research analyst at the Harvard Joint Center for Housing Studies. “There’s a lot of stock to move and people are waiting to see where the bottom is.”

Foreclosures play a complex role in the rate of home sales. In cities like Sacramento and Phoenix, foreclosed homes have flooded the market with discounts.

But real estate laws can have as much to do with homes hitting the market as foreclosure rates.

In California and Arizona, the law restricts deficiency judgments–a court’s ability to collect on the remaining value of a foreclosed home once it has been sold. In these states, homeowners with negative equity can walk away from the property, resulting in what some call “jingle letters,” house keys sent to the bank in an envelope. While the practice has consequences for lenders and borrowers, it speeds turnover in a foreclosure-ridden market.

“Lenders get the house back very rapidly and can move to sell the house very rapidly,” says Anthony Sanders, a professor of finance and real estate at Arizona State University. “In other states, deficiency judgments can slow foreclosure markets to a crawl. You go to Georgia and it’s much tougher.”

In Phoenix, which had 9.4% more recorded transactions than the previous year, many foreclosed homes weren’t on the market until recently. Sales of homes owned by banks and other financial institutions were nearly 10 times higher in July than they were the previous year. Sanders says that early in the crisis, banks held on to foreclosed properties.

“Banks, like everyone else, were hoping for a turnaround in the housing market. They were hoping that they could sell a house for more,” he says. “As the evidence comes out that this isn’t happening, they’ve wised up and started reducing house prices to get it out of their inventory.”

Radar Logic’s Feder says that increased sales of foreclosed homes in places like Phoenix and Los Angeles will be good for the market.

“Median prices are affected by these heavily discounted homes. As foreclosed homes are absorbed, we will be left with nonforeclosed homes, and we will start to see stability in the housing market,” he says. “The question is, how long will that take?”

A handful of major cities around the country have seen a sharp rise in transactions, but most are still waiting uneasily for the market to bottom out and buyers are finding loans increasingly difficult to get. In some west coast and Florida cities badly affected by subprime loans and dropping house prices, foreclosed homes are being sold at a faster rate and may be moving those cities toward a housing recovery.

But in New York, whose economy is expected to be hit hard by troubles in the financial services sector, housing prices have just begun to drop, down 5.3% in the second quarter. Sales have dropped 24.5%, suggesting the worst may be yet to come.

Even in stable markets, “less is happening,” says Feder. “It doesn’t necessarily mean buyers have plummeted, it just means buyers and sellers still don’t agree on prices.”

CAROL PERDEW
Prudential California Realty
(209) 239-7979
www.CentralValleyHomes.com