1a – The Current Market
The good news for people trying to buy a house right now is that prices in Walnut Creek have come down about 31% in the last 5-years. The bad news for people trying to refinance or sell their house is that prices in Walnut Creek have come down about 31% in the last 5-years. The Top 2/3 of homeowners in Walnut Creek have owned their homes long enough that the housing crisis hurts, but is not crippling to them. This page should be helpful to homeowners who bought or refinanced at the top of the market and have seen most or all of their equity disappear.
About 1/3 of houses in the USA are paid in full.
Another 1/3 still have considerable equity.
The final 1/3 have no equity and owe more for their house than the current market value.
If you’re in the Top 2/3, the housing crisis has had an impact on your life.
If you’re in the Bottom 1/3, the housing crisis has had a HUGE impact on your life.
If you’re in the Top 2/3 when we sell your house, it will be a normal transaction.
If you’re in the Bottom 1/3 and you need to move, it will be a bit more challenging.
If you’re in the Bottom 1/3 and you have a high interest rate loan – you’re stuck. You can’t refinance and take advantage of the 4% interest rates now because of the loan to value ratios. You ask your bank to modify your loan for you and they say they can’t do it unless you’ve missed 6-months worth of payments – you’re frustrated because you’ve never missed a payment.
If you’re in the Bottom 1/3 and you are going through a divorce – both of you are stuck. You owe more to the bank than the house is worth and neither one of you can buy the other one out and keep a stable home for the kids. Your down payment money was the first money to evaporate when values tanked. You have to cash in your retirement account in order to make up the difference just to be able to sell the house and go your separate ways.
If you’re in the Bottom 1/3 and you’re underwater by more than your family’s annual income, you are seriously looking at the value of your credit and whether it makes sense for your family to be throwing good money after bad – it feels like you’re burning a pile of money each month. You are considering doing whatever it takes to get out from under the house.
If you’re in the Bottom 1/3 and have had an illness or financial setback – and are underwater on your house, you have probably already stopped paying your mortgage and are sitting in limbo as you wait for the bank to take action and foreclose on your house. The emotional toll can be huge – consuming a lot of your emotional energy and keeping you from focusing on areas that can help you rebuild your life.
There are more families than you can imagine who are sitting around the kitchen table trying to decide what is right for their family. And that difficult decision is made even harder by all the chatter out there about what’s right, what’s wrong, how to do it, why do it – and unfortunately, those decisions need to be made by you. Some people just stop caring and walk away – only to have to deal with the ramifications later. Many others try to work with their bank, only to get frustrated in the red-tape. Planning ahead is the solution for the best outcome – and that’s where we might be able to help a bit.
If you, or any of your friends or family, are in the Bottom 1/3 and would like to discuss possible solutions, Lisa and Kevin are available to help. There is no cost to meet with us for an hour or two. With over 400 agents in our group, we are in the trenches of the housing crisis and have many options that you may not have considered.
EIGHT OPTIONS FOR FAMILIES IN THE BOTTOM 1/3
Sell the house and put in additional cash to complete the sale.
Wait it out – stay in your house and continue to pay the mortgage.
Rent out your house and continue to pay the mortgage.
Get your lender to give you a Loan Modification.
Sell your house via a Short Sale.
New laws help protect you – there is no recourse from Lien Holders that approve a Short Sale – they cannot sue you later for the deficiency.
Do what’s called a “Deed In Lieu”.
This is where you volunteer to turn the house over to the bank.
Let the bank foreclose on your house.
Litigation with the bank.
This is usually the last resort if your bank is not willing to work with you for a Loan Modifcation or Short Sale.
Lisa and Kevin have a lot of experience with loan modifications, short sales, the foreclosure process and timelines. Lisa and Kevin can also show you how to rebuild your credit after you get through the process. If you choose to move – or have to move, it is super important to talk to an Attorney and CPA before you start down the path of a short sale or foreclosure – most people don’t realize the tax liability they will have until after the sale has been completed and it’s too late. Lisa and Kevin can get you a free initial consultation from a local Attorney and CPA who can answer your questions and help you immediately. Every situation is different, but the items below can help give you a start on researching some of the options available to you.
1b – Loan Modifications
You have the ability to pay, and want to pay, but want to get out from under a lousy loan and get into a fixed-rate loan with lower monthly payments. And, yes, we are starting to see some of the banks authorizing Loan Modifications (Loan Mods). Three ways you can get a Loan Mod – two are free, one will cost money in attorney’s fees. The Loan Mods we’ve seen being offered have been as low as 2% fixed rate for 5-years and then a small bump up to the current market rate – about 4% or so. The new loans are fixed rates that are fully amortized over 30 to 40 year terms. The banks are basing your modified monthly payment on 31% of your household income before taxes. For instance, if your household income is $100,000 per year, then 31% of that would be $31,000 per year, or $2,583 per month. This $2,583 per month payment would cover your principal, interest, property taxes and home owners insurance.
This is how your Loan Mod might look with a $500,000 loan amount :
Current Payment at 6% interest = $2,997 + $500 property taxes + $100 insurance = $3,597 per month.
NEW Payment with a Loan Modification at 2.53% interest = $1,983 + $500 property taxes + $100 insurance = $2,583 per month.
This is an overly simplified example of how the banks are doing loan modifications. The difference between your old payment and your new payment may be enough to have it make sense to stay in your current house – and continue making payments even if you owe more on the house than what it’s worth. Your new modified payment could be cheaper than what it would cost you to rent a house, it can save you from moving, it could save you from filing bankruptcy, it is a fixed rate and payment and may be the only way to re-finance a lousy, high-interest or variable-rate loan. The bank doesn’t write off a bad debt and you get to stay in your home. We like Loan Modifications because they help to stabilize families and entire communities – loan modifications are much more beneficial to the USA economy as well. Short sales and foreclosures reduce home values and uproot families.
We are not seeing too many banks forgiving part of the balance. This means if your house is worth $500,000 and you owe $600,000, you are still $100,000 underwater. You still can’t sell it down the road unless you either (A) do a short sale, (B) add $100,000 to the proceeds or (C) wait until the prices come back up to $600,000. If your household income qualifies you for a $500,000 modified loan, then your bank may make the new loan for $500,000 and put the other $100,000 “on the back end” at zero interest. You would need to pay back this $100,000 when you sell the house. If you hold onto the house for a long time and values increase again, then this plan makes a lot of sense. If your bank is willing to forgive a part of the balance, then you will need to talk to your CPA to see if there will be any tax consequences to you.
Now for the hard part – getting one for your family. Banks do not make loan mods easy to get. Your best approach is to contact your bank directly and fill-out the forms they need to get started. You will need to be able to document your income with tax returns, bank statements and paystubs. If your bank turns you down, find out why – many times the numbers they input for your income or expenses need a bit of clarification to be accurate – you can ask them to review each item with you and make any corrections. If you can document your income and want to stay in the house, you should be able to work out a loan modification with your bank. Keep calling back every 2-weeks at a minimum to check on progress – this will, hopefully, keep you in the queue and keep you off of the Notice of Default and foreclosure path.
1c – Short Sales
If you need to move – or have to move, then a short sale may make the most sense. In a short sale your lender agrees to take less than what is owed on the house and releases you from any further obligations. This is why short sales are so popular right now. Once a short sale is complete you are done with the house and have cut your losses – you are able to move on with your life. All real estate commissions are paid by the lender – there is no out of pocket cost to you. We might be able to negotiate a “cash for keys” settlement for you as well – some lenders will give you $3,000 or more to help with moving costs. Doing a short sale instead of having a foreclosure might also allow you to buy another house years sooner than if you go through a foreclosure. Doing a short sale instead of letting the bank foreclose might also benefit you in getting future jobs or high-security positions. A short sale can be done the traditional way or discreetly without an Open House or even a sign in your yard – with over 400 agents in our group, we can probably sell your house without it ever going on the open market.
The catch on short sales is that all other lien holders (if any) would have to sign off on the sale in order to sell your house this way. If you do have a second loan or other lien on your house, then your lender will likely offer the other lien holders a small token payment – usually 10% of what is owed and less than $5,000. If we are able to successfully get everyone to agree – you are done.
If the other lien holders do not agree to the terms offered, then a sale cannot be made. In order to sell any house, the new buyers need to have clear title, which means there are no other claims against the property.
In today’s market, of those that choose to try a short sale, only half of them make it to completion. If your deal doesn’t come together, another solution needs to be looked at. You can reconsider keeping the house and trying to get the bank to modify your loan – you can then rent it out later if you need to move. You can let the lender foreclose on the house – a lot of times, this might require a personal bankruptcy in order to eliminate any future financial obligations to your lender(s). You can also volunteer to turn the house over to the lender – this is called a Deed In-Lieu. You can also choose to work with an Attorney who might be able to get your short sale approved after going down the litigation path. Each option has good points and bad points.
In 2011 REMAX Accord handled over 300 short sales for sellers who wanted to move on with their lives. That said, we feel a short sale is only right for 20% to 30% of the people we talk to. Our goal is to give you enough information so that you can make the choices that are right for you and your family. We will point out why it might not make the most sense for you and arm you with the right questions to ask your Attorney and CPA before you make any decisions.
1d – Tax Consequences
It is super important to talk to your CPA before you start down the path of a short sale, deed-in-lieu or foreclosure – most people don’t realize the tax liability they could have – until after the sale has been completed and it’s too late. After completing either a short sale or a foreclosure, your lender will issue you Form 1099-c – cancellation of debt. A copy gets sent to the IRS as well.
You will most likely not have any tax consequences if
(A) the loan is the one used for the original purchase or
(B) if you refinanced and used the money for improvements or
(C) you are insolvent or declare bankruptcy.
You could end up owing a lot of money in taxes if you refinanced your house to take money out for a boat, car, investments or other uses. These income taxes might not go away – even with a bankruptcy.
A quick word of caution : if the bank-issued 1099-c, box-7 is wrong (fair market value of your house when surrendered or sold) then the calculation of cancelled debt is wrong in box-2. So, there are lots of things to consider in making your decision. Talking to your CPA is the second step in your process of sorting out your options. We have several local CPA’s that can meet with you at no cost for your initial meeting.
1e – Who Owns Your Loan?
This is one of those odd questions that nobody thinks about – but will help you in understanding the process of a loan modification, short sale or foreclosure. The Lender (also known as the ‘investor’) is the one who “owns” your loan. Many times a “servicer” (the one who takes your payments) is used – the servicer and the lender are often two different companies. The servicer, in most cases, is the gatekeeper and has the power to approve or disapprove a loan modification or a short sale. The servicer is also the one who handles the foreclosure process. There is a financial incentive for the servicer to foreclose on houses instead of approving a loan modification or short sale because the servicer gets much higher fees for a foreclosure. This conflict of interest is one of the many roadblocks for getting your deal done and why it can be a frustrating process for everyone involved. Patience and tenacity is the key to getting what you want when working with servicers and lenders.
If you are going to do a loan modification, the first step is to lookup who owns your loan. Fannie Mae and Freddie Mac have many programs that other lenders don’t – they are government owned. You can call your servicer to ask – most of the time your servicer will be able to tell you if you ask them. If they can’t tell you who owns your loan, you might need to send the servicer a written request (do not include the request with your payment – it will go to a different address).
1f – The Foreclosure Process
The hardest part of the foreclosure process is the toll it takes on families. A majority of marriage problems come from financial problems. Making decisions together and working as a team is very important if your goal is to get away from an underwater house or a bad loan.
Foreclosures are a step-by-step process with timelines and procedures that your bank must follow. Understanding these timelines and procedures is the first step in understanding what your options are. Here are the timelines for the foreclosure process in California :
STEP-1 : After the borrower missed a payment or two their bank may contact them. Once that conversation happens, then the foreclosure clock starts ticking. Under California Civil Code § 2923.5 (a) the lender must contact the borrower by phone or in person to assess the borrower’s financial situation and explore options for avoiding foreclosure. During the conversation, the lender must inform the borrower of the right to meet with the lender within 14 days. The lender must also give the borrower the toll-free number for finding a HUD-certified housing counseling agency.
STEP-2 : 31-days after the bank contacts the borrower they can file a Notice of Default (NOD). The NOD is filed (recorded) with the County Clerk’s Office and becomes public record.
STEP-3 : 90-days after the NOD was filed, the bank can file a Notice of Sale (NOS)
STEP-4 : 20-days after the NOS was filed, the bank can auction the house on the court house steps.
A word of caution : Even if you are talking to the bank trying to get a loan mod or a short sale approval, your bank may still be pursuing a foreclosure. An attorney may be needed if the bank files a Notice of Default and will not give you written notice that it will delay the foreclosure proceedings while it gets your loan mod or short sale approved. There is legislation in the works that would prohibit banks from doing a “dual track” which would eliminate this challenge and give borrowers time to complete their short sale or loan modification.
1g – STRATEGIC DEFAULTS
People are angry at the banks for not working with them to modify the terms of the loans. The banks would rather sell the house to a stranger for 50% less than what is owed, rather than reduce or modify their loan – this is what angers the borrowers. If a house is underwater by $200,000 and the bank has to pay another $50,000 or $100,000 to recover, fix and re-sell the house, doesn’t it make a lot more sense to modify the loan? In our opinion, if a borrower can’t pay the mortgage, the bank should try to modify the loan. If the borrower still can’t pay the mortgage, then the borrower should wrap up the transaction with a short sale and get on with their life.
If you borrowed money from a friend or relative – that becomes a moral issue and you have a moral obligation to repay the loan. The loan from the bank is strictly a business transaction with 30 to 50 some odd pages of the rights and responsibilities of each party. California is a no-recourse state, which means that if a borrower stops making the payments, the only recourse for the bank is to take the house back.
The bad news for the banks – and the USA economy – is that the banks are so overwhelmed right now that it can take 6-months to over 3 years for a bank to foreclose on a house. If the bank has refused to give the borrower a loan mod or approve a short sale – the borrower often chooses to stop paying the mortgage and live rent-free in the house. We’ve seen a rapid rise in these “strategic defaults” over the last few years and it is a big part of the continued housing crisis. Strategic default is planning how you want to walk away from your house so it is most advantageous to you. It’s a hard position for the banks to be in – the banks know that a good attorney can stretch out the foreclosure process for quite a while. Borrowers know that even threatening litigation from an attorney can get their bank to approve a loan mod or short sale. Borrowers also know that they can live rent-free for 6-months to 3-years as litigation goes through the process.
With a Deed In Lieu you simply contact the bank and let them know that you will be surrendering the house – returning it to the bank. If you only have the original loan on the house and have not refinanced your loan, the bank has no other security other than the house. You definitely want an attorney to handle this for you to make sure your contractural obligations have been met. Tom Hanks wrote, directed and starred in a movie with Julia Roberts called “Larry Crowne” about a retail strore manager who lost his job and did a Deed In Lieu after the bank refused to work with him to refinance his house - it was an interesting protrayal of the process and worth watching on Netflix or cable.
What can Lisa and Kevin do for you? Lisa and Kevin cannot help you with a Deed In Lieu or a Strategic Default other than to let you know that they are options. When we meet in person to discuss your options, we will discuss these options as well - we have a few attorneys that we can suggest as a starting point and can share examples of how others have approached this.
Brent White did an interesting article about underwater houses, shame and fear in the housing crisis in 2010 - – University of Arizona Legal Studies Discussion. Brent’s 54-page article suggests that more people should be walking away and might give you another perspective on which choice you make. Click HERE for a copy of the article
Morgan Stanley walked away from 5 commercial buildings in San Francisco a few years ago - strategic defaults like this are normal business for large companies.
1h – Taking Action
If you are in the Bottom 1/3 – be kind to yourself. Know that this national crisis has affected families from ALL income levels. Talking with Lisa and Kevin about your options is free and can help you figure out your next step.
You can also talk to your bank directly or click on these links to for access to several government programs that might be able to help :
2a – Buying Another House
FHA loans may be available to you after 3-years with a short sale or foreclosure. Getting a lender to underwrite that loan may prove more difficult with a foreclosure than a short sale. Possible, but challenging.
2b – REMAX . . . Outstanding AGENTS – Outstanding RESULTS!
When it’s time to buy or sell your house, you want to hire Lisa Caldwell and Kevin O’Brien, two Top-Producing Agents with the Largest Real Estate Company in the world – REMAX has the largest Real Estate and Relocation Network in the world with over 89,000 Agents with offices in every state in the USA and in 84 different countries. REMAX Accord has over 400 Agents in the East Bay. Lisa and Kevin are experienced, highly respected and a pleasure to work with. Lisa and Kevin have combined sales of over $100-million. That’s a lot of transactions! Lisa and Kevin are with you every step of the way – when you work with Lisa and Kevin – you get Lisa and Kevin – not an assistant or inexperienced agent.
Lisa and Kevin Get The Job Done.
Lisa can be reached at (925) 525-1105 and via e-mail to Lisa@WalnutCreek.US.com
Kevin can be reached at (925) 595-0422 and via e-mail to Kevin@WalnutCreek.US.com