Homeowners in Distress

A recent report indicates that nearly one quarter of all US mortgages are underwater where the  outstanding mortgage is greater than the value of the underlying real estate.  If your mortgage balance is just slightly more than the value of the property, then it’s generally not a big deal.  Unfortunately, that’s not the case for many.  For many homeowners who purchased at the peak, there’s a signficant difference between the mortgage outstanding and the value of their home.  This is forcing many people to pursue a strategic foreclosure as it makes little economic sense to pay a mortgage on a house that has a value significantly less than the  mortgage , particularly if you can buy or rent a similar house for less. There are some people who are choosing foreclosure even in instances where they could otherwise afford the mortgage payments.  Of course, there are many who choose this option because they can’t.

At this particular juncture, it’s very significant that all of this is occurring  now, because the other shoe has not dropped as far as mortgage resets are concerned.   The “other shoe” is the  $ 500 billion of Payment option (pick a payment) ARMs that have still yet to reset.  This reset process will begin in earnest during the next year.  The resets mean that folks with these mortgages who are paying  an “interest only” monthly payment will begin paying a fully amortizing mortgage payment that is double or triple the payment they’re currently making. This will result in another round of foreclosures on top of what’s occurring already.

This will be like pouring gasoline on the fire that’s already out of control and create a self reinforcing cycle of further declines in real estate values and even more foreclosures.   Of course, this is not without consequence for the banks and the taxpayers given that it’s our money that will ultimately bail everyone out.  This is a very serious matter.

With respect to real estate,  we’re caught in a deflationary trap where values will continue to drop until the mortgage problems are dealt with.   Tax credits or not, given what’s on the horizon, now is not the time to buy any real estate as you’ll do so at your financial peril.

If you happen to take the foreclosure option, you should be aware that current tax law generally excludes the discharge of mortgage indebtedness from income.    Of course, you should always check with your tax advisor regarding the applicability of any tax provision to your specific circumstances.

This article is from the Wall Street Journal.

Distressed Homeowners Ponder Whether to Stay or Go

By JAMES R. HAGERTY

SCOTTSDALE, Ariz. — Brian Gindlesperger says he has never been late on a mortgage payment and considers paying off his loan “the right thing to do.” But as the value of his home continues to fall, he is starting to wonder whether paying his debt is the smartest thing to do.

Four years ago, Mr. Gindlesperger, a police officer, and his wife Kelly, a real-estate agent, paid $650,000 for a four-bedroom house in this wealthy Phoenix suburb. They believed they were getting a bargain price for the area and made a 20% down payment, using a 30-year fixed-rate mortgage to pay the balance. To help pay for their eldest daughter’s college costs, home improvements and a wedding, they took out a second mortgage against their home. Now they owe about $647,000 on the two mortgages.

 But home prices on average have dropped about 48% in the Phoenix area since peaking in mid-2006, according to the First American CoreLogic index. Mr. Gindlesperger figures his home now probably is worth only $375,000 to $425,000, even though it comes with a four-car garage, a pool and a 1.2-acre lot. Zillow.com, a Web site that makes home-value estimates based largely on recent sales of nearby properties, pegs their house at $374,000.

 Families like the Gindlespergers are among millions of Americans who are “underwater” on their mortgages, owing more than the current value of their homes, and they face a dilemma: Keep making payments and hope for the best — or walk away, give up their home and accept the seven-year blemish of a foreclosure on their credit record.

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No one is forcing the Gindlespergers out of their home, but sometimes they have to dip into savings to make their mortgage payments. Like others who are underwater, they lack a cushion of equity that would protect them if illness or a job loss slashed their income. That makes them more vulnerable to foreclosure because they couldn’t count on selling their home for enough money to satisfy their lenders.

Only a huge rebound in home prices — something that appears unlikely in the near term — would give the Gindlespergers a shot at having equity in their house again.

Some of their neighbors have walked away from mortgages they saw as losing bets. That is tempting because the Gindlespergers could rent another house for much less than they now pay each month for their mortgages, property taxes, insurance and maintenance costs.

On the other hand, they don’t want to move. “It’s our home. We have horses. We have dogs,” says Mr. Gindlesperger.

The Gindlespergers still aim to hang onto their house and wait for a stronger economy to boost its value.

But they can’t wait for better days indefinitely, Mr. Gindlesperger says. “I’ve got a trigger point.” If the family savings fall below a certain point, they would have to consider all options, including an attempt to sell the home for less than the loan-balance due and get the lenders to agree to forgive the rest of the debt — a transaction known as a short sale. “We’ve always been responsible homeowners,” he says. “We’re sitting here draining our assets to keep current” on the mortgage. But, at some point, he adds, “you have to limit your exposure to being a victim in this.”

http://online.wsj.com/article/SB125902556993561567.html

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