The housing boom was supposed to be great for America. Bill Clinton and Bush II said that homeownership should be available to all, and they instituted policies to try to make that happen. Interest rates were low and both government and private lenders flocked to get people into homes. People were buying en masse and for many this was their first home. The security of homeownership had finally been afforded to the masses. Everything seemed like it was great in America right? Wrong!
The chart below shows a housing chart from 1890 to 2006. Note the outrageous housing boom between the years 2000 and 2006.
(Home Values 1890 through 2006. Housing Boom from 2000 - 2006)
The material wealth created for these people were astronomical as many houses were appreciating up to 100% in a few short years. People were buying 2 or 3 properties for rentals, flipping homes and using equity in homes to pay for everything from college to the big screen TV in every room. So what can stop this financial freight train in its tracks – capitalistic greed.
Financial institutions looked at this wealth creation as a perfect opportunity to make loads of money. Prices are rising – sell more houses. To sell more houses, we need more clients; and we don’t care how we get them.
· So what if they have no money, we can sell them homes for no money down.
· Who cares if they have bad credit, we can create subprime credit programs for them.
· If you don’t have a job - no problem, we can create a program with no income verification.
These 3 strategies are called predatory lending, where banks and financial institutions take advantage of consumers; enticing them into loans and financial contracts that they cannot afford. Banks did it and quasi-public institutions like Fannie Mae and Freddie Mac followed right along. Consumers accepted loans like never before; hoping to finally get a piece of the “American Dream” that Clinton, Bush, Congress, the Media and our neighbors convinced everyone was a “right”. It is true that the American Dream is for everyone, but the “getting something for nothing” strategy of the housing boom was not it for many Americans. While many Americans did get rich during the housing boom, millions more got caught up in the tsunami of the housing collapse, which has caused the housing financial crisis we are in today.
(Home Value Projection made in 2006 - very close to reality)
From the peak of the housing market in 2006, home prices have fallen anywhere from 10 to 70%. Homes in Northern California that were valued at $650,000 in 2007 are now valued at $250,000. A condo in the bay area that sold for $500,000 in 2005 is now valued at $150,000. In Las Vegas 85% of homes are underwater (meaning the mortgage is more than the value of the home). In places Arizona and Florida houses and condos are selling for 50 cents on the dollar. To top off this bad news, all reports are that housing prices continue to fall. Recent statistics for 2011 show that home prices have fallen 5% this year alone and are expected to continue to fall another 10%. Foreclosures are on the rise again and the government programs instituted by Obama to prop up the housing market have failed. The short boost from the Federal Housing Stimulus Program has come and gone and although the government offered loan modifications and new loans during that period, private financial institutions have held onto their money like misers on their death beds, refusing to lend to consumers to prop up the economy and the flailing housing market.
When facing the realities of 2011:
· home values that continue to fall,
· owning a property that is worth 30% to 70% less than what you are paying for it
· home loans that cannot get refinanced,
· balloon payments coming due to predatory loans,
· maxed out home equity loans from poor spending habits, and
· a shaky economy where job loss is right around the corner or in your home;
What are your real options in dealing with your home today? It certainly looks gloomy, but here are your real options that you should consider exploring.
1. Keep paying your mortgage (Do Nothing). If your home is more than 30% underwater today, you will probably live the rest of your life without your home returning to the value that you bought it for. This is not the American Dream, this is the American rip-off. Of course this is the strategy that the banks want you to take because they are the ones ripping you off and making the profit on your back.
2. Short Sale. This is basically selling your home for any price you can get for it. If you bought your home for $300,000 but it is worth $150,000 you can short sell it for around that price (but probably lower). You get to walk away from your home but you still owe the $150,000 balance. This is the classic example of “buying high and selling low”; the OPPOSITE way to make money. You have basically locked in your losses and must now spend years paying for something you no longer own
3. Foreclosure. Stop paying your mortgage and let the bank foreclose on your home. Taking this strategy means months of harassing phone calls from your lender, leading to the foreclosure notices and the eventual repossession of your home by the bank. If you can endure the months of irritating phone calls this may be a good option for you if you want to get rid of your home. The advantages are:
· You can live in your house for months (maybe even a year or more) without having to pay your mortgage
· Instead of throwing your money away every month paying for nothing, you can use your money to pay your other bills
· You can use some of that rental money to save for the rental deposit on the new place you will eventually have to move into
There are only two disadvantage of this strategy:
1. You lose your home. If you are underwater on your home by more than 30% this is not a disadvantage, it is an advantage! You are getting rid of your losing investment that will only cause you 30 more years of pain.
2. Your credit score will be damaged. If you are behind several months on your payments – wake up; your credit score is already damaged. Another point to consider is that even though the foreclosure will stay on your credit report for several years, in today’s terrible financial environment there are new programs out there that allow you to qualify as a first time home buyer 3 years after foreclosure. Here is a link to one of those programs.
4 Chapter 7 Bankruptcy. If on top of your upside down home you have other large debts (credit cards, unpaid medical bills, equity loans, etc.) you may consider filing bankruptcy to eliminate all your debts including your mortgage. Unlike the straight foreclosure, Chapter 7 bankruptcy allows you to walk away with a clean slate. Again, your credit score is affected for up to 10 years but the late mortgage payments and credit card payments will be on your credit report for just as long. Bankruptcy offers you away to start over and rebuild your financial life. Banks will never recommend this option because it is the only scenario where you win and the financial institution loses. You are absolved of your debt and the bank is left holding the bag. If you want to pursue this option you must consult a lawyer AND thoroughly examine your family, financial and personal situation to see if this is the right option for you. Trying to do this on your own without professional help and the support of your family could result in a disastrous situation that could haunt you for the rest of your life.
5 Debt Restructuring / Chapter 13 Bankruptcy. There are many companies out there that will help you restructure your debt. They will take all your bills, negotiate terms with all your creditors (to include your mortgage lender) and come up with a new monthly amount that you pay to satisfy your debts. This strategy usually reduces your monthly bill expenditure substantially, but your credit score still takes a major hit and you are still saddled with your house that is worth less than you are paying for it. Chapter 13 Bankruptcy follows a very similar process as private debt consolidation. This solution is only good for people who have lots of assets that they don’t want to lose and/or for people who need to keep their home for family purposes even though it is a terrible investment. Again be very careful with private debt consolidation companies as many are shady. Never try to handle a Chapter 13 bankruptcy without a lawyer.
6 Refinance with the Bank. The banks of course want to keep you in your property at all costs. Foreclosure is a losing proposition for the banks as their core business is not real estate and they will most likely lose money on every foreclosure they are forced to take back. For this reason they will offer you the option to refinance, which really amounts to spreading your payments out over a longer period of time at a moderately lower interest rate. This helps the bank as they end up getting more of your money through interest. You however are still in your 30% underwater house, which has now become more expensive than when you first bought it. If you need to stay in your house for a year or two until you figure out a better strategy refinance is the way to go. Just remember that this should be a temporary strategy until you find a real strategy to get rid of your albatross (I mean house).
These are your basic options to survive the reality of the housing market of 2011. If you are able to fix your current housing situation, the future looks great. You can re-enter the housing market in a few years with home prices at their lows. You will be able to buy low and sell high and possibly reap the rewards of the American Dream of homeownership. Until then, good luck in dealing with the current housing crisis and remember: you did not create this housing debacle so you should feel no guilt in adopting a strategy to get yourself out of it.
Over 80% of homeowners in Las Vegas are underwater on their homes.
There is a little known program being offered by banks called Cash for Keys where banks will give you a negotiated amount if you walk away from your house (foreclosure) and agree to leave the home in good condition. Here is a link on how to approach the program.
If you are underwater 30% or more on your home you may live your whole lifetime without your home value returning to the amount of your original mortgage.
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