Archive December 2011
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Stopping Strategic Defaults
Blog Category: Occupy Our Homes
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STRATEGIC DEFAULT FACTS
-Strategic defaults are the natural and logical consequence of severe price decline in the value of someone's property.
-As severe decline happens ‘right next door’, Sellers will decide that strategic default is their only choice.
-Severe decline is caused by 3 Bank/Lender Rules that keep markets out of balance and forcing prices down.
Modifying these 3 Bank/Lender Rules will stop price decline. We MUST do this for decimated markets. We must do this NOW.
If out of balance markets are not helped, they will continue to decline. Resulting drops in tax revenue could bankrupt governments and end up ruining most property owners.
Even the Banks/Lenders don’t know how to stop market prices from falling. They need our help.
HOW TO STOP HOME PRICE DECLINE
Modifying (1-2 yrs) these 3 Lender Rules specifically for markets in distress will immediately stop prices from declining and return these markets to balance.
We ignore this to our peril.
LENDER RULE 1 - locks Sellers into short sales: ‘Mark to Market’ Appraisals
REOs or shorts often sell for a price far lower than current market value, which ‘marks to market’ this lower price on the entire neighborhood.
This lower price crushes more equity out of every home, pushes more loans upside-down, and locks in a whole new set of Sellers that now have to keep paying on upside-down loans, sell short, or lose homes to foreclosure.
From then on, no matter what price a Buyer is willing to pay for a home in that neighborhood, the Buyer’s Lender insists on an appraisal that is required to take this new lower price into account, driving prices down. New REOs and short sales are sold for ever lower prices to snag buyers. Round and round, the cycle goes down. This self-reinforcing price-destruction downward spiral is the LEADING CAUSE of strategic defaults.
Paying on a $350,000 debt when the house next door just sold for $200,000 causes most owners to seriously consider their options.
What options? There aren’t any. There are NO OTHER OPTIONS AVAILABLE for Owners other than to sell short or go to foreclosure.
Loan modification attempts have proven futile. And with an upside-down home loan, that Owner cannot qualify for a new loan to buy something else without paying off the entire shortfall. Who has hundreds of thousands of dollars to pay off an upside-down loan? Nobody.
What else can the Owner do? Just keep paying on an upside-down mortgage for 30 years? Never move? Never sell?
As Owners in many markets since 2007 watch prices decline year after year with no end in sight, they eventually become convinced that continuing to pay the mortgage will just expose them to losses unrecoverable in the future.
Enter strategic default.
LENDER RULE 2 - locks Home Buyers out: No Loans for 3 years to Buyers with short sale/foreclosure on record
This Rule has decimated Home Buyer demand. No government incentives to Buyers can ever compensate for this loss.
In the 9 counties of the San Francisco Bay market, over 83,000 families are now locked out of buying for 3 years due to home loss. This equals almost 1.5 YEARS’ WORTH OF ANNUAL SALES for this market (approx 50,000 sales per year). This is ‘where the buyers went,’ sidelined by this Lender Rule.
In the meantime, homes for sale (supply) continues apace as more and more Owners give up trying to hang on (due to job/income loss or strategic default) and decide to sell their homes short or foreclose. More and more short sales exacerbate the downward spiral locking out more and more future Buyers.
A scary fact is, that overall, so far in 2011, more families per month are losing their homes to short/foreclosure than in 2010. (entire SF Bay Area)
LENDER RULE 3 - locks Investors out of loans: Major Restrictions against Investors
These Lender restrictions against Investors have been instituted over the last 2-3 years and are taking their toll on the market.
- - REO Cash Purchase Deed Restrictions – cash buyers cannot re-sell or refinance over 120% of purchase price for 60 days
- - Maximum 4 loans per investor – no loans available after the first 4 properties
- - No refinancing allowed for 6 months (sometimes 12 months) for a cash purchase
- - No Investor sales to Home Buyers for at least 91 days, with huge restrictions if sale price is over 120% of purchase price, regardless of repair costs
These Lender Restrictions discourage investors and have greatly reduced investor purchases, directly contributing to price declines.
Stable home prices require balanced supply and demand.
When Rule 1 locks more Sellers into short sales, Rule 2 locks out more Home Buyers, and Rule 3 severely restricts Investors, how can prices be expected to rise?? They can’t.
Once markets are seriously out of balance, these 3 Lender Rules ensure prices will continue to decline for the foreseeable future unless drastic changes are made.
OCCUPY OUR HOMES is an effort for all owners to join together and demand changes from the Banks to keep owners in their homes. Join us.
CJ Holmes, real estate investor since 1977, broker since 2005, and market analyst since 2007, has personally handled hundreds of transactions, viewed thousands of properties, and dealt with countless agents. She also owns a portfolio of income producing properties, and has developed unique market analyses to determine and predict price trends, which principles apply to markets nationwide. She can be contacted at (707) 578-5727, email@example.com, or www.cjholmes.com