Saturday, September 29, 2007

Millions of Homeowners Have Only Three Choices

I believe millions of homeowners that purchased with little or nothing down and folks who accessed the ATM machine one too many times via HELOCs and serial refis with unaffordable payments only have three choices. The first option is to consider refinancing now into an ARM or a fixed mortgage rate to avoid the rate resets that they may be facing in coming months. Most resetting ARM's both prime and subprime are looking at a first adjustment of 2-2.5% from the rate that they were accustomed to paying. This is only an option if their is equity, the client can afford the payment, fully document income and has a decent FICO score. Stated income is still available although the rates are healthy and are only available if their is 10-15% equity in the property.

The second option is to sell. Many people were severely stretching to pay the interest only or even the teaser rate on a pick-a-pay loan. Struggling to pay a mortgage is a bit more satisfying in a stable to rising environment as you get the benefits of home ownership and an investment vehicle. Buying in bubble markets was "worth" it for many people because the rising values allowed them to install an ATM and access money in amounts they had never had access to. The ATM is broken and cashout activity has slowed dramatically in the last year. (See chart below.)
Hundreds of thousands of homeowners have no equity or are upside down. This is especially true in Southern California as we had the largest percentage of exotic loan products and a cashout mania. The 2003-06 zero down purchasing frenzy is coming to haunt folks who bought too much home or who are just now experiencing their first rate adjustment. They are waking up to the fact that it wasn't worth it to pay 50% of their income just for housing. They should consider downgrading or renting. Most rents in Socal are $2000 for a standard single family home in a decent middle class neighborhood. This contrasts sharply with a 4k payment on the same home.

The third option is to conduct a short sale to avoid foreclosure. A foreclosure will destroy a FICO score like nothing else. They will be locked out of buying a new home for years. Folks should try to work out arrangements with their lender for a more affordable mortgage assuming that the late payments are because of a rate reset. If that isn't possible then a listing or a short sale should be explored with the lender and a competent realtor.

A short sale is a fire sale of the house to rapidly sell the home to pay off the lender(s). You don't fool around in this situation and list the home with a hope and pray price. This is where a realtor comes in and lists the home at TODAY'S market price to make a rapid sale. Don't be fooled by the housing inventory numbers, homes will and can sell if people drop prices to meet the available buyers. Home builders are doing this daily with crazy car dealer style weekend sales advertised on AM radio and by holding auctions. Someone will buy anything at the right price. If the home can't be sold or people ignore the reality of the market many will make out an envelope and mail the keys to the lender. That jingle is the last thing a bank wants to hear when they go to the payment P.O. Box. It is happening a lot more often than you would imagine.

If you or someone you know is facing these choices I would strongly advise speaking to a qualified professional about the options available. Consider yourself fortunate if none of this applies to you. Do you have any other ideas for homeowners facing these tough choices? Post your thoughts.