Walk away from your mortgage?

Many homeowners who have seen the values of their homes decline by 30 - 50% over the past couple years are beginning to think about their mortgage in much more objective terms. Rather than hope against all signs to the contrary that their homes will someday return to the valuations prior to the crash, some people are deciding that their best move is to simply walk away from their mortgages in the same manner that banks have walked away from their obligations since 2008. The New York Times writes about this phenomenon in the article below.

http://www.nytimes.com/2010/01/10/magazine/10FOB-wwln-t.html?emc=eta1

Taking this course of action is not without consequences and should not be entered into lightly or without professional guidance. Michigan law allows banks to sue for a deficiency judgment following a foreclosure of real estate so simply walking away from a home that is "underwater" is not necessarily a clean or a good solution for those ownning property in the state.

I have helped people think strategically about their residential mortgages for fifteen years and everyday I talk to homeowners who owe more on their homes than their home is worth. In these challenging times it is important to consult professionals who understand bank loss mitigation departments and Michigan foreclosure law before doing something that may result in the loss of your home, damage to your credit and litigation.

A dark cloud over Detroit and a silver lining.

http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_052619.pdf

http://www.smartmoney.com/investing/economy/the-new-prospectors/

Detroit home values led the nation in March with a decline of nearly 5%, making the Detroit market the most depressed in the nation with values at 1995 levels. While it is difficult for owners of now dramatically devalued real estate to see any bright side to the story, for those fortunate enough to be able to invest in real estate, there may never be a better time than now.

See the Smart Money magazine article about investors flocking to Detroit to invest in area real estate. I represent some individuals and companies who are betting on Michigan and actively engaged in the market. I am quoted in the article and have seen first hand how smart decisions in a down market can yield impressive returns.

With every turn in the market, there are opportunities and this time is no different.

Foreclosure from the Bank's Perspective

http://freakonomics.blogs.nytimes.com/2009/05/01/power-question/

Foreclosure is an intensely personal event for most homeowners, but for the banks it just a business transaction. Article suggests things are likely to get a bit worse before they get better.

Detroit Home Values at 1996 Levels

http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html

http://www.nytimes.com/interactive/2008/12/04/business/economy/HOUSING_PRICES_GRAPHIC.html

http://www.nytimes.com/2009/04/01/business/economy/01econ.html?_r=1

The January 2009 Case Shiller index shows that home values have continued to plummet in the new year. The Case Shiller index measures a market's relative appreciation or depreciation from where that particular market was at the index's baseline, January 2000.

Since the Detroit market peaked in December of 2005 it has given up just under 40% of its value and, relative to the top twenty major markets, has lost the most value since the baseline date. Detroit home values are now 22.5% lower than they were in January 2000 placing them at July 1996 levels.

Short Sale Assistance for Military Personnel

The recently passed Federal stimulus bill (The American Recovery and Reinvestment Act of 2009) provides assistance to military members who are permanently reassigned during the current housing crisis. A military member qualifies if s/he:

1. Was relocated more than 50 miles away;
2. Purchased the property before 7/1/06;
3. Sold the property between 7/1/06 and 9/30/12;
4. Occupied the property as his or her primary residence; and
5. Has not previously received these benefits.

The program allows the military member to recover 95% of the loss incurred by being forced to move if a sale has already taken place. If a sale has not occurred, then the government can acquire title to the property by paying off the balance of the mortgage or paying the owner up to 90% of the home's previously appraised value.

To apply for the benefit military members must complete a DD Form 1607, Application for Homeowners Assistance Program.

More information is available at www.militaryfinancenetwork.com

Is help on the way from Lansing?

http://www.metrotimes.com/news/story.asp?id=13791

Michigan has the highest unemployment rate in the country - over 11%. Southeast Michigan has 2/3 of the state's foreclosures but just under 1/2 of the population. This combination of factors is driving residential property values down in dramatic fashion. Even though Metropolitan Detroit never saw the wild run up in prices from the "bubble" experienced on the coasts and around cities like Las Vegas and Phoenix, we are now suffering with those markets as home values give up more than 11 years of appreciation.

Lansing has been slow to act, but there now seems to be some interest among State Legislators to do something to address this situation that has brought middle class Michiganders to their knees. You can track the progress of three of the bills making their way toward the Governor's desk for signature at the links below:

House Bills 4453, 4454, and 4455 would change the process by which foreclosures are conducted providing more due process to home owners and requiring lenders to consider loan modification. Importantly, if signed into law, these Bills would add additional requirements to a lender seeking to foreclose a property by advertisement and allow the borrower to force the lender into court if the requirements were not complied with. Such protections, at the very least, would serve as a stalling tactic for home owners which may increase their bargaining power in short sale or deed in lieu negotiations.

http://www.legislature.mi.gov/(S(tyrhks2yeumjdnm45gmr5v55))/mileg.aspx?page=getObject&objectName=2009-HB-4453

http://www.legislature.mi.gov/(S(tyrhks2yeumjdnm45gmr5v55))/mileg.aspx?page=getObject&objectName=2009-HB-4454

http://www.legislature.mi.gov/(S(tyrhks2yeumjdnm45gmr5v55))/mileg.aspx?page=getObject&objectName=2009-HB-4455

Futures Index Suggest Slide in Values into 2010

http://www.nytimes.com/2009/03/07/business/economy/07home.html?hp

It appears that home values will not rebound anytime soon if this particular futures index of home values is to be believed. Although real estate markets are highly localized, it looks like no relief is in sight until at least 2010.

Personally, I believe that once the market finds a bottom, there will be a sharp, short run-up in home values as pent up demand in some sub-markets drives prices up before returning to more historic levels of appreciation. In the near term, however, when people have to move from their principal residence, renting the property or a short sale is probably still their best option.

Anything other than completely paying your mortgage in a timely way will adversely affect your credit score, but one must place a value on their credit score. Preserving a high credit score at all costs may not make sense for all individuals. A credit score simply provides access to credit and helps lenders price that credit. If an individual doesn't need credit over the short to medium term then perhaps a (dramatically) reduced credit score is not such a high price to pay for getting out from under your house.

March 7, 2009