Let's put the whole situation about the upside down Real Estate into perspective. The outcome of the mortgage frenzy has had a devastating effect on the economy with entire neighborhoods collapsing. Here's how the foreclosures will affect the entire neighborhood or the city and even the state. Look up and down your street. If you see a lot of “For Sale” signs it is time to worry. Even if you are not going through a foreclosure, the foreclosure will affect your property value. For example you live in a neighborhood that the average house is $100,000 and there are several housing in the neighborhood that have a value of $100,000 but they have been foreclosed on and the lender now owes the property.
An investor comes along and buys several properties for a little as $50,000 or less each. You need to refinance your home after being in your property for over 15 years and you owe $50,000 on your property and you know the value in the area is $100,000 so you think you have $50,000 worth of equity. You want to do a $20,000 cash-out refinance to do some repairs around your house. Well, your property must appraise for over $70,000 plus any closing cost. If the properties in surrounding neighborhoods have been selling for $50,000 within the last six months you are at risk to lose some or all of your equity. Equity is the difference between what you owe and the market value. So even if you are not in foreclosure the foreclosures in your neighbor will affect your property value. No one is untouched by this crisis. The Appraisers must indicate if the neighborhood is declining. This will change the terms of your loan for purchase or refinancing.
If a seller put their house on the market to sale the buyers think they can get a great deal. The media has given the buyers the illusion that they can offer $20,000 to $30,000 less than the listing price. The dilemma continues with insulting offers and nasty negotiations between the buyers and seller increasing the frustration in the housing market. Let's be clear about the negotiation of Real Estate in this upside down market. The negotiation gap can be greater with the lender owned property versus property that is owned by a consumer.
Now let's look at the investor's plight. Yes, the investor is getting a great deal but if they plan to flip the property they may be in for a rude awaking. After the rehab has finished and the investor is ready to put the property back on the market the vale in the neighborhood has decline and the profit margin will decrease. The best approach is to buy the property, rent it out and wait for the crisis to turn the corner. Now is the time for the investors to get some good deals but their profits will be better later.
The Mortgage Industry is trying to correct the bad loans by tighten up on the qualification for buyer. There have been several changes in the industry that have made a lot of the creative financing disappear. Several states have made it impossible to do state income loan, no income-no asset loans, no reserve loans, pre-payment penalties on loans and zero down loans. These are some other loans that were misused by the inexperienced Loan Officers in the past. The stated and no income-no asset (nina) loans were primarily designed for self-employed buyers that wrote off most of their income so they would pay little taxes but they actually made more money than what was stated on their tax returns. Another use of the stated and nina loan was when one member of the married couple could not be on the loan but there was more money coming into the household to maintain the mortgage payment without difficulty. Many Loan Officers would part a single parent with a fixed income into this stated loan and after a few payments the dream of owning a home turned into a nightmare.
The main nightmare in this upside down market is the dreaded adjustable rate loan. The reality of this loan is the selling point was that the buyer was suppose to improve their credit score within the next two years before the adjustment then refinance into a fixed rate and everyone would live happily ever after. Well, it did not work out that way. The Loan Officer was happy to get more money, the homeowner was happy to get an improved credit score and the economy was suppose to thrive. Not to be. What really happened in some case was a run in with Murphy's Law.
Whatever could go wrong did go wrong. Life hurt some people. Loss of a job; there are hundreds of jobs being outsourced everyday because the corporations suffered from greed and searching for an increase in profit margin. The loss of a job will cause unyielding stress that ultimately leads to divorce which leads to foreclosure. Health issues can cause a change on your credit report if your insurance do not cover the illness or co-payment. If the illness is life threaten bills may not get paid resulting in foreclosure. Make sure you have disability insurance if you can. Death in the family can cause a change in the ability to pay your mortgage especially if it's the death of a spouse.
If you experience any of the forementioned issues and your credit is negatively impacted you made not be able to refinance when it's time for the adjustable rate to start adjusting. Most adjustable rates adjust after the initial 2, 3 or 5 years and ever 6 months after that until it reaches it's ceiling which is about 5% higher than it is now. On the average a person can handle the first adjustment and maybe the second adjustment but after a year the payment can adjust more than 3.5% and their income raises are only 3% per year - well you see the dilemma.
Most people don't have a budget or don't keep to it. The increase in the price of gas alone has crashed most people's budget not to mention the extra cost every month to supply your habits to relieve stress: smoking, gambling, drugs, cable, driving, spa, gym, kid's sports, traveling or whatever extra spending that helps you make it through the day.
To answer the question what happened in the Real Estate Market: The Adjustable Rate Mortgage. The proposed freeze by the government is a temporary Band-Aid. I will address the solutions in Part 3.
