This past week the media has been completely absorbed with our nation’s economy; and rightly so. The topic has come up in just about every conversation I have had in recent days. Regardless the final solution created by Washington the lessons to learn are many and carries with it many unknown changes to the way we live life.
It would be a mistake for anyone to assume that after this week, life will go on as usual. Only the naïve or the unthinking will believe that change will impact everyone else and leave them untouched. The changes emerging on our horizon will impact everyone. In the words of Bob Dylan in his song, The Times, They Are A’Changin’:
Come senators, congressmenPlease heed the callDon't stand in the doorwayDon't block up the hallFor he that gets hurtWill be he who has stalledThere's a battle outsideAnd it is ragin'.It'll soon shake your windowsAnd rattle your wallsFor the times they are a-changin'.
During the past 10 years policies have been put in place making it possible for millions of Americans to realize the dream of home ownership. While this is a noble ideal, it was only made possible by purposefully recalibrating the minimum requirements for home ownership. Higher and more rigid standards may seem cold, uncaring and aimed at keeping home ownership an entitlement of the middle class. But as our current housing crisis is revealing, we could have avoided this economic emergency by holding to the higher criterion.
Lower down payments result in higher risk loans. Lowering minimum credit requirements only raises the odds that the number of foreclosures will increase. In our attempt to make home ownership available to more families, we set the stage for economic disaster.
Helping millions more Americans realize the ideal of home ownership is not wrong. It is the way in which we went about implementing the ideal that we went wrong. Would more regulation and oversight have prevented our current situation? Probably not. It is highly unlikely that those charged with managing our economy were unaware of this progression toward financial disaster. They saw it coming and consciously chose to allow its progression.
A basic principal has been violated and continues to be ignored by our government. It is a reflection of the way many Americans live their lives. Whether by choice or default the status quo has become, “if we can do it, we should”. Without thinking much further than the end of our noses, we make financial decisions that have potentially life-changing ramifications.
We need a new vehicle. Our decision is based on want rather than need, on monthly payment rather than long-term cost. So a year ago we bought an SUV as our commuter vehicle. Gas was $2.50 a gallon. Now that gas is well over $3 a gallon we see the error of our ways.
We need a place to live. Similarly our decision is based on monthly payment rather than overall cost. We’re comfortable with a $1,500 monthly payment but the lender says we can qualify for a much larger (nicer) house. The payment may be $2,100 but because we qualify for it, we decide that we should buy the larger (nicer) home.
America has the highest average standard of living of any country in the world. This distinction has come at a price. And the price is the sum total of what it has cost us to remain free. Free from tyranny, free from oppressive government, free to worship and free to pursue a happy life. The best way to protect freedom is to treat it as the costly treasure that it is instead of as an entitlement to further encourage the mentality of “if we can, we should”.
The quickest road to ruin is thinking that freedom is unfettered. If our way of life is to be protected, we must learn to live contented lives inside the boundaries freedom provides. Just because we can make home ownership available to everyone doesn’t mean everyone should own a home.
Friday, September 26, 2008
Wednesday, September 3, 2008
The Face of Foreclosure
The Smith family (not their real name) just walked out of my office. I spent the past two hours trying to find a way to help them purchase a home. Sam Smith is a retired Veteran with available V.A. mortgage benefit. Sam and Susie live with their daughter Sarah in her home.
About eighteen months ago, Sarah was involved in an automobile accident in which the other driver was at fault. This driver falsely claimed to have insurance. She also gave Sarah the wrong address and phone number. The uninsured portion of Sarah’s automobile insurance covered most of her medical expenses (over $30,000) but there was still a sizeable amount left for Sarah to pay. For the eighteen months following the accident, Sarah was unable to work.
Two months before the accident, Sam received a small inheritance from his uncle. For the next several months Sam and Susie used this money to continue paying all of the house payment, utility bills as well as the rest of Sarah’s expenses. Susie stayed at home helping Sarah while Sam continued working. Needless to say, the money ran out long before Sarah was able to go back to work.
May 2007 was the last payment that was made. Sam’s $1,500 a month income was completely inadequate to cover the $1,400 a month mortgage payment as well as the utilities, food, gasoline and other household expenses. To make matters worse, Sarah learned that her mortgage had an adjustable rate. After the first year of fixed interest rate payments her payments would fluctuate every six months. Her $1,400 a month house payment would soon swell even higher.
Sarah contacted her loan servicer and told them of her situation and found them unwilling to offer much help. After two months had passed with no payment made, they began receiving phone calls and urgent letters. Sarah continued communications with the servicing company. After four months without making a mortgage payment Sarah received more urgent letters informing her that unless the payment was brought up to date or some other arrangements were made, foreclosure proceedings would begin.
Again Sarah contacted her loan servicer and attempted to make payment arrangements. The only solution she was offered was a repayment of the missed mortgage payments at a 15% interest rate. At the same time she would have to keep her ongoing mortgage payment current.
Sarah and her parents have contacted two attorneys who have made frail attempts to help. Finally they spoke with a realtor who recommended them to me for V.A financing. After running all the numbers, their debt to income ratio is well beyond the V.A. maximum of 41%. Susie is scheduled to begin work in October and the additional income her employment provides should put them in position to qualify for V.A. financing. Until then, the Smith’s live under the constant threat of the loss of their home.
Just two weeks ago, Sarah received a letter from the loan servicer that September 5th was the date scheduled for final judgment. They have little time and few options that will save their house.
The Smith’s are not alone. Throughout the metro area there are other families who have extenuating circumstances that are completely outside of their control that have affected life in ways that threaten their homes. There are not easy solutions to these problems. And when adequate solutions are finally made possible it may be too late for the Smith’s.
The Smith’s are without living relatives who could possible help. They have used all their reserves just to keep the home as long as they have. They have consistently communicated with their lender and have done everything within their power by earning an income while nursing their daughter back to health.
I didn’t enjoy writing this article. And I certainly didn’t enjoy not being able to provide an acceptable solution to the Smith’s situation. I did, however enjoy writing a lengthy letter on behalf of the Smith’s that they can take to Legal Aid in hopes of pushing out the loan servicer’s final judgment to sell their home in a sheriff’s auction.
I offer this article in the hopes that it helps every reader find more compassion and understanding for families who find themselves facing foreclosure.
About eighteen months ago, Sarah was involved in an automobile accident in which the other driver was at fault. This driver falsely claimed to have insurance. She also gave Sarah the wrong address and phone number. The uninsured portion of Sarah’s automobile insurance covered most of her medical expenses (over $30,000) but there was still a sizeable amount left for Sarah to pay. For the eighteen months following the accident, Sarah was unable to work.
Two months before the accident, Sam received a small inheritance from his uncle. For the next several months Sam and Susie used this money to continue paying all of the house payment, utility bills as well as the rest of Sarah’s expenses. Susie stayed at home helping Sarah while Sam continued working. Needless to say, the money ran out long before Sarah was able to go back to work.
May 2007 was the last payment that was made. Sam’s $1,500 a month income was completely inadequate to cover the $1,400 a month mortgage payment as well as the utilities, food, gasoline and other household expenses. To make matters worse, Sarah learned that her mortgage had an adjustable rate. After the first year of fixed interest rate payments her payments would fluctuate every six months. Her $1,400 a month house payment would soon swell even higher.
Sarah contacted her loan servicer and told them of her situation and found them unwilling to offer much help. After two months had passed with no payment made, they began receiving phone calls and urgent letters. Sarah continued communications with the servicing company. After four months without making a mortgage payment Sarah received more urgent letters informing her that unless the payment was brought up to date or some other arrangements were made, foreclosure proceedings would begin.
Again Sarah contacted her loan servicer and attempted to make payment arrangements. The only solution she was offered was a repayment of the missed mortgage payments at a 15% interest rate. At the same time she would have to keep her ongoing mortgage payment current.
Sarah and her parents have contacted two attorneys who have made frail attempts to help. Finally they spoke with a realtor who recommended them to me for V.A financing. After running all the numbers, their debt to income ratio is well beyond the V.A. maximum of 41%. Susie is scheduled to begin work in October and the additional income her employment provides should put them in position to qualify for V.A. financing. Until then, the Smith’s live under the constant threat of the loss of their home.
Just two weeks ago, Sarah received a letter from the loan servicer that September 5th was the date scheduled for final judgment. They have little time and few options that will save their house.
The Smith’s are not alone. Throughout the metro area there are other families who have extenuating circumstances that are completely outside of their control that have affected life in ways that threaten their homes. There are not easy solutions to these problems. And when adequate solutions are finally made possible it may be too late for the Smith’s.
The Smith’s are without living relatives who could possible help. They have used all their reserves just to keep the home as long as they have. They have consistently communicated with their lender and have done everything within their power by earning an income while nursing their daughter back to health.
I didn’t enjoy writing this article. And I certainly didn’t enjoy not being able to provide an acceptable solution to the Smith’s situation. I did, however enjoy writing a lengthy letter on behalf of the Smith’s that they can take to Legal Aid in hopes of pushing out the loan servicer’s final judgment to sell their home in a sheriff’s auction.
I offer this article in the hopes that it helps every reader find more compassion and understanding for families who find themselves facing foreclosure.
Wednesday, August 20, 2008
6 Alternatives to Foreclosure
Hopefully this article will be absolutely useless to everyone who reads it. Unfortunately I know that there will be too many who can benefit from the information offered here. The place to begin is to take a hard look at your financial situation.
Create a budget - Plan out a spending strategy for the next several months. See what costs you can trim to free up as much money as possible for home payments. You may need to pay the minimums, or even less, on other debts. In rare circumstances it could make sense to skip payments on some bills so you can continue to pay your mortgage. Another option to consider is to borrow money from friends or family, or perhaps even tap into your retirement funds. Do the latter only if you're convinced you can make future payments; you don't want to drain your retirement funds if you're only going to end up losing the house in the end.
Check your refinance options - If you have equity in your home, if your credit rating is relatively intact and if your lender hasn't yet filed a notice of default, you may be able to get another loan with more affordable payments. An experienced mortgage broker can let you know your options. If you choose this option, be careful not to jump into a risky loan.
Be realistic - Many times, people struggle to hold on to a house they simply can't afford when they'd be far better off without it. It may seem harsh, but it's better to sell a home while you still have equity and some semblance of a credit score than to have it taken away in foreclosure.
Get organized - If you decide to contact your lender and try for a loan modification, you'll need to prepare a small mound of documentation. The lender will specify what is needed, but typically you'll be required to supply the details of your financial situation, your budget, documentation of your hardship and a "hardship letter" that outlines, in virtual detail, the circumstances that led you to fall behind in your payments and the improved circumstances that will allow you to get your financial life back on track.
You may also be required to provide a market analysis of your house. This will document how much equity you have in your home. A real estate agent can typically prepare this for free in exchange for the chance of winning your business should you decide to sell. If a loan modification or refinance isn't possible or feasible, your options are limited to these:
Sell - If you have enough equity in your home to allow you to pay off your mortgage in full, after deducting any real estate agent commissions, then a quick sale is usually your best option. You'll preserve what's left of your credit score and your equity, leaving you in a much better position should you want to buy another home in the future.
Negotiate with your lender for a short sale - If you owe substantially more on your home than it's worth, you may be able to get the lender to accept less than it is owed by negotiating a "short sale." In a short sell, you essentially sell the house for whatever you can get, and the lender agrees to accept the proceeds and not go after you for the deficit. You have to consider the downside. A short sale can further damage your credit scores, often showing up as a "settlement" on your credit report. You may also face an IRS bill on the unpaid debt, which is generally considered income to you.
Allow the foreclosure to proceed - This is generally the worst choice. In some states and in some circumstances, the lender can even go after you in court for any deficit between what the home sells for and what you owe. An attorney or housing counselor can let you know if that's a possibility.
Even if the worst happens, though, the damage to your financial life needn't be permanent. If your situation improves, you may be able to get another mortgage, at a reasonable interest rate, within a few years.
Create a budget - Plan out a spending strategy for the next several months. See what costs you can trim to free up as much money as possible for home payments. You may need to pay the minimums, or even less, on other debts. In rare circumstances it could make sense to skip payments on some bills so you can continue to pay your mortgage. Another option to consider is to borrow money from friends or family, or perhaps even tap into your retirement funds. Do the latter only if you're convinced you can make future payments; you don't want to drain your retirement funds if you're only going to end up losing the house in the end.
Check your refinance options - If you have equity in your home, if your credit rating is relatively intact and if your lender hasn't yet filed a notice of default, you may be able to get another loan with more affordable payments. An experienced mortgage broker can let you know your options. If you choose this option, be careful not to jump into a risky loan.
Be realistic - Many times, people struggle to hold on to a house they simply can't afford when they'd be far better off without it. It may seem harsh, but it's better to sell a home while you still have equity and some semblance of a credit score than to have it taken away in foreclosure.
Get organized - If you decide to contact your lender and try for a loan modification, you'll need to prepare a small mound of documentation. The lender will specify what is needed, but typically you'll be required to supply the details of your financial situation, your budget, documentation of your hardship and a "hardship letter" that outlines, in virtual detail, the circumstances that led you to fall behind in your payments and the improved circumstances that will allow you to get your financial life back on track.
You may also be required to provide a market analysis of your house. This will document how much equity you have in your home. A real estate agent can typically prepare this for free in exchange for the chance of winning your business should you decide to sell. If a loan modification or refinance isn't possible or feasible, your options are limited to these:
Sell - If you have enough equity in your home to allow you to pay off your mortgage in full, after deducting any real estate agent commissions, then a quick sale is usually your best option. You'll preserve what's left of your credit score and your equity, leaving you in a much better position should you want to buy another home in the future.
Negotiate with your lender for a short sale - If you owe substantially more on your home than it's worth, you may be able to get the lender to accept less than it is owed by negotiating a "short sale." In a short sell, you essentially sell the house for whatever you can get, and the lender agrees to accept the proceeds and not go after you for the deficit. You have to consider the downside. A short sale can further damage your credit scores, often showing up as a "settlement" on your credit report. You may also face an IRS bill on the unpaid debt, which is generally considered income to you.
Allow the foreclosure to proceed - This is generally the worst choice. In some states and in some circumstances, the lender can even go after you in court for any deficit between what the home sells for and what you owe. An attorney or housing counselor can let you know if that's a possibility.
Even if the worst happens, though, the damage to your financial life needn't be permanent. If your situation improves, you may be able to get another mortgage, at a reasonable interest rate, within a few years.
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