March 15th, 2010 5:42 PM by Dave Gubler
(Loan Modification vs. Short Sale vs. Foreclosure)
Are you like the band on the Titanic; playing on in the face of imminent disaster? We've all heard the story (or witnessed it in the movie right?) of how the band played on as the "indestructible" Titanic sank.
I encounter many homeowners that remind me of the band on the Titanic. Admirable in their determination to "play on" but are they really making the right choice? Often their is no reasonable solution that will allow them to remain in their home. The data on loan modifications has become increasingly dismal with fewer resolutions and soaring re-default rates.
For many homeowners the iceberg has struck in the form of job loss, adjusting rates, illness, divorce, etc. combined with a real estate market that has crashed to an extent that noone (noone I know) predicted. If you are struggling to make payments but have equity in your home (please approach this from an objective stance or you aren't doing yourself any favors!) you can ignore this blog. You have something to fight for.
What are underwater homeowners fighting for? In most cases it can only be a sentimental argument that impels an underwater homeowner to cling to an asset that has sunk in to the depths. I don't mean to use hyperbole but this is a true statement for many real estate markets that have dropped sharply and profoundly in the last three years. Every struggling homeowner in America (yes, I like making sweeping grandiose statements like this) needs to examine their equity position. What is the current fair market value of the home against the total amount owed? Seek the advice of a real estate agent (self-serving, as it sounds) and get an objective and thorough analysis of fair market value. Good agents know their markets! This is a crucial first step for any struggling homeowner to assess their next step.
Rapid home appreciation is a thing of the past folks (with the exception of a very few markets) and we have to stop drinking the Kool-Aid. If you believe it is likely that we'll see double-digit home appreciation again any time soon (a phrase which here means "in our lifetimes!") then you are clinging to an imaginary life preserver. I know many of us benefitted from the rapid appreciation in hot markets. There are no indicataions that this will happen again any time soon. There is, in fact, a mountain of evidence against rapid real estate appreciation however (beyond the scope of this blog post but worth looking in to if you feel that I am in error). When stock plummets and there is no indication that the company will recover we all recognize we must sell!
If you are struggling to make mortgage payments and you have established that you are "underwater" (negative equity) then ask yourself the following?
- Can you rent/lease a comparable home for less than your current combined housing expense in your neighborhood? (Principal, Interest, Taxes, Insurance, and HOA)
- Do you know the consequences of foreclosure and have you compared them to the consequences of short sale?
- What terms would have to be offered to you on a loan modification in order for you to remain in the home over the long term? Is this feasible or likely to occur soon enough to keep you in the home? (If you are thinking "principal reduction" please banish the thought. We obtained a fair number for clients but they are a thing of the past now.)
- How many years are likely to pass before you are again in an equity position?
I encourage you to consult with a professional real estate agent on these matters. Someone that is intimately familiar with the following:
1. The local real estate market.
2. Your lender(s) current distressed asset policies, personnel, and procedures.
3. Mortgage loans and terms.
It would be very self-serving, indeed, to advise all struggling underwater homeowners that they need to do a short sale. It will be the right solution for many but obviously not for everyone. I am simply admonishing any homeowner that is struggling and that is underwater to consult with a professional about their options. Too many times I have been approached after it is too late to effectively implement beneficial options for a homeowner. The longer you stand on the deck ignoring the rising water the fewer options you will have.
Don't be the band on the Titanic! You have options and there are experienced agents (lifeboats if you will humor me) that can help you navigate troubled waters. A short sale will not be the right resolution for every homeowner but it should be considered before it is too late and foreclosure becomes the only option.
Find out more about short sales:
Short Sale vs. Foreclosure
Short Sale Answers
Making Home Affordable (HAFA) Short Sale
Reasons Short Sales Fail