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Rich Homeowners Walking Away from Mortgage Loans

July 9th, 2010

Think the rich are immune to the housing crisis? You would be wrong. According to the New York Times, “more than one in seven homeowners with loans in excess of a million dollars are seriously delinquent.”

Walking Away from Home Loans

CoreLogic compiled data that indicate that people with less expensive homes are more likely to continue making payments to mortgage lenders. “Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment,” the article states. Sam Khater, CoreLogic’s senior economist, was quoted as saying, “The rich are different: they are more ruthless.”

Strategic mortgage defaults have become more common as the housing market has struggled to recover. Some homeowners have simply stopped paying on mortgage loans because  they see no point in putting money into properties that have lost significant value. It’s not that they can’t afford to make payments on home loans, they just don’t want to.

Falling Home Prices

According to a recent article on Freddie Mac’s Web site, many strategic defaulters live in states where housing prices have suffered huge drops. Walking away from homes, the article argues, hurts entire communities in the long run:

That’s because strategic defaults affect many other families and communities. And these costs – or as they are known in economic jargon, externalities – are not factored into the individual borrower’s calculations.

Let’s start with the neighbors. When strategic defaults occur, homes go into foreclosure and sit vacant for some period of time. We know from experience that foreclosures and vacancies drive down the property values of everyone else in the neighborhood. Thus, strategic defaulters, in effect, deplete the personal wealth of their neighbors. 

Average Joe and Jane

Ultimately, it’s the average homeowner who is likely to be affected the most. A middle-class family that loses a home through foreclosure is likely to struggle for years to rebuild a stable financial situation.

Defaulting on Mortgages and Still Living Large

When people with million-dollar properties default on home loans, they often continue to have access to other financial resources and investments. They may even have a second or third home to move into and continue to live a pretty comfortable lifestyle.

Avoid Defaulting on a Mortgage

Whatever your income level or home’s value, it’s best to do everything you can to avoid defaulting — strategically or otherwise. Alternatives to strategically defaulting include resigning yourself to making mortgage payments even if you’ve lost a lot of home equity and waiting for the market to recover.

You could also try to refinance your mortgage loan to lower your payments and interest. Finally, if necessary, do whatever is necessary to sell your home to get rid of mortgage payments.

Mortgage Acceleration Pros and Cons

March 3rd, 2010

The troubled economy has caused some homeowners to consider accelerating their mortgage loan payments. Although many financial experts caution against paying off a home loan early, many people are ignoring that advice and focusing on owning their homes faster.

Mortgage Interest

One of the most common reasons given to discourage people from paying off a mortgage early is because they won’t be able to deduct the interest they paid on their income tax returns.

Before you accept this argument hook, line, and sinker, use a mortgage payment calculator to see if the amount of interest you can deduct on a tax return beats what you can save on interest by aggressively attacking mortgage principal.

Saving and Investing

Another argument against paying off a home mortgage early involves the notion that you could earn more by investing the money you would put toward extra payments. In some cases you would earn more by investing the money. But it’s important to stay true to yourself and decide what type of risk you want to take with your cash.

Are you going to feel more secure with your money in the stock market or some other type of investment, or are you going to be happier knowing that you are going to own your home free and clear in a few years? Only you can decide if mortgage acceleration is right for your situation.

How to Accelerate Mortgage Loan Payments

If paying off a home mortgage early appeals to you, consider these popular methods:

  • Make mortgage loan payments biweekly instead of monthly. This amounts to making 13 payments a year instead of only 12. Although many banks offer to set up biweekly payments for a fee, you can do it on your own. Simply cut your monthly home loan payment in half and pay that amount every two weeks.
  • Use bonuses, tax refunds, and other windfalls to pay down your home loan. Make sure you direct the mortgage lender to apply the funds to your principal.
  • Refinance mortgage to pay it off in 15 years. Depending upon how much principal you owe, expect to see the monthly payments increase. Make sure you have the income to support the higher mortgage payments.

Pay off Other Debt

Finally, when deciding whether or not to pay off a mortgage loan early, consider whether or not you have other debts. If you have high interest credit card debt or other loans, use extra cash to pay them off before turning your attention to acclerating mortgage payments. 

Government to Help Housing Markets Suffering the Most

February 19th, 2010

People struggling with mortgage loans in five states are getting additional aid to get them through the housing crisis. President Obama said the government plans to give $1.5 billion to local and state housing agencies in an effort to help troubled homeowners.

Help for Troubled Mortgage Loans

Funds are to go to agencies in Nevada, California, Arizona, Florida, and Michgan, states hit hardest by the housing downturn. Those states have seen housing prices plunge more than 20% from their peak.

Money can be used in various ways, including modifying home loans that are underwater or helping unemployed people struggling with mortgages to avoid foreclosure. Housing agencies can also use the aid for “programs encouraging sustainable and affordable homeownership,” according to the White House blog.

Get Help with Your Mortgage

While these programs should help many troubled homeowners, you may need to look for relief sooner than that. Contact your mortgage lender or loan servicer if you are already behind on monthly payments. You may be eligible for a mortgage refinance or loan modification.

Refinance Mortgage

Mortgage refinancing through the government’s program requires:

  • Your mortgage loan to be guaranteed by Fannie Mae or Freddie Mac
  • You to be current on mortgage payments
  • The ability to make payments on the refinanced home loan
  • You to be the owner-occupant of a one- to four-family home

If you don’t have a home mortgage guaranteed by Fannie Mae of Freddie Mac, don’t assume that your mortgage lender can’t help you. They may have some other program to help you do a mortgage refinance.

Mortgage Loan Modification

Getting approved for a home loan modification through the government’s program requires:

  • Your mortgage payment (including taxes and insurance) to be greater than 31% of your monthly gross income
  • You must be able to document financial hardship that is keeping you from affording your mortgage payment
  • Have a first lien that originated before Jan. 1, 2009

If you are facing foreclosure, mortgage loan servicers can’t proceed with a foreclosure sale until you’ve been evaluated for help through the mortgage loan modification program.

Contact Mortgage Lender

The most important takeaway is that you must be proactive about getting help with your mortgage loan. Ducking and dodging phone calls and letters from your mortgage lender isn’t going to help your situation. Be diligent about tracking down someone at your mortgage lender who is authorized to set up some kind of deal to get back on track with your home loan.

Mortgage Loan Modifications Fall Short of Goals

December 11th, 2009

I recently wrote about how more than 650,000 home mortgages had been modified this year through October because of the government’s foreclosure prevention plan. That number increased to more than 697,000 mortgage loans through November, but most of them were only trial modifications, according to Bloomberg. 

Permanent Mortgage Loan Modifications

Although the Making Home Affordable program aimed to help 4 million distressed homeowners, only 31,382 mortgages have actually been permanently modified, according to the Treasury Department. GMAC Mortgage Inc., JPMorgan Chase & Co., and Ocwen Financial Corp. completed the most mortgage loan modifications.

What’s Holding up the Process?

Home loan modifications have been affected by a variety of factors. The Obama administration has said that about a third of borrowers failed to provide proper proper documentation to get their mortgage loans modified permanently. Loan servicers also have dropped the ball in many cases. Some loan servicers have lost documents submitted by borrowers or not requested the appropriate documents.

Putting Pressure on Mortgage Lenders

The Treasury Department is stepping up pressure on mortgage lenders to get more loans permanently modified. In the meantime, more homeowners are falling behind on mortgage payments. About 7.9 million homeowners got behind on mortgage payments in the third quarter, according to the Mortgage Bankers Association.

Do Mortgage Modifications Have Poor Outlook?

Laurie Goodman, senior managing director of Amhert Securities Group LP, told Congress last week that the mortgage loan modification program is “destined to fail” because it doesn’t address the fact that so many homeowners have negative equity in their homes.

About a quarter of U.S homeowners have negative equity in their homes. That means they owe more on their mortgages than their homes are worth. Previously, estimates had put the number of homeowners with negative equity at around 32%.

Refinance Mortgage

Mortgage loan modifications obviously don’t work for everyone. But if you still need help lowering your monthly mortgage payments, consider mortgage refinancing. Contact your loan servicer to see if you qualify to refinance your mortgage through the Making Home Affordable program. To get refinancing through the government’s program you must be current on monthly payments and have a home loan that isn’t higher than 125% of your home’s value.

If you don’t qualify for that program, search for refinancing deals from mortgage lenders here.

10 Things to Consider about Doing a Mortgage Refinance

October 5th, 2009

Current mortgage rates have fallen near record lows, but should you move to do a mortgage refinance? Here are 10 things to consider if you’re thinking about refinancing.

  1. Consider a 15-year mortgage if you have a low balance. Fifteen-year mortgage rates averaged 4.36% last week, the lowest rate since Freddie Mac began tracking the rates.
  2. Consider paying points to get a lower mortgage rate. Generally, you can lower your mortgage rate by about 0.25% for each point you pay.  Each point will equal 1% of the total amount of your mortgage.
  3. Use a loan calculator to figure out what your monthly payments will be after refinancing. A loan calculator also can show the break-even point for recouping fees paid to refinance.
  4. Check out home values in your area before applying to refinance a mortgage. This will keep you from being surprised by a low appraisal during the refinance process. Keep in mind that if you live in an area hit by a lot of foreclosures, it may be difficult to get a high enough appraisal to refinance if you don’t have a lot of home equity.
  5. Don’t apply for a mortgage refinance until after you’ve reviewed your credit report. Make sure all information on your report is accurate. If you have a poor credit history, you may be turned down for refinancing.
  6. Don’t apply for other types of credit before getting approved for a mortgage refinance. Too many credit inquiries or newly opened lines of credit are red flags to mortgage lenders.
  7. Ask mortgage lenders to provide a Truth-in Lending Disclosure and Good Faith Estimate before paying an application fee or a rate lock-in fee. Some lenders may balk at doing this, but anyone who wants your business should be able to give you this information.
  8. Make sure you continue making payments on your current mortgage. You are still responsible for the payments until you close on the refinance.
  9. Comply with the mortgage lender’s request for documentation of income, income taxes, financial statements, etc. Dragging your feet on getting these documents together can delay closing on your home loan.
  10. Just because mortgage rates are low doesn’t mean you should refinance. Talk with an experienced mortgage counselor if you need help deciding whether or not refinancing will help you.

Countdown to Your Mortgage Closing

If you do refinance your mortgage, be patient. Mortgage lenders have been overwhelmed by requests for loan modifications and refinancings so it make take a little longer than you want to get to closing.