Your Questions About Foreclosures | foreclosureorder.com

Your Questions About Foreclosures

Your Questions About Foreclosures

William asks…

Why is the sub prime mess a problem for the economy?

I need some help here because I must be the only dummy that doesn’t understand the problem.

Why are the mortgage companies reporting such huge losses? The mortgages are secured loans that are backed by real estate. Are the property values that low? If it’s a matter of conservative accounting rules in valuing the loans, then are we really in a crisis?

I agree that it is a social tragedy if thousands lose their homes to foreclosure, but is that cause for a recession? I would think the glut of cheap homes in foreclosure would stimulate home sales and the economy making it all a wash.
Is the problem compounded by the loans being “bundled” as asset backed securities? I’m really trying to understand the economic forces in play here. I understand the pitfalls of excessive consumerism and predatory financing, but I have difficulty understanding the macro-economics.

Your Questions About Foreclosures

The Expert answers:

This is going to take a moment, so hold on.

Lets start in 2003. Greenspan lowered the Fed Rate to a ultra historic low of 1%. Economically speaking, this was incredibly stupid! The interest rate is the risk of money. With a 1% rate, that essentially meant that the risk was factored out. When that happens investors and consumers act irresponsibly, and that is exactly what happened.

1) People got into mortgages they NEVER should have been in. Not only did they get into these loans, but with the low introductory rates already associated with ARMs, these people got into houses that were too big for them to ever get into. This is where consumers were acting irresponsibly. Now, maybe some of them figured they would sell the house before the rate readjusted…its irrelavent what they were thinking, they ALL were made aware the adjustment WOULD take place. But with the attention span of a feret, that meant nothing to these people.

2) Another consumer/investor hybrid that was affected and that contributed was the speculators within the housing market, primarily the house flippers. You have a house on the market, a house flipper buys it and flips it and puts it on the market 4 weeks later. Then someone who wants to live in the house buys it and moves in. What happened in this transaction? Well for one house we got two mortgages, and when the monthly MBA Purchase Application report is delivered (Mortgage Bankers Association) to the market and says there were 2 applications made, but mentions nothing about them being for the same house. So, this creates an artificial signal to the market that housing is exploding and for everyone to jump in. So new homes start to be built. As time progresses, this process continues because two signals are being communicated to the consumer: 1) the housing market is on fire and prices are flying through the roof due to the demand. Get in while you can and secure a good rate, 2) rates are at a literal all time low, get them while you can.
This whole thing corrects itself when the speculators can’t find anyone to buy the home they are not stuck with (The largest segment of the housing economy, in dollar value, that foreclosed are the homes valued over $470K). So these houses start to foreclose first and then the subprimes foreclose en masse. The rates adjusted, and the result was no one could afford to pay for them and they couldn’t sell them, so they foreclosed (banks HATE foreclosures).

3) Then there are the Collateriallized Mortgage/Debt Obligations (CMOs/CDOs). So, in order to meet the demand for all of the home loans the financial institutions pooled all of the mortgages into groups; for example’s sake we will focus on the subprime group since they were the largest volume wise. These mortgages were pooled together and then sliced up into Debt instruments (just think of a bond) called CMOs or CDOs. They then sold them like as securities, like bonds. So lets say you bought one, as they were usually sold at $25,000 minimums. What happens is you get this note and when the subprime mortgages made their monthly payment, a portion of the percentage was kept by the finance institution and a portion went to the CMO holders as interest payments. So, rather than receiving a annual interest payment like most bonds, you are receiving one every month. The 25K you invested in owning this (the principal) would be due back to you when the note expired, usually at when the mortgage was paid off on its regular schedule. (there is a lot more to this process, but I am sticking to the basics to explain to you what happened in the market and then the economy). That 25K you invested then goes to the bank to be used to make more home loans, and then they make more CMOs or CDOs. As you see, the cycle continues.

Naturally, there is a risk inherent in this process to the investor, which is why it has a minimum amount that is so high and is largely reserved for investors with over a million in assets and Institutional Investors (other banks, mutual funds, hedge funds, etc). Part of this risk is the possibility of foreclosure, and this is where the Credit Rating on the note comes into play (i am not about to go into this, just know that when the system experienced a massive foreclosure rate, and therefore the bonds defaulted on their interest payments, the credit rating system went to crap and NO ONE wanted to issue credit as it was too risky). When the rates adjusted, foreclosures came swarming in. Investors were striffed their interest payments and the banks couldn’t liquidate the homes fast enough, and receive a decent value for the homes (typical in a foreclosure, which is why they hate them). The end result, hundreds of billions of dollars lost, and the impact is felt all over the world.

So how does this affect the economy. The biggest loosers was the Financial Sector, which happens to be the largest sector in the economy; roughly 20%. When they dropped, the took the market with them; especially since they weren’t issuing credit due to the Credit Rating mess, and many companies were needing to get credit in order to expand, since their respective sectors were fine. So, the spread trickled all over.

This means that property values were dropping as demand was ACTUALLY reseting to its actual levels. Unemployment went up, since the contruction sector, and the industries that feed off of it, dried up. This meant consumer spending went down, which further spread the problem of no money in the market.
The end result, we are facing (if not already in, as we never know we are in a recession until several months after being in it) a recession. The burn is, while the rates are dropping, so too are the home values. Some people aren’t able to refinance their home loans because they don’t even have enough equity…and the equity they thought they had is now getting lost to the drop in the home’s value (due in large part to the glut on the market with homes, but also due to the fact that the inflation in the housing market was 8-10% for a while there, and that is now readjusting). Now, some think this is just the tip of the iceberg. There were a lot of foreclosures last year due to reseting rates, BUT this year, there are scheduled to be $1 Trillion dollars worth or resets. Bush worked with the Finance Sector to post-pone this reset for another five years, but this is not all of them …. And this still doesn’t mean mass foreclosure has been post-poned, as a recession could easily cause that problem.

I know its a lot, and I hope I answered it to a point where it was made clear. Your question is not in any way a simple one…in fact, it is an incredibly complex one!!! And I enjoyed the opportunity to discuss it.

Your Questions About Foreclosures

Helen asks…

Home in foreclosure, moving to another state, what are the chances they will try to collect shortage?

I’m from MA, moving back there after losing my home in RI. I know that MA has a provision to prevent recovering shortages on foreclosure sales. I don’t think that exists in RI. As a MA resident, will they be able to pursue me there for judgment? What is the likelihood they would try to recover when I have no assets, no property and very poor credit. Thanks.

Your Questions About Foreclosures

The Expert answers:

You’re correct. RI allows for deficiency judgments. How likely? It depends on factors unknown — how big is the deficiency, what are your future earning prospects, how easy is it to obtain a deficiency judgment, etc.?

The real matter for you is that they will 1099 you for the amount of debt that is forgiven, and some portion of the debt may be taxable income.

Your Questions About Foreclosures

Richard asks…

2 mortgage pmts missed, no job, loan>value. so..short sale now or stay in home for free until foreclosure?

Close family member is in trouble and needs help. Since she is only 2 months behing now and has no job, no money and bad credit, would it make any sense to stay in the home until foreclosure.. instead of negotiating a short sale now?…to save on future rent after short sale goes through?
Right now she is considering negotiating short sale, but that could mean sale/closing in 2-3 months, and then she has to be out and find a rental…and still may be unemployed.

I’m just trying to figure out how long she can stay in the property with short sale vs foreclosure….and weigh the credit consequences of each.

And negotiating with lender for loan modification won’t help. She has no job or money.

Your Questions About Foreclosures

The Expert answers:

Good luck…

Your Questions About Foreclosures

Sandra asks…

Spec Home for Sale: Should I ride the market out or try to rent?

I have a spec home on the market (Metro Detroit – the foreclosure capital!) and the carrying costs are starting to add up. I’m wondering if I should try to rent it out to cover my expenses, or just continue to ride out the market. Dropping the price isn’t always the best option (plus, I’d like to make a little money on the deal:)). I’m wondering the pros and cons of renting. I really don’t feel like being a landlord, but I also hate to see money fly out the door each month while I sit and wait for the horrible housing market to turn around. Based on current rentals in the area, I’ve determined I could make a little money each month, but I really need to get that construction loan off my credit! Any suggestions would help.

Thanks

Your Questions About Foreclosures

The Expert answers:

You can’t have your cake and eat it too…Unfortunately you got caught. You do have a few choices…
1. Discount the home enough to sell it and learn from the mistake
2. Rent it and run the risks associated with being a landlord
3. Find a buyer with lower credit who wants to own but can not qualify under the current housing situation and construct a lease purchase agreement.

Your Questions About Foreclosures

Lisa asks…

Houses in foreclosure or repossessed — is there a free web site that lists them? Or how do you find them?

I want to find foreclosed or repossessed homes for sale.

Your Questions About Foreclosures

The Expert answers:

This is asked in Y A everyday, and the short answer is that free sites don’t exist. And the ones you pay for are not renowned for their accuracy.

Powered by Yahoo! Answers

Your Questions About Foreclosures
Your Questions About Foreclosures
Your Questions About Foreclosures
Your Questions About Foreclosures
Your Questions About Foreclosures

Your Questions About Foreclosures

Your Questions About Foreclosures