For thousands of homeowners across the country saddled with adjustable-rate mortgages, 2008 promises to be a financially challenging year as interest rates begin re-setting thereby drastically increasing monthly mortgage payments.
It is this problematic course of events in the residential market that has seen the number of foreclosures skyrocket over the past several months, with even greater increases expected in the New Year and beyond.
However, there is some hope for homeowners despite the dreary forecast of what’s to come, and as in any turbulent market, there is opportunity for investors who are willing to take some risks.
If you currently own a home that is, or soon will be, in foreclosure you have one favorable bargaining chip that should bring some level of comfort: Banks (and other lenders) don’t want to take properties back from borrowers. Why? There are two simple answers. 1.) The foreclosure process is very expensive for the lender and 2.) Banks/lenders are grossly undermanned and are not equipped to deal with the deluge of foreclosures that shall soon occur.
Recent published reports from industry insiders suggest that one very large bank, that shall remain nameless in this article, incurs an average cost of $60,000.00 in connection with initiating a residential foreclosure. That dollar amount includes property maintenance, attorneys’ fees, taxes, pay-offs to junior lien holders, etc. From a business standpoint, most lenders realize that it is wise to try and negotiate a payment plan, including some debt forbearance, with the homeowner rather than incur the expense of a foreclosure action.
Lenders lack manpower to deal with the volume of foreclosures set to take place in 2008. As a result, although most states allow the lender to initiate a foreclosure action once the borrower is delinquent 30 days on the mortgage payments, the national average before lenders take action is 7 months. Lenders just don’t have the personnel to deal with the volume in a speedier fashion.
This should be encouraging news to homeowners who have fallen behind in their payments. Many lenders are willing to recognize your financial woes (sudden unemployment, disability) and work out a payment arrangement that addresses your mortgage arrears. However, borrowers need to be proactive. Instead of avoiding your bank’s phone calls, take the initiative to communicate with your lender. It is important to be honest about your current and future financial status. Often times, the lender will accept a re-payment and/or forbearance plan that you would have never thought acceptable. Remember, foreclosures cost lenders a lot of money!
If you are an investor, then a residential market that is rife with foreclosures or soon-to-be foreclosures may represent a tremendous opportunity. Pre-foreclosures, which are often referred to as “short-sales”, allow an investor to purchase a property for an amount that is below what is owed to the bank. Although these types of transactions require specific documentation and lender approval, they may benefit both a purchaser and seller.
In a pre-foreclosure situation, the seller, who is delinquent in mortgage payments, has an opportunity to preserve (or at least reduce the damage to) his/her credit rating by avoiding a full-scale foreclosure proceeding. The buyer, often times an astute investor, may end up purchasing the property at a favorable price. Although this sounds very appealing to all parties, there are some pitfalls. Sometimes the debt forgiveness can result in income to the seller that must be reported to the IRS on a 1099 form. It can also take as long as 60 days to receive lender approval for a pre-foreclosure sale–such a long time period could affect a potential buyer’s interest-rate lock. Finally, most lenders impose strict requirements for a pre-foreclosure sale that must be met in order for the deal to close.
Whether you are a homeowner facing a foreclosure or an investor waiting to capitalize on a depressed market, there are options that will allow many to survive, and even thrive, despite the turmoil that many have predicted as 2007 comes to a close.