Bankruptcy can save the house from foreclosure

By Les Christie, staff writer NEW YORK (CNNMoney.com) --

Slick TV commercials and online ads tell delinquent borrowers that they can save their homes by filing for personal bankruptcy.

But is it true -- or just too good to be true?

True!

Bankruptcy can bring foreclosure proceedings to a halt, end harassment from debt collectors, and give borrowers time to make up missed payments and reorganize their finances. In some cases, bankruptcy can also help mortgage borrowers save their homes permanently.
It's not, however, going to help every troubled homeowner. If, for example, the homeowner's biggest problem is not enough money, bankruptcy is not going to solve that.
"It's the best tool there is for people behind in payments but who have ongoing income," according to Binghamton, N.Y., attorney Peter Orville, "those who had been making payments and who could be making payments again."

Halting the process

The first thing a bankruptcy filing accomplishes is to stop the foreclosure process. Lenders can't foreclose or even try to collect debt until permitted to do so by the court.
But first, you have to decide what type of bankruptcy to file for. There are, basically, two types to choose from: Chapter 7 and Chapter 13.
A Chapter 7 bankruptcy delays foreclosure. but eventually it usually results in the liquidation of most assets, according to attorney Stephen Elias, author of "The Foreclosure Survival Guide." Borrowers almost always lose their homes in a Chapter 7.
Some bankruptcy attorneys, like New York-based David Pankin, prefer Chapter 7 because it gets rid of all unsecured debt, leaving only secured debt, such as mortgages, exempt. In this scenario, borrowers still owe their mortgage payments but they can likely afford to make them because all the other debts have been discharged.
But for most experts, Chapter 13 is usually more effective at helping people keep their homes. It gives them time to repair their finances, usually three to five years, during which the court agrees to an income-based budget with monthly payments made to trustees.
The trustees pay the bills, first paying off the secured debt. After that, the trustee pays off unsecured debt, starting with back income taxes.
Next in line comes unsecured debt like credit cards and medical bills. By then, there's usually little cash left and these bills are paid at less than the full rate, often as little as five cents on the dollar.
Borrowers, if they kept up on their payments, can emerge from bankruptcy with their homes still in their possessions.
One thing courts cannot do is "cram down" loan balances on primary residences. That is, reduce mortgage debt to what the home is worth. Neither can they lower interest rates, in most cases, nor lengthen the term of the loans.
They can, however, "strip off" second mortgages, like home equity loans or lines of credit, when home values fall below the first mortgage balances, according to Elias.
"This allows the judge to get rid of the second mortgage," he said. "If there's not enough equity to secure the second, it becomes unsecured debt."
That can be a huge advantage for borrowers. Homeowners may have, for example, a $200,000 first mortgage balance and another $50,000 on a home equity loan. If the home value has dropped to less than $200,000, the judge could rule that all $50,000 of the second is unsecured. Then, it can be paid off at the same pennies-on-the dollar as other unsecured debt.
But there are other downsides. Bankruptcy can lop as much as 240 points off credit scores. And bankruptcies can remain on credit reports for 10 years, said Pamela Simmons, a California real estate attorney, while all other black marks disappear after seven years or less.

Fending off deficiencies

There is also a potential tax advantage to filing for bankruptcy rather than going to foreclosure, according to Simmons. When a home is repossessed and the lender forgives the portion of the mortgage balance above its market value, a tax liability can be triggered. Any difference between what people borrow and what they repay is considered income.
Congress is temporarily allowing that unpaid debt to be forgiven -- but only for money specifically spent on the home purchase or on home improvement.

Foreclosed? Here comes the tax man

Millions of people, however, refinanced mortgages or took out home equity loans and used the money to fund vacations, pay college tuition, buy cars or boats or simply to live the good life. That money is taxable.
Simmons had a recent client who was allowing his lender to foreclose on him and called her about the timing, asking whether he had to vacate by the day of the auction.
In passing, she asked him how much he owed on the house. He said he bought it for a million but had taken out another $2 million, most of which had not been spent on the house. When she told him he would owe taxes on it both to Uncle Sam and the State of California, he was dismayed
She rushed him into her office and they did the paperwork so he could file for bankruptcy.
"If they discharge that deficiency in bankruptcy, you don't owe tax on it," said Simmons.

More Than 500,000 Trial Loan Modifications Canceled

More than 40 percent of the trial loan modifications started under HAMP were canceled as of the end of last month, but permanent mods totaled nearly 400,000, according to the latest Treasury report.
Of the 1,282,912 trials started, 520,814 have been canceled, 364,077 are active, 389,198 are permanent, and the remaining 8,823 were permanent but subsequently canceled.
The most common causes of trial cancellations included missing documentation, trial plan default, and ineligibility due to debt-to-income ratios already being below 31 percent.
Most who were canceled were put in an alternative modification.
Bank of America now leads all servicers with 72,232 permanent modifications, followed by Chase with 54,722 and Wells Fargo with 44,628.
However, smaller loan servicers have been converting a larger share of their eligible 60+ day delinquent borrowers, thanks in part to the use of verified documentation.
Performance of Permanent Modifications
Delinquency data included in the latest report revealed that 4.1 percent of the 126,527 loan mods made permanent in the first quarter of 2010 were already 60+ days late.
Another 1.3 percent are 90+ days late.
The numbers are 5.4 percent and 1.5 percent for mods completed in the fourth quarter of 2009, and 10.5 percent and 4.4 percent for the third quarter of 2009, respectively.
While it’s too early to really tell, the re-default numbers look lower than those tied to other modification programs.

MIT: Foreclosure Reduces Value of a House by 27%

A foreclosure reduces the value of a home by 27 percent on average, according to a MIT study titled “Forced Sales and House Prices,” which examined 1.8 million home sales in Massachusetts from 1987 to 2009.Researchers weren’t surprised to find that foreclosures were selling for a discount, but were shocked at how large it was.Other types of “forced sales” lowered home prices by much smaller amounts – when a house was sold after the death of the owner, the price only dropped about five to seven percent.And when a homeowner declared bankruptcy, the home price fell just three percent on average.They believe the gap in home price reductions has to do with the tendency of foreclosed properties to fall into disrepair.You know, the homes with overgrown weeds and brown lawns accompanied by foreclosure notices in windows.The brains behind the study found that those same properties also lower the values of homes in the surrounding area, but not by much.If a property is located within 250 feet of a foreclosed home, you can expect the value of the home to fall by just one percent on average.

90 Percent of Homeowners Don't Regret Decision

90 Percent of Homeowners Don’t Regret Decision
12Jul10

An overwhelming 90 percent of homeowners don’t regret buying their homes, according to a new survey from consumer finance site Bankrate.com.A “mere” nine percent said they do regret the decision, though with default rates in the teens, it kind of makes you wonder if it’s not more.Among those who do regret buying property, the most common complaint was the inability to ditch, along with trouble making mortgage payments each month.“It’s surprising – and reassuring – to hear 90 percent of homeowners say they don’t regret the purchase of their current homes,” said Greg McBride, CFA, senior financial analyst for Bankrate.com, in a press release.Of course, 25 percent of Black homeowners said they regretted buying their homes, with respondents mostly saying they couldn’t afford payments.This group was also the most likely to hold adjustable-rate mortgages and option arms.Better Mortgage AwarenessOnly eight percent of all those those surveyed didn’t know what type of mortgage they had, compared to 26 percent two years – so I guess that’s the silver lining to this ongoing mortgage crisis.Fixed-rate mortgages continue to surge in popularity, with 79 percent of respondents saying they have one on their home.The poll of 1,001 randomly selected adults was conducted by Princeton Survey Research between June 24-27.

Biggest Defaulters on Mortgages Are the Rich

By DAVID STREITFELD
Published: July 8, 2010

LOS ALTOS, Calif. — No need for tears, but the well-off are losing their master suites and saying goodbye to their wine cellars.

The housing bust that began among the working class in remote subdivisions and quickly progressed to the suburban middle class is striking the upper class in privileged enclaves like this one in Silicon Valley. Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

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 rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.
Five properties here in Los Altos were scheduled for foreclosure auctions in a recent issue of The Los Altos Town Crier, the weekly newspaper where local legal notices are posted. Four have unpaid mortgage debt of more than $1 million, with the highest amount $2.8 million.

Not so long ago, said Chris Redden, the paper’s advertising services director, “it was a surprise if we had one foreclosure a month.”

The sheriff in Cook County, Ill., is increasingly in demand to evict foreclosed owners in the upscale suburbs to the north and west of Chicago — like Wilmette, La Grange and Glencoe. The occupants are always gone by the time a deputy gets there, a spokesman said, but just barely.
In Las Vegas, Ken Lowman, a longtime agent for luxury properties, said four of the 11 sales he brokered in June were distressed properties.

“I’ve never seen the wealthy hit like this before,” Mr. Lowman said. “They made their plans based on the best of all possible scenarios — that their incomes would continue to grow, that real estate would never drop. Not many had a plan B.”

The defaulting owners, he said, often remain as long as they can. “They’re in denial,” he said.
Here in Los Altos, where the median home price of $1.5 million makes it one of the most exclusive towns in the country, several houses scheduled for auction were still occupied this week. The people who answered the door were reluctant to explain their circumstances in any detail.

At one house, where the lender was owed $1.3 million, there was a couch out front wrapped in plastic. A woman said she and her husband had lost their jobs and were moving in with relatives. At another house, the family said they were renters. A third family, whose mortgage is $1.6 million, said they would be moving this weekend.

At a vacant house with a pool, where the lender was seeking $1.27 million, a raft and a water gun lay abandoned on the entryway floor.

Lenders are fearful that many of the 11 million or so homeowners who owe more than their house is worth will walk away from them, especially if the real estate market begins to weaken again. The so-called strategic defaults have become a matter of intense debate in recent months.
Fannie Mae and Freddie Mac, the two quasi-governmental mortgage finance companies that own most of the mortgages in America with a value of less than $500,000, are alternately pleading with distressed homeowners not to be bad citizens and brandishing a stick at them.

In a recent column on Freddie Mac’s Web site, the company’s executive vice president, Don Bisenius, acknowledged that walking away “might well be a good decision for certain borrowers” but argues that those who do it are trashing their communities.

The CoreLogic data suggest that the rich do not seem to have concerns about the civic good uppermost in their mind, especially when it comes to investment and second homes. Nor do they appear to be particularly worried about being sued by their lender or frozen out of future loans by Fannie Mae, possible consequences of default.

The delinquency rate on investment homes where the original mortgage was more than $1 million is now 23 percent. For cheaper investment homes, it is about 10 percent.

With second homes, the delinquency rate for both types of owners was rising in concert until the stock market crashed in September 2008. That sent the percentage of troubled million-dollar loans spiraling up much faster than the smaller loans.

“Those with high net worth have other resources to lean on if they get in trouble,” said Mr. Khater, the analyst. “If they’re going delinquent faster than anyone else, that tells me they are doing so willingly.”

Willingly, but not necessarily publicly. The rapper Chamillionaire is a plain-talking exception. He recently walked away from a $2 million house he bought in Houston in 2006.

“I just decided to let it go, give it back to the bank,” he told the celebrity gossip TV show “TMZ.” “I just didn’t feel like it was a good investment.”

The rich and successful often come naturally to this sort of attitude, said Brent T. White, a law professor at the University of Arizona who has studied strategic defaults.

“They may be less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest,” Mr. White said.

The CoreLogic data measures serious delinquencies, which means the borrower has missed at least three payments in a row. At that point, lenders traditionally file a notice of default and the house enters the official foreclosure process.

In the current environment, however, notices of default are down for all types of loans as lenders work with owners in various modification programs. Even so, owners in some of the more expensive neighborhoods in and around San Francisco are beginning to head for the exit, according to data compiled by MDA DataQuick.

In Los Altos, Los Altos Hills and the most expensive neighborhood in adjoining Mountain View, defaults in the first five months of this year edged up to 16, from 15 in the same period in 2009 and four in 2008.

The East Bay suburb of Orinda had eight notices of default for million-dollar properties, up from five in the same period last year. On Nob Hill in San Francisco, there were four, up from one. The Marina neighborhood had four, up from two.

The vast majority of owners in these upscale communities are still paying the mortgage, of course. But they appear to be cutting back in other ways. The once-thriving Los Altos downtown is pocked with more than a dozen empty storefronts in a six-block stretch.

But this is still Silicon Valley, where failure can always be considered a prelude to success.

In the middle of a workday, one troubled homeowner here leaned over his laptop at the kitchen table, trying to maneuver his way out from under his debt and figure out the next big thing.

His five-bedroom house, drained of hundreds of thousands of dollars of equity over the last 13 years, is scheduled for auction July 20. Nine months ago, after his latest business (he has had several) failed in what he called “the global meltdown,” the man, a technology entrepreneur, said he quit making his $9,000 monthly payments.

“I’m going to be downsizing,” he said.

The man spoke on the condition of anonymity because, he said, he did not want his current problems to interfere with his coming reinvention. “I’m a businessman,” he explained. “I have to be upbeat.”

Housing Supply Metrics

by CalculatedRisk on 6/27/2010 08:13:00 PM
http://www.calculatedriskblog.com/2010/06/housing-supply-metrics.html

Here is a table of various housing supply measures (just putting this in one place with links to the source data).

Note: here is the Weekly Summary and a Look Ahead. It will be a busy week!

Housing Supply Overview:

Total delinquent loans (1) 7.3 million
Seriously delinquent loans (1,2) 5.0 million
Total REO Inventory (3) 0.5 million
Fannie, Freddie, FHA REO (4) 210 thousand
Homeowners with Negative Equity (5) 11.2 million
Homeowner vacancy rate (6) 2.6%
Rental vacancy rate (6) 10.6%
Excess Vacant Units (6,7) 1.7 million
Existing Home Inventory (8) 3.89 million
Existing Home Months of Supply (8) 8.3 months
New Home Inventory (9) 213 thousand
New Home Months of Supply (9) 8.5 months

1 Source: estimate based on the Mortgage Bankers Association’s (MBA) Q1 2010 National Delinquency Survey. "MBA’s National Delinquency Survey covers about 44.4 million first lien mortgages on one-to four-unit residential properties ... The NDS is estimated to cover around 85 percent of the outstanding first-lien mortgages in the country."

2 This is based on the MBA's estimate of loans 90+ days delinquent or in the foreclosure process.

3 Source: Radarlogic and Barclays as of Feb 2010.

4 Source: Fannie Mae, Freddie Mac and FHA. Fannie, Freddie, FHA REO Inventory Surges 22% in Q1 2010

5 Source: CoreLogic Q1 2010 Negative Equity Report

6 Source: Census Bureau Residential Vacancies and Homeownership in the First Quarter 2010

7 CR calculation.

8 Source: National Association of Realtors

9 Source: Census Bureau New Residential sales

Time is running out to qualify for California's first-time home-buyer tax credit.

Kathleen Pender, Chronicle Staff Writer
Friday, June 18, 2010

The state Franchise Tax Board has received applications claiming about 80 percent of the funds allocated for the credit. Although it's hard to predict, tax board spokeswoman Denise Azimi says the credit could be gone within a few weeks.

In March, the Legislature approved $100 million in state tax credits for first-time home buyers who purchase a new or existing home in California. To qualify, the buyer must close escrow after May 1 and before the $100 million runs out.

The credit is 5 percent of the purchase price or $10,000, whichever is less, spread over three years. To make full use of the credit, the buyer would have to owe at least $3,333 in California income taxes in each of those three years.

Because many first-time buyers won't owe that much tax and lose part of their credit, lawmakers allowed the tax board to reduce the $100 million pot by only 57 percent of the credit claimed by each buyer. If a buyer requested a $10,000 credit, the pot would shrink by only $5,700.

As of Tuesday, the tax board had received more than 15,000 applications claiming more than $78 million in post-reduction credits. Because many applications are duplicates or invalid, the board said it plans to accept at least 28,000 applications to make sure the full $100 million is awarded.

The board, which has been posting weekly updates on its Web site ( www.ftb.ca.gov) showing how much money remains, will announce the cutoff date at least 24 hours in advance so people can fax their documentation. The credit will be allocated on a first-come, first-served basis, according to the time and date stamp on the fax. The board warns that submission before the cutoff does not guarantee a credit; it will stop allocating credits once the $100 million is gone.

A first-time buyer is someone who did not own a principal residence for the preceding three years. The buyer must reside in the home for at least two years immediately following the purchase date.

At the same time it approved the first-time home buyer credit, the Legislature approved a separate tax credit for people who already own a principal residence who purchase a newly constructed (but not an existing) home. This credit is also worth up to $10,000, spread over three years. Because more repeat buyers will be able to take full advantage of the credit, this $100 million pot will be reduced by 70 percent of the tax credit allocated to each buyer.

This program also has $100 million in credits available, but the money is not close to running out. Buyers can reserve a credit by entering into a binding contract between May 1 and Dec. 31 and closing before Aug. 1, 2011.