Friday, July 26, 2013

Why $26 Million Won't Keep you From Bankruptcy

Anyone that knows me, knows that I have a voracious appetite for sports generally, and football Vince Young and the judicial order to sell his possessions.  Vince Young, as you may recall was passed over by the top team, dropped to the Tennessee Titans, but still slotted well enough that his rookie contract included a guaranteed provision of $26 million.  The average human will not see that kind of earning power in a life time, much less over the course of 5 years.
specifically.  I not only love the gameplay, but the business side of professional sports has always been a fascination.  This week, Tully Corcoran of Fox Sports posted an article in regard to

Yet, in regard to the article, Mr. Young became indebted and sought a short-term loan during the lock-out year a couple years back.  The loan was there to keep other loans afloat until he could again draw on income as a player.  This is where this story becomes relevant to my clients and shows that income and earning potential are only one part of healthy finances.  Mr. Young, in addition to a huge salary, had a huge amount of credit.  He bought homes, cars, vacations, jewelry, etc. and instead of budgeting this in regard to his income, he used credit to enjoy now that which would be paid for later.

The problem with credit, is not the credit itself, but the over use or over leveraging that takes place. Too many borrowers look at the fact that they have so much income, that they can take on the additional $100 payment here or the extra $50 payment here.  Surely, the one account isn't the problem until the final straw that breaks the proverbial camel's back.

Mr. Young had too much credit and when his playing days were finished, as the article states, he will be allowed, after paying back his creditors by auctioning his possessions, to keep about $60,000 or less than two tenths of one percent of what he was guaranteed in his first contract.

So, we must look at the debt to income ratio and determine if you are fiscally sound, or need to back up a little bit on your consumption.  Your home should not exceed 28% of your gross income, but underwriting will allow up to 31%.  If your fully amortized loan payment, meaning your principal, interest, taxes and insurance payment is greater than 31% of your gross income, you have too much house.

Secondly, you need to look at the total debt ratio.  36% is a reasonable amount that can edge toward 43%.  This does not mean that we are adding the principal home loan amounts to minimum card payments, but payments that would actually pay back the loans that you have.  If you are paying on minimums and are sitting at 36%, you may well be closer to 50%. 

If you find that your ratios are this high, you are an illness, car accident, or lay off away from having a court order you to liquidate.  It is time to seek some professional counseling on your debts and see what you can do to not end up like Vince Young.

Tuesday, June 11, 2013

Short Sales Outpacing Modifications

It may come as a surprise to some that banks would prefer that you short sell your property than modify it.  It may also surprise you when I slap that surprise off your face with a little education.  Think of a mortgage as a single share of stock.  At the time that the bank lent the money, it was like a purchase of a stock certificate.  It had a certain value on the market at the time, but the value changes with time.

Like any other stock, speculation has a role to play in "market" value.  In 2007, speculation by both corporate buyers, flippers, and a glut of lending lead to an inflated purchase points.  With the recession, housing, in part because of lousy lending underwriting, took huge losses, some sectors losing up to 70% of value in the matter of weeks.  Bank, though institutional and without flesh and blood personas, are run by humans and the banks did what a lot of investors do at a time of downturn, they sold.

The sale of these mortgages/stocks were done at a fraction of the value that had been paid at the time of lending.  You hear the expression "pennies on the dollar," well that would have been accurate here.  In addition to voluntary sell offs, some banks simply crumpled under the stress.  Lehman Brothers, Wachovia, Washington Mutual, Country Wide were some of the biggest names to blink in the face of the maelstrom that was coming and the assets that represented main street mortgages were purchased pennies on the dollar.

Fast forward about five years and you are contemplating your ability to pay for your home.  It no longer has the value it once did, your interest rate is locked in 2007 purgatory, and you are wondering why you owe more to your new bank than the house is worth.  If I described you with pinpoint accuracy, it is because I write fortune cookies on the side.  The next best option to you is to go to your bank and ask it to modify the loan to a more affordable version for the post-apocalyptic you.

The bank comes back and says no.  It has a myriad of reasons that it hides behind, such as poor DTI, you make too much, or my favorite, your loan doesn't meet investor guidelines.  Let's take a machete and cut through this crap.  What the bank is saying is that because it bought your house for pennies, it can make money simply selling it to whoever is willing to buy it.  If it modifies your loan, then it will have to wait up to 40 years to see a real return on its money.  So thanks for playing but if you don't want to pay, it doesn't care.

In reading through the article linked above, I will admit that my offices have had an above average result in obtaining modifications.  Short sale is usually a secondary option for my clients and the results play out in many modifications.  It has to do a lot with knowing the pressure points, knowing the options, and then being persistent like a Gonzaga Bulldog when it comes to pushing for that outcome.

If modification is something that you crave, there are options available in Washington.  The Foreclosure Fairness Act Mediations provide a terrific forum for us to get results for our clients so that the norm of short sales outpacing mods does not have to be your outcome.

Monday, June 10, 2013

Foreclosure Ninjas and Shadow Inventory

Under the stealth of cloaked balance sheets and un-realized transactions, our nation is being overrun by foreclosure ninja.  It was reported in DS News that between GSEs like Fannie and Freddie and separately by HUD, that 1.7 million properties are in the shadows.  This number is in addition to the nearly 200,000 properties that are held as REO properties ready for sale by the GSEs and HUD.
infiltrated by the shadow inventory of properties held by banks, GSE's and HUD that are more than 90 days in arrears but not yet in foreclosure. 

A corollary article stated that year over year, the Washington market has seen a jump in foreclosures by 67 percent in the Seattle-Tacoma-Bellevue metro area.  If we only worried about the metro, we would be neglecting the fact that foreclosures have reached far into suburbia and the rate for the entire state is 88% above last year's numbers.  Now you may wonder, how in the world could we as Washingtonians be facing such horrendous news when we have clearly seen a year over year increase in values?

The Wall Street Journal on Sunday ran an interesting article that hit on some of the reasons why we are seeing these dichotomous events here in Washington.  Corporate purchasers are entering the market in numbers that belie the significance of the collective impact on the housing market.  Simply put, as that last sentence was full of legal speak, the corporate buyers are only buying a few home, but those purchases are significantly swinging prices.

So what does that mean those that are sitting on a home right now?  It means that in the short term, your home value is going to increase.  It means that in the mid term you could see a dramatic change in value of upwards of 30%.  If you don't believe me, and there isn't really any reason that you should, so check out Mr. Harry Dent, I know I would change my name too.

The recovery that is a buzz in the markets is smoke, the un-foreclosed homes, the shadows, and the ninja silently stalking in and out is a second downturn.  Smart investors, homeowners, and businesses will trim debt while they can, cinch the belt and look for opportunities that will grown in down markets.  Even sneaky foreclosure ninjas can be beat with understanding where the smoke and shadows are and employing a comprehensive strategy for defeating them.

Friday, March 1, 2013

WSC Slaps Quality as Trustee

Thursday, a decision by the State Supreme Court held that Quality Loan Services failed to use its own best judgment in an impartial manner toward both the beneficiary (read Big Bank) and the borrower (read You).  Consequently, the Trustee breached its duty of good faith and violated Washington State consumer protection laws.  You can read that last sentence as "Trustee, you will pay the homeower's attorney's fees." If that is isn't a slap in the face, then I don't know what one is.

In litigation with numerous servicers and trustees over the last three years, I was told by the Trustee on more than one occasion, "we do what the bank tells us to do."  That, according to the State Supreme Court is a direct violation of the consumer protection act and actionable.  Trustees will significantly review the communications between its staff and the public (and public's attorneys) and make some changes.  I do not think there will be drastic changes, but the spector now looms.

One thing that I do worry about is that overzealous attorneys, quick to obtain attorney's fees, will force what we are seeing out of California, judicial foreclosure.  Be thoughtful in what you bring to court.

Tuesday, January 1, 2013

EXTENDED: Mortgage Forgiveness Debt Relief

Finally, there is some news worth blogging about for many of my clients, the Mortgage Forgiveness Debt Relief Act of 2007, which was set to sunset this morning, has been extended for one more year.  Many clients going through short sales and foreclosure have been anxious about this provision.

Section 202 of the Fiscal Cliff deal which was passed early this morning, contained the extension.  This does not make the provision permanent but does provide some relief to those working through the process de-leveraging personal debts.

It is this blogger's opinion that this issue will come up again as part of the remaining debt ceiling talks that must be finished before March this year.  The housing market it still tenuous despite recent increases in market pricing.  The banks have yet to significantly deal with the back log of homes being held in shadow inventory, and there has been a significant increase in the number of foreclosure filings in Washington State in the last three months.  If that trend continues through the new year, then it is likely that this provision may need extension for a few more years.

For more information on this act and how it impacts your home, see the IRS at this link or call my offices.