Kelli Grant Group

Berkshire Hathaway HomeServices AZ

Buy and Bail and Strategic Default in Arizona

The Buy and Bail Fairy Tale – The Elephant in the Room

pink elephantI’ve studied the elephant that no one likes to talk about for about 4 years. This week, I attended the Short Sale Tsunami event where a panel of real estate attorneys, real estate analyst Mike Orr, Commissioner Judy Lowe, along with representatives for Chase and Wells Fargo spoke about our local Phoenix market.  One of the hot discussions was Strategic Default strategy.  After learning so much about this over the years, I wanted to share some information.  I’m not even going to entertain the moral or ethical question about it.  Nor is this blog intended to give legal advice because I am not a real estate attorney.  My intent is to provide some facts about strategic default, who is doing it, how, and the purpose.

CAUTION! This blog may cause increased heart rate and high blood pressure for some people. angry man throwing the book

Although we are certainly seeing great signs of recovery over the past 4 months, many homeowners in the Greater Phoenix area are sitting in their home staring at a mortgage statement wondering how they can owe hundreds of thousands of dollars more than their home is worth.  Worse yet, many of those homeowners will never see their home appreciate back to what they owe in their lifetime.  If you look at history, take the facts and do the math of average appreciation rates once the economy stabilizes, it doesn’t add up…literally.

So the question becomes, “What to do?”  You don’t qualify for a short sale or loan modification because  you aren’t financially destitute.  Some homeowners in Arizona have come up with a strategic solution aptly named the “Buy and Bail”.   But, many have questioned, “Is the Buy and Bail illegal?”.

 Confused Man with two contractsSo here it is, the shocking truth: The Buy and Bail is NOT illegal.   However, some may say it’s definitely immoral.  People have a moral issue with the “Buy and Bail” because we’re taught as children to “keep our promises”.  A popular belief is that ‘you bought the house, you took a loan out, now you should pay it back.’  One real estate attorney told me, “It’s not a moral issue. It’s a contractual issue.”  (and there’s an entire conversation with contractual verbiage that he can explain that is quite interesting!)  He also asks his clients, “Would you pay $150,000 for good credit?”  Most people say, “No way!”  His response is, “That’s what you’re doing by staying in that house.”

Putting the “moral issue” aside, the only justification I hear for staying in a severely underwater property is that “your credit will be ruined”.  So basically, you should stay in it for the sake of your ego.  “You won’t be able to buy a house for 7 years if you foreclose!”  Hence, the strategy of the “BUY ….Then Bail”.

Strategic default is a business decision to cut one’s losses short, cut bait, let go of the dead weight.  The typical profile of a homeowner who seeks out this type of solution doesn’t have financial hardship in the way that they’ve lost a job or racked up too much debt spending money they didn’t have.  Their hardship is that they’re hundreds of thousands of dollars under water on a property whose value will not recover in 10, 20, 30 or more years. They put 10 to 30% cash down payment when they purchased the property. They are not the zero down or FHA buyers.  They have money in the bank and earn a good income.  For various reasons, such as a growing family, need to Big Sale Half Offmove for a job, or they’re savvy with money and realize there’s a 50% off blue light special going on, they need or want a new house

Fact:  If you qualify for the new mortgage AND the existing mortgage along with any other debts, without lying or falsifying facts or documents (AKA “Mortgage Fraud”), you can buy a property.  A few years ago, people were creating fake lease agreements on the existing property to qualify for the new mortgage.  Even if you have a valid lease agreement on a property and are trying to buy another property, the new lender does not even take that lease into consideration as income.  And, let’s be clear – mortgage fraud is illegal in any situation.  This also means that you shouldn’t get the new loan as an “investment property” instead of a primary residence.  As soon as you change your mailing address and switch your utilities to the new house, they just might suspect you lied. . . and YES, there are consequences.

Your new lender will most likely ask you to write a letter about what you’re going to do with the existing property.  This letter is a key piece and you should see a real estate attorney before writing it.  What you write on this letter and put your signature on matters.  Less is more.  This letter states your “intent”, so take caution.

Some say that the new lender won’t lend you money on a new purchase if they suspect a strategic default or a “buy and bail” may occur.  Do you really think that a bank doesn’t want to lend money to someone who is well qualified and has a minimum 10 to 40% down payment?  Of course they do!

Once you have closed escrow on the new property, then what?  The new lender may check your credit again within the first 90 days of the new loan.  It is highly likely that they will sell your loan, so your credit can be pulled again AFTER you have closed escrow.  Should you make a few more payments on the old house to show good intent?  Should you make a few more payments in case the new lender pulls your credit again?  Ask your real estate attorney. 

All the attorneys I’ve talked to have consistently conveyed the message that it is hard to prove someone’s “intent” in a court of law.  We have yet to see a lender attempt to go after a homeowner for a “Buy and Bail”.  Do they like it?  Of course not.  Will they try to scare you out of it?  Yes.  Arizona is a non-recourse state with anti-deficiency laws in place.  Talk to your real estate attorney about the details of the laws.  If you took out a HELOC, you BETTER speak to a real estate attorney.

Man Running with ContractWhen you took out the mortgage, you agreed to make payments.  You also agreed that if you stop making payments, the bank can take the house from you.  Once you stop making payments and the bank forecloses, you have satisfied your end of the agreement.  You gave the house to the bank (in excellent condition, right?) and they resold it for a profit.  Did they lose money?  No.  They got all those interest payments over the years from you and now they resold it and got more money.  They made out ok.  PS…….If you can buy a new house, a short sale is not likely to be an option on the old house.

The Mortgage Debt Forgiveness Relief Act of 2007 is scheduled to expire at the end of 2012.  As of right now, you may even qualify for tax relief of the foreclosure under this act. Certainly, seek the advice of your CPA!

I regularly attend classes, events and seminars where economists, attorneys, CPA’s, and industry leaders speak about short sales, foreclosures, strategic default, mortgage fraud, and tax consequences.  It’s important to stay on top of a moving target to understand what options are available. It’s my job to consult with clients and provide you with information so that you can decide the BEST option for YOU and your family…..and for me to know reputable professionals that can help you accomplish your goals.

If you would like to speak to a real estate attorney about your real estate questions or a situation, a number of highly accredited real estate attorneys are listed on my website.  Please feel free to contact me with questions. Two of the recommended attorneys have helped several of my clients and specialize in this area.

March 30, 2012 Posted by | Buyers, Financing & Mortgages | , , , , | Leave a comment

Mortgage Rates Fall Back Below 4%

Freddie Mac Weekly Mortgage Rates

After a brief run-up two weeks ago, mortgage rates are back below 4 percent. It’s good news for home buyers and mortgage rate shoppers of Scottsdale because with lower mortgage rates come lower mortgage payments.

According to Freddie Mac’s weekly Primary Mortgage Market Survey, the national, average 30-year fixed rate mortgage rate fell to 3.99 percent this week from last week’s 4.08 percent.

Last week had marked the first time since December 2011 that the benchmark rate crossed north of 4 percent — a span of 16 weeks.

And, it wasn’t just rates that got cheaper this week — closing costs dropped, too.

Freddie Mac’s survey showed that the average number of discount points to accompany a 30-year fixed rate mortgage fell one-tenth of a percent this week to 0.7, where one discount point is equal to one percent of your loan size.

As a real-life example, a $200,000 Fireside at Norterra mortgage with an accompanying 0.7 discount points would be subject to an additional $1,400 one-time closing cost. Last week, that cost was $1,600.

Note, though, that these are average mortgage rates for the nation. On a local level, rates may be higher or lower, and so may the accompanying number of discount points.

For example, in this week’s Freddie Mac survey, each U.S. region boasts its own “average rate” :

  • Northeast Region : 4.00% with 0.7 discount points
  • West Region : 3.94% with 0.9 discount points
  • Southeast Region : 4.01% with 0.8 discount points
  • North Central Region : 3.99% with 0.6 discount points
  • Southwest Region : 4.02% with 0.8 discount points

These rates are each well below the average rates of a year ago when the average 30-year fixed rate mortgage was 4.86%. 

Low mortgage rates can’t last forever so if you’ve been wondering whether now is a good time to buy a home or refinance one; or whether rising rates will harm your monthly budget, the answer may be yes. A weak economy held mortgage rates low last year. An improving economy should push rates higher this year.

Talk to your loan officer and review your home loan options. Looking ahead to spring and summer, mortgage rates appear poised to rise.

March 30, 2012 Posted by | Mortgage Rates | , , | Leave a comment

Case-Shiller Shows Uneven Recovery For U.S. Housing

Case-Shiller Home Value Changes

Recent data suggests that the U.S. housing market is in recovery. However, the data also shows this to be an uneven recovery.

According to the monthly S&P/Case-Shiller Index, for example, home values rose in three of 20 tracked markets between December 2011 and January 2012. 17 tracked markets showed home prices still in decline.

It’s easy to point to the Case-Shiller Index as evidence that the housing market in Arizona has yet to bottom, but we have to consider the Case-Shiller Index’s shortcomings — specifically in a recovering economy.

For example, the Case-Shiller Index is based on changes in home prices of a single home, through successive sales. This means that to calculate its home price index, the Case-Shiller searches for sales of the same home over a period of time and calculates the difference in contract price. 

This methodology can distort the home price tracker downward during times of weak economy because there is no distinction made for homes sold in foreclosure or as a short sale.

35% of all homes sold in January were “distressed”, says the National Association of REALTORS®.

Another distortion in the Case-Shiller Index is that the model neglects all home types that are not of type “single-family residence”. This means that multi-unit homes and condominiums are excluded from the Case-Shiller Index model.

In some markets, such as Chicago and New York City, condominiums account for a large percentage of overall sales. 

Lastly, the Case-Shiller Index is published with a “lag”, which renders it useless to buyers and sellers of Phoenix in search of real-time, relevant data. The most recent Case-Shiller Index is published with a 60-day delay, and accounts for home purchase contracts written between October and December 2011.

Since October, the U.S. economy has added more than 1 million jobs and the economy has moved into “moderate expansion”, according to the Federal Reserve. Data that’s two seasons old does little to help us today.

Making sound real estate decisions is about having timely, relevant data at-hand when it’s needed. The Case-Shiller Index fails in that respect. It’s good for highlighting the U.S. housing market on the whole, as it existed in the past. For real-time market data, though, you’ll want to talk with an active real estate agent.

March 29, 2012 Posted by | Housing Analysis | , , | Leave a comment

Pending Home Sales Index Remains Strong Into Spring

Pending Home Sales IndexThe housing market took a step back in February, but remains near post-recession highs.

According to data from the National Association of REALTORS®, February’s Pending Home Sales Index slipped 0.5 percent from the month prior, to 96.5.

The Pending Home Sales Index is a monthly report which measures the number of homes under contract to sell, but not yet sold, nationwide.

The index is benchmarked to a value of 100, the average level of home contract activity in 2001, the first year that pending home sales data was analyzed. It also happened to be a year of historically-high levels of home contract activity. Therefore, a Pending Home Sales Index reading of 100 suggests a strong housing market nationwide.

The index has read north of 90 since October 2011.

On a regional basis, February’s Pending Home Sales Index varied :

  • Northeast Region: -0.5 percent from January 2012
  • Midwest Region : +5.7 percent from January 2012
  • South Region : -3.3 percent from January 2012
  • West Region : -2.6 percent from January 2012

Mild weather may have helped the Midwest Region last month but even regional data can only tell us so much. Like everything in real estate, housing data must be local to be relevant.

Throughout the South Region, for example, the area in which contract activity fell most on a monthly basis, there are states which performed better than the regional average, and states which performed worse. Furthermore, even within those states, there are some cities which over-performed, and others which underperformed.

It’s why we can’t put too much stock in national housing news. Buyers don’t buy nationally — they buy locally.

Today’s home buyers and sellers in Phoenix , therefore, should look beyond the national Pending Home Sales Index and into local market drivers. The Pending Home Sales Index can paint a broad picture of the U.S. housing market but for data that matters to you specifically, it’s not as widely helpful. 

To get relevant, timely local real estate data, talk to a real estate professional.

March 28, 2012 Posted by | Housing Analysis | , , | Leave a comment

New Home Sales Slip In February

New Home SalesSales of “new homes” fell to the lowest levels in four months last month.

According to the Census Bureau’s monthly New Home Sales report, 313,000 new homes were sold in February 2012 on a seasonally-adjusted, annualized basis, representing a 1.6% drop from the month prior.

A “new home” is a home for which there has been no prior owner nor tenant.

At first glance, the data looks negative for the housing market; a suggestion that the well-publicized housing market recovery may be slowed. However, within February’s New Home Sales report are three important counter-statistics worth mentioning.

First, although annualized home sales volume slipped 5,000 units in February, this occurred as the number of homes for sale nationwide remained constant at 150,000. This is the fewest number of new homes for sale since at least 1993 — the first year that the Census Bureau tracked such data.

A small home supply promotes rising home values when buyer demand is rising and, in February, buyer demand held firm.

A second reason to remain optimistic on housing is that New Home Supply was 5.8 months in February. This means that, at the current pace of sales, the entire new home inventory will be “sold out” in 5.8 months.

Housing experts say that when home supplies fall below 6.0 months, it’s bullish for housing.

And, as a third reason to look past the New Home Sales headline figure, last month’s reporting Margin of Error was huge.

According to the government, the February New Home Sales data was published with a ±23.9% margin of error. This means that the actual New Home Sales sales volume may have dropped as much as -25.5%, or may have climbed by as much as +22.3%. 

Because the range of possible values includes both positive and negative numbers, the Census Bureau assigned its February data the “zero confidence” label.

It will be several months before February’s New Home Sales data is revised. Until then, buyers in Scottsdale would do well to take cues from the real estate market-at-large which shows steady, gradual improvement. 

If your 2012 housing plans call for buying new construction, consider using February’s results as a window to “make a deal”. As the year progresses, great values in housing may be gone for good.

March 27, 2012 Posted by | Housing Analysis | , , | Leave a comment

How To Replace Cracked, Dirty Grout

How to replace groutTile is among the most versatile home surfacing materials. It can be as functional and good-looking on your home’s walls as it can be on counter tops, adding a polished look to your kitchen or bathrooms.

Tile is also easy-to-clean — so long as it’s well-maintained.

Proper tile cleaning is more than just a daily wipe-down. Cleaning tile requires a periodic resealing of the tiles themselves, as well as a re-grout for when the existing grout cracks, or stains.

Replacing grout is a job that’s low on skill but large on elbow grease. You can hire it out to a handyperson in Phoenix , or you can handle it in-home. If you choose to replace your own grout, here are the steps you’ll want to follow.

First, you’ll need some tools :

  • Hammer and screwdriver
  • Grout scraper
  • Putty knife
  • Damp sponge
  • Dry cloths
  • Grout
  • Grout sealer

Start by using your screwdriver to loosen bits of the damaged and/or dirty grout. Tap the screwdriver with the hammer gently to avoid scratching your tile. Once you’ve loosened the grout, use the grout scraper to remove the remnants. 

Next, pour new grout into the crevices between the tiles and smooth it into place using the putty knife. The motion is similar to that of buttering a slice of bread. Scrape up the excess grout as you work. Continue spreading the grout until you’ve finished a several-foot section.

Before the grout has dried, use a damp sponge to wipe the tiles clean and neaten the grout lines. You can also use your finger to smooth and remove excess grout from between the tiles.

Repeat the grouting and cleaning process until all of the grout has been replaced. Allow the grout to dry for the length of time recommended by the manufacturer.

Next, using the dry cloths, buff the tiles, using a forceful, circular motion to remove any remaining grout residue.

Then, as a final step, for long-lasting protection, seal the grout using a commercial grout sealer from a hardware store.

Keeping grout in good condition does more than just make your kitchen or bathrooms look great — it protects the surfaces beneath the tile, too. Re-grouting tile is a basic home improvement task that can pay for itself many times over.

March 26, 2012 Posted by | Around The Home | , , | Leave a comment

Building Permits On The Rise

Building PermitsThe new construction housing market appears primed for growth this season.

According to the Census Bureau, the number of single-family building permits issued in February rose to 472,000 on a seasonally-adjusted, annual basis, marking the highest building permit tally since April 2010 — the last month of that year’s federal home buyer tax credit program.

Building permits are a pre-cursor to new home construction.

In 2011, from the date of permit-issuance to the date of “ground-breaking”, an average of 27 calendar days passed. February’s data, therefore, is a signal that the market for newly-built homes should be strong this year, an idea supported by the most recent homebuilder confidence survey.

As buyer foot traffic soars, homebuilders expect to make more sales in the next 6 months than at any time since the housing market’s collapse. Builder confidence is at a 5-year high.

Last month, however, single-family housing starts slipped.

As compared to January, February’s single-family housing starts fell by 50,000 units on a seasonally-adjusted, annualized basis. The 10% drop represents the largest one-month drop since February 2011. It’s a statistic that may suggest that this year’s results are simply seasonal.

For buyers of new construction, the news is mixed.

Rising permits and builder confidence may mean that Phoenix homebuilders will be less willing to negotiate with today’s buyer on upgrades and/or home prices. However, as more new home supply is set to come online, excess housing stock could help keep home prices low. 

If you’re planning to buy new construction in Arizona this year, be sure to ask your real estate agent about the local home supply, and how the market is currently trending. With mortgage rates low and the summer buying season approaching, you may find some of your best deals of the year available in just the next few weeks.

March 23, 2012 Posted by | Housing Analysis | , , | Leave a comment

Existing Home Sales Stay Strong; Spring Season Underway

Existing Home Sales

The market for home resales stays strong.

Despite sparse home inventory, the National Association of REALTORS® reports that 4.59 million existing homes were sold in February on a seasonally-adjusted, annualized basis. An “existing home” is a home that cannot be classified as new construction.

Last month’s sales data represents a 9 percent improvement from the year prior.

There are now just 2.43 million homes for sale nationwide — a 19% reduction versus a year ago. The complete home inventory would “sell out” in 6.4 months at the current sales pace.

Some analysts believe that a 6-month home supply indicates a housing market in balance.

The real estate trade group’s report contained other noteworthy statistics, too :

  1. 32 percent of home sales were made to first-time buyers
  2. 33 percent of home sales were made with cash (i.e. no mortgage)
  3. 34 percent of home sales were of foreclosed homes or homes in short sale

In addition, nearly one-third of all home sales “failed” last month, the result of homes not appraising at the purchase price; or, the buyer’s inability to secure mortgage financing; or, insurmountable home inspection issues.

Even accounting for last month’s high contract failure rate,though,  the Existing Home Sales report still posted its second-highest reading since May 2010. For today’s Scottsdale home buyer, the data may be a “buy signal”.

As compared to last fall, home supplies are down and home sales are up. Basic economics tell us that home prices should start to rise shortly — if they haven’t already. After all, the Existing Home Sales data is 30 days old, reporting on February. It’s nearly April today.

The good news is that homes remain affordable. With conforming and FHA mortgage rates in the low-4 percent range, home affordability is at its highest in history. Home prices may rise this spring, but at least your mortgage payment should remain low.

March 22, 2012 Posted by | Housing Analysis | , , | Leave a comment

Buyer Foot Traffic Through New Construction Up Nearly Threefold Since 2009

HMI 2000-2012

Home builder confidence in the newly-built, single-family housing market remains high.

In March, for the second consecutive month, the National Association of Homebuilders reports the Housing Market Index at 28 — a doubling of the reading from just 6 months ago and, along with last month, the highest HMI value since June 2007.

When home builder confidence reads 50 or better, it reflects favorable builder conditions in the single-family, new home market. Readings below 50 suggest unfavorable builder conditions.

The HMI itself is a composite reading. It’s the result of three separate surveys sent to home builders by the trade association. The NAHB asks builders to report on their current single-family home sales volume; their projected single-family home sales volume for the next 6 months; and, their current buyer “foot traffic”.

Approximately 400 surveys are returned each month. The results are compiled into the NAHB Housing Market Index.

In March, home builders provided mixed replies to the survey questions :

  • Current Single-Family Sales : 29 (-1 from February)
  • Projected Single-Family Sales : 36 (+2 from February)
  • Buyer Foot Traffic : 22 (Unchanged from February)

It’s noteworthy, despite slowing sales in March, that home builders expect a surge in new home sales over the next 6 months. The reasons for this are several and should be of interest to today’s home buyers.

First, the jobs market is heating up. The U.S. economy has added more than 1 net new million jobs over the last 6 months and that is increasing the pool of potential home buyers in Arizona and nationwide. 

Second, the housing market, in general, is improving. Home sales are brisk in many U.S. markets and home supplies are dropping. This creates pressure on home prices to rise.

And, third, low mortgage rates have helped pushed home affordability to all-time highs. More home buyers earning the national median income can afford a median-priced home than at any time in history. 

It’s all culminated in a monthly Buyer Foot Traffic reading which, at 22, is nearly triple the foot traffic reading from just three years ago. Home buyers — in Scottsdale and everywhere else — are out in full-force, capitalizing on today’s buyer-friendly market.

If you’re looking to buy new construction in the second half of 2012, consider moving up your time frame. Market conditions are constantly changing, and may move out of your favor. As builder optimism increases, the price you pay for your new home may increase, too. 

March 21, 2012 Posted by | Housing Analysis | , , | Leave a comment

Loans For Underwater Homeowners : HARP 2.0 Now Available

Making Home Affordabie

The new, revamped HARP program is now available in Arizona and   nationwide. It was officially released Saturday, March 17, 2012 by Fannie Mae and Freddie Mac.

HARP is an acronym. It stands for Home Affordable Refinance Program. HARP is the conforming mortgage loan product meant for “underwater homeowners”. Under the HARP program, homeowners in Scottsdale can get access to today’s low mortgage rates despite having little or no equity whatsoever.

HARP is expected to reach up to 6 million U.S. homeowners who would otherwise be unable to refinance.

HARP is not a new program. It was originally launched in 2009. However, the program’s first iteration reached fewer than 1 million U.S. households because loan risks were high for banks, and loan costs were high for consumers.

With HARP’s re-release — dubbed HARP 2.0 — the government removed many of HARP’s hurdles.

In order to qualify for HARP, homeowners must first meet 3 qualifying criteria. 

First, their current mortgage must be backed either Fannie Mae or Freddie Mac. Loans backed by the FHA or VA are ineligible, as are loans backed by private entities. This means jumbo loans and most loans from community banks cannot be refinanced via HARP.

  • To check if your loan is Fannie Mae-backed, click here.
  • To check if your loan is Freddie Mac-backed, click here.

The second qualification standard for HARP is that all loans to be refinanced must have been securitized by Fannie Mae or Freddie Mac prior to June 1, 2009. Mortgages securitized on, or after, June 1, 2009 are HARP-ineligible.

There are no exceptions to this rule.

And, lastly, the third HARP qualification standard is that the existing mortgage must be accompanied by a strong repayment history. Homeowners must have made the last 6 mortgage payments on-time, and may not have had more than one 30-day late within the last 12 months.

If the above three qualifiers are met, HARP applicants in Fireside at Norterra will find mortgage guidelines lenient overall :

  • Refinancing into a fixed rate mortgage allows for unlimited loan-to-value
  • The standard 7-year “waiting period” after a foreclosure is waived in full
  • Except in rare cases, home appraisals aren’t required for HARP

Furthermore, HARP mortgage rates are on par with non-HARP rates. This means that HARP applicants get access to the same mortgage rates and loan fees as non-HARP applicants. There’s no “penalty” for using HARP.

To apply for HARP, check with your loan officer today.

March 20, 2012 Posted by | Mortgage Guidelines | , , | 1 Comment