photo credit: techfun

Foreclosures have been going on at a record pace & it appears they will continue for a while.  But banks have been smart enough to not put all of their inventory on the market at once.  They would crash the market and further erode the value of the real estate they own.  These houses that have been recently foreclosed or are soon to be foreclosed on are called “shadow inventory”.

According to research by the National Association of Realtors, there are 2.4 million properties in this shadow inventory.  But this number could be even higher.  It doesn’t include homes in which owners are trying to do a mortgage modification or a short sale.

It’s safe to say that the market is going to be facing foreclosures for a while longer.  No one knows how long for sure, but it will remain a buyer’s market for the foreseeable future.

Banks will only lend money on the value of the house “as-is” .  But if you are like me, you wouldn’t live in the “as-is” version of most of these bank-owned houses on the market.  And if you have to get FHA backing on your loan they will do an inspection and give a list of repairs that will have to be made before you can buy the house.  But the bank that owns the house won’t make any repairs.   By now you may be wondering how you can still get a good deal and still be able to make it our dream home.

There is an FHA loan program that could be your solution.  It’s called the 203(k).  This loan will give you the money to both buy the home and fix it up–all in one package.

The 203(k) loan is based on the value of the home after repairs are completed.  So part of the process is to line up a contractor who will submit a detailed proposal of the work to be completed and the cost of the project.  An appraiser then  looks at the house and the contractor’s proposal and determines whether the work will bring up the value to meet the program’s guidelines.

There are a select few real estate agents and lenders willing to work with these loans.  Many agents and lenders shy away from working with 203(k) loans because they require a lot of work.  But for those agents and lenders willing to work hard for their clients it is a great benefit for everyone.

If you want to consider looking for a good deal on a fixer-upper house, consider working with an agent experienced in rehab properties and the 203(k) loan process.

I spoke with an attorney who works in a title company I use.  He told me that banks can pursue deficiency judgments against foreclosed homeowners in Missouri.  He said that he had represented banks who did so.

As always, the information here is not to be assumed to be legal advice.  Consult a real estate attorney for the real scoop on legal questions involving real estate.

In states like Florida, this can be big numbers.  Say you had a house with a mortgage of $500,000 but now that the market has gone south it’s only worth $250,000.  When the bank forecloses and sells your home, they can come after you for the remaining $250,000.

In places where the market value has plunged off a cliff, some homeowners are walking away and letting banks take back their homes.  But in states that allow deficiency judgments, banks may start playing hardball.  Deficiency judgments vary by state, so always seek legal counsel in making your decisions.

Here is a link to a website outlining Missouri foreclosures.

Here is a link to a website outlining Kansas foreclosures.

FHA announced it is temporarily lifting this restriction–with some qualification–in order to allow buyers to more easily purchase homes being sold as a result of foreclosure.  This is a good move on the part of FHA.  It is good news for the real estate market in general.  From what I’m hearing, we are likely to be seeing foreclosures continue to flood the market.

Doing away with the 90-day requirement will help the coming trend that shows the foreclosure problem is beginning to move up market as well.  As more “middle class” owners face layoffs and unemployment, higher priced homes are coming on the market as foreclosures.  For an investor, the higher value in a house the greater the risk of loss and the more need he has to fix it and sell it quickly.  These new guidelines will allow investors to fix and flip these higher value homes.

There are some restrictions aimed to limit the predators while allowing legitimate investors to show how they increased the value of a property and justify their profit.  This new p0licy will likely not get the media attention the tax credit received, but I believe it may prove to be as effective at helping the market absorb the continued flood of foreclosures.

Click HERE for the full report on the HUD website.

Specific details of this temporary policy are available on the HUD website.

photo credit: fPat

Some lenders are starting to write down the principal for some homeowners in trouble, according to a story in this weeks edition of Business Week.  Mortgage work-out solutions in the past have just addressed the interest side of loans, giving very little to homeowners who now owe significantly more than the present market value of their home.

Banks can either forgive part of the principal or merely defer it.  If principal is deferred, the homeowner must pay back the full amount of the loan when he sells the house.  If the house doesn’t sell for enough to cover the balance, the homeowner has to pay the difference.  Such a solution may just push the problem down the road for many people.

It is still rare for banks to forgive or defer principal.  But in the 3rd quarter of 2009, 3% of the total mortgages that were modified included principal modification–either reduction or deferral.

The writers of this article didn’t mention the effect of mortgage write-downs on the homeowner’s credit.  It is likely such a new concept that the rules of the game have yet to be established.  I will venture a guess, however, that the effect will be similar to that of a short-sale: that is, it will not be the train wreck that foreclosure can be.  But it will have a significant impact on the credit score.

photo credit: alan.stoddard

The Kansas City Star recently reported about Kyna Franklin who received help saving her home from foreclosure.  (See full story here.)  The details aren’t specific, but part of this foreclosure appears to have involved a request for a loan modification.  The Obama administration instituted a program to encourage lenders to modify loans–usually by lowering interest–in an attempt to curb the growing foreclosure problem.

But some lenders have used this program as a way to “steal”  homes that have a good deal of equity.  Here’s the scenario that happened to a friend of mine:

He was current on his payments with a good credit score and about $20K in equity, but he is self-employed and his income has dropped.  He contacted the lender and asked to do a loan modification.  He was told that mortgage payments couldn’t be received by them while his request was being processed.  He made his payment anyway, but the lender returned it.  At the end of the month, he received a call from a friend who buys foreclosures at auction.  His house is being sold at auction by the lender, who has foreclosed on his home.

Unfortunately, he found that he is not alone.  This lender did the same thing to many others in Missouri.  The attorney general is looking into it, and pressing charges.  But in the meantime, I had to help my friend move out of his house into a rental.  His credit dropped over 100 points, and he’s left wondering how something like this could have happened.

My friend’s story may not be the norm.  There may be lenders out there who aren’t preditory.  But it gives me pause.  I think that anyone thinking about asking for a loan modification should do some research about the process before jumping into waters that may be teeming with sharks.

“If you have to eat a live toad, don’t look at it too long.  If you have to eat several live toads, eat the biggest one first.”

I think this may be a good way to look at short sales verses foreclosure when it comes to the effect on your credit.  In general neither are pleasant, but foreclosure tends to have more of a negative effect on your credit score than a short sale.

With so many people underwater on their mortgages, banks are sometimes willing to do a short sale even if the mortgage is current.  For some homeowners it may be the only way to salvage some of their credit.  But it isn’t a painless process.  For a more thorough analysis of how short sales and foreclosures affect your credit, click here for an excellent article by Elizabeth Weintraub.