Despite slower sales, prices are still rising in Baltimore area.
Baltimore's cooling housing market should continue to dodge the price slumps that have hit other parts of the country, experts said yesterday.
Home values will continue to gain moderately through the end of the year despite the slowdown in sales, thanks to relatively strong employment and job growth in the region, predicted Gregory H. Leisch, chief executive officer of Washington real estate consulting firm Delta Associates. Leisch presented his forecast at a housing outlook conference held by Metropolitan Regional Information Systems Inc., a Rockville-based real estate listing service that covers parts of Maryland, Washington, Northern Virginia, West Virginia and Pennsylvania.
The median price of a single-family home in the United States dipped 2.7 percent in 2006, compared with a year earlier, Leisch said. But it rose 4.8 percent in the Baltimore area, surpassing price gains in Chicago, New York and Los Angeles, Leisch said, even as the number of homes sold fell 13 percent.
And the average home price remained stable in the first quarter of this year.
The area, which has an unemployment rate below the national average, has been helped by its shift from a manufacturing base to an economy with growth in the medical, education and defense sectors, Leisch said.
"Baltimore was a Rust Belt city and now is one of the best-balanced regional economies," he said, with consistently high job growth and high-quality jobs, and thousands more expected in the next four years from a federal base realignment, know as BRAC, that will bring jobs to Fort Meade and Aberdeen Proving Ground.
"Is that sufficient to support a sturdy housing market? We think so," said Leisch.
The Washington metro area also fared well in the first three months of this year despite a slower pace of sales, according to the MRIS Trends in Housing Report, released in conjunction with the series of forecast conferences, including yesterday's at Martin's West in Baltimore County.
Though prices in the Baltimore region are projected to increase, values are not expected to approach the double-digit gains that persisted into the second quarter of last year.
And the average number of days homes are staying on the market has continued to rise, from 37 days in 2005 to 60 days in 2006 to 93 days in the first three months of this year.
Daraius Irani, the director of the Applied Economics Group at Towson University's Regional Economic Studies Institute and a panelist at yesterday's event, said job growth in Maryland has not been as strong as in past years.
"We are very puzzled by the fact that job growth has been anemic but unemployment is low," he said. "We view it as not enough job candidates are qualified in these high-skill fields.
The flood of new military and related jobs coming from BRAC will likely attract other companies seeking to locate near a concentration of high-tech businesses, Irani said.
Some 40,000 to 60,000 jobs overall are anticipated by 2011, creating an additional 25,000 households in Maryland and generating an estimated $500 million in income and property taxes annually, said Lisa Swoboda, a panelist and deputy director of the Office of Military and Federal Affairs in the state's Department of Business and Economic Development.
(Baltimore Sun)
Tuesday, May 8, 2007
Monday, May 7, 2007
Prince George’s County tops in state for 2006 foreclosures
Prince George’s County led the state in foreclosures in 2006, and has continued that pattern for the first quarter of 2007.
A total of 1,558 foreclosures were recorded in the county last year, with 590 in the first three months of this year, up 56 percent from the same period in 2006.
But Prince George’s dubious distinction is nothing new, and was the case even before the subprime market plunged, said Darrell Carrington, a senior loan officer with Freestate Mortgage Services in Bowie.
In fact, troubles in the subprime mortgage market have not hit Maryland as hard as other states.
Of the nearly 129,000 subprime home loans serviced in Maryland in 2006, about 2 percent, or 2,580, were in foreclosure by the end of the fourth quarter, up from 1.3 percent, or 1,677, in the first quarter of last year, according to Mortgage Bankers Association 2006 National Delinquency Survey.
That’s still significantly lower than the national average of 5 percent.
Subprime loan delinquencies in Maryland also rose significantly in 2006, from almost 8 percent in the first quarter to 12 percent in the fourth quarter. The mortgage association could not provide county data.
Carrington said high home prices in Prince George’s, in relation to other nearby counties, is a factor in its high foreclosure rate.
The parents of many of today’s homebuyers needed to make a 20 percent down payment, ‘‘but those days are kind of gone,” he said.
Such a down payment on a $350,000 house would be $70,000, and most people don’t have that much cash, he said.
The result is that more of the purchase price is borrowed, resulting in higher mortgage payments.
Mortgage broker Kip S. Douglass, president of Douglass Mortgage Advisory Group in Upper Marlboro, said he has seen the rise in home loan defaults in Prince George’s County. In a listing he surveys, Douglass said, he noted 16 new notices of default filed on April 17.
That total — about double what he used to see — is no longer atypical, he said.
Some of these borrowers will catch up with payments before losing their home, some will file bankruptcy and others will work out a forebearance agreement with their lenders, Douglass said in an e-mail. Some will also try to sell the property, he said, but perhaps half will lose their home to foreclosure.
Some real estate business has been lost because people who were marginally qualified to buy a home before are no longer approved for loans, said Kevin Cyrus, assistant branch manager of Long and Foster Real Estate Inc. in Mitchellville. As the housing market has cooled, lenders are not as lenient, so buyers need either more money down or more help with closing costs, he said.
Since subprime lenders have suddenly either closed their doors or withdrawn from the subprime market, ‘‘they are no longer standing behind pre-approval letters they have already issued,” Cyrus said. The need for Realtors to scrutinize lender letters has heightened, he said.
Subprime market troubles and disappearing lenders have caused some problems, but nothing ‘‘catastrophic,” said Donald Frederick, president of the Prince George’s County Association of Realtors.
‘‘The biggest problems I’m aware of were delayed settlements, not canceled settlements,” Frederick said. ‘‘There are plenty of programs that replace these types of loans, so I don’t see the problem being as big as some people think it is.”
Banks insured by the Federal Deposit Insurance Corp., such as Bank of America, Sandy Spring Bank and BB&T, don’t dabble much in the subprime market.
Nationally, 23 percent of all subprime loans are made by FDIC-insured banks, said Kathleen Murphy, president and CEO of the Maryland Bankers Association. ‘‘It is a small percentage of the overall subprime lending market,” she said.
With some loan programs ending, and credit guidelines tightening, brokers must really be skilled at finding the right loan, Douglass said.
‘‘What’s happening is, people are starting to need more professional help now,” he said.
(Business Gazette)
A total of 1,558 foreclosures were recorded in the county last year, with 590 in the first three months of this year, up 56 percent from the same period in 2006.
But Prince George’s dubious distinction is nothing new, and was the case even before the subprime market plunged, said Darrell Carrington, a senior loan officer with Freestate Mortgage Services in Bowie.
In fact, troubles in the subprime mortgage market have not hit Maryland as hard as other states.
Of the nearly 129,000 subprime home loans serviced in Maryland in 2006, about 2 percent, or 2,580, were in foreclosure by the end of the fourth quarter, up from 1.3 percent, or 1,677, in the first quarter of last year, according to Mortgage Bankers Association 2006 National Delinquency Survey.
That’s still significantly lower than the national average of 5 percent.
Subprime loan delinquencies in Maryland also rose significantly in 2006, from almost 8 percent in the first quarter to 12 percent in the fourth quarter. The mortgage association could not provide county data.
Carrington said high home prices in Prince George’s, in relation to other nearby counties, is a factor in its high foreclosure rate.
The parents of many of today’s homebuyers needed to make a 20 percent down payment, ‘‘but those days are kind of gone,” he said.
Such a down payment on a $350,000 house would be $70,000, and most people don’t have that much cash, he said.
The result is that more of the purchase price is borrowed, resulting in higher mortgage payments.
Mortgage broker Kip S. Douglass, president of Douglass Mortgage Advisory Group in Upper Marlboro, said he has seen the rise in home loan defaults in Prince George’s County. In a listing he surveys, Douglass said, he noted 16 new notices of default filed on April 17.
That total — about double what he used to see — is no longer atypical, he said.
Some of these borrowers will catch up with payments before losing their home, some will file bankruptcy and others will work out a forebearance agreement with their lenders, Douglass said in an e-mail. Some will also try to sell the property, he said, but perhaps half will lose their home to foreclosure.
Some real estate business has been lost because people who were marginally qualified to buy a home before are no longer approved for loans, said Kevin Cyrus, assistant branch manager of Long and Foster Real Estate Inc. in Mitchellville. As the housing market has cooled, lenders are not as lenient, so buyers need either more money down or more help with closing costs, he said.
Since subprime lenders have suddenly either closed their doors or withdrawn from the subprime market, ‘‘they are no longer standing behind pre-approval letters they have already issued,” Cyrus said. The need for Realtors to scrutinize lender letters has heightened, he said.
Subprime market troubles and disappearing lenders have caused some problems, but nothing ‘‘catastrophic,” said Donald Frederick, president of the Prince George’s County Association of Realtors.
‘‘The biggest problems I’m aware of were delayed settlements, not canceled settlements,” Frederick said. ‘‘There are plenty of programs that replace these types of loans, so I don’t see the problem being as big as some people think it is.”
Banks insured by the Federal Deposit Insurance Corp., such as Bank of America, Sandy Spring Bank and BB&T, don’t dabble much in the subprime market.
Nationally, 23 percent of all subprime loans are made by FDIC-insured banks, said Kathleen Murphy, president and CEO of the Maryland Bankers Association. ‘‘It is a small percentage of the overall subprime lending market,” she said.
With some loan programs ending, and credit guidelines tightening, brokers must really be skilled at finding the right loan, Douglass said.
‘‘What’s happening is, people are starting to need more professional help now,” he said.
(Business Gazette)
New Initiative Helps Maryland Homebuyers Avoid Foreclosure
ANNAPOLIS, Md. -- Statistics show Baltimore city sees nearly twice as many home foreclosures than Philadelphia.
To combat that, lawmakers have created a new initiative to help potential homebuyers make good decisions when choosing a mortgage lender.
According to Rep. Elijah Cummings, D-Maryland, people need to realize the history of some of the firms that are available.
Click here to find out more!
"For example, if there's a 60 percent foreclosure rate and you know that from the beginning, then you've got to talk to somebody and say, 'Is this the right thing for me to do?'" Cummings said.
Cummings has introduced legislation in the past to strengthen regulations in the subprime lending market and to mandate preloan counseling.
(wbaltv.com)
To combat that, lawmakers have created a new initiative to help potential homebuyers make good decisions when choosing a mortgage lender.
According to Rep. Elijah Cummings, D-Maryland, people need to realize the history of some of the firms that are available.
Click here to find out more!
"For example, if there's a 60 percent foreclosure rate and you know that from the beginning, then you've got to talk to somebody and say, 'Is this the right thing for me to do?'" Cummings said.
Cummings has introduced legislation in the past to strengthen regulations in the subprime lending market and to mandate preloan counseling.
(wbaltv.com)
Fighting to Keep the Roof
Fighting to Keep the Roof
Strapped Owners Find Help From Their Lenders
Ernestine Witherspoon managed to hang onto her house in Northeast Washington even after she lost her job and fell far behind on her mortgage payments.
Her lender, Countrywide Home Loans, was weeks away from seizing the house when Witherspoon called, explained her situation, and worked out a plan to repay the $9,800 she owed. She scraped together $3,600 -- only because she landed a new job -- and Countrywide then tacked $25 onto her monthly payments for the life of the loan to make up the difference.
"I was treated well," said Witherspoon, 51, a secretary at a Maryland hospital. "But when you are in the position I was in, you have no choice but to accept the lender's terms if you want to keep your property, and that makes you feel very, very vulnerable."
Witherspoon benefited from the increasing willingness of lenders to help troubled borrowers stay in their homes. After easing lending standards in recent years, mortgage companies are facing a rising tide of late payments and defaults, driven by subprime borrowers with blemished credit or other factors that make them a risk to lenders. More than two dozen subprime lenders have shut down, and the rest of the industry is seeking ways to limit the damage.
"We would much rather work with a borrower than go through the foreclosure process," said Steve Bailey, Countrywide's senior managing director of loan administration. "We lose money on a foreclosure, the borrower is out of their home, and nobody is happy. The math works against us."
The lenders' new leniency works in favor of some borrowers. But to take advantage, homeowners have to move quickly, even if calling a mortgage company seems intimidating or stressful. Many people facing foreclosure simply "shut down" out of fear, says J. Michael Collins, a housing specialist with PolicyLab Consulting Group in Ithaca, N.Y.
"The more stressed people are, the less they're willing to seek help and the less they feel that lenders are helpful," he said.
If homeowners can overcome their anxiety and act soon enough, they have more options that can help avoid foreclosure. Those include refinancing the house, altering the terms of the original loan, filing for bankruptcy protection or even selling the house at a loss. But borrowers lose leverage, credibility and precious time when they try to dodge the lender, as more than half of them do in foreclosure cases, according to a survey by Freddie Mac, one of the largest investors in U.S. mortgages.
"As soon as you see trouble coming, that's the time to take action," said Ric Edelman, a financial planner in Fairfax.
The Equity Factor
If you're a financially troubled borrower, there are a few steps you should consider before contacting your mortgage company, especially if you have not missed a payment. Think about refinancing or taking out a home-equity loan, if you have equity in the property.
If refinancing won't work, identify every opportunity to raise cash. Sell your childhood toy collection on eBay. Rent out a room. Seek help from your church. "Do whatever it takes to raise money. You don't want to tell a creditor that you're having a problem if you can avoid it," especially if all you need is a one-time fix, Edelman said.
Telling a lender about your financial woes could put you at a disadvantage if you have equity in your home, said Jack Guttentag, professor of finance emeritus at the University of Pennsylvania's Wharton School and author of the Mortgage Professor column.
"The lender may tell you to come back after you've missed two payments," Guttentag said. By that time, your credit is shot, making it tough to borrow money elsewhere. If the lender then forecloses, that lender is protected against loss because the equity in your home could cover the loan balance and foreclosure-related costs, he said.
The riskiest borrowers typically don't have much equity, often because they have put little or no money down to buy their homes or have taken out second mortgages. As the housing market has softened, and home prices stagnated, those borrowers have found it hard to sell or refinance their way out of trouble.
Even if they could refinance, many borrowers with subprime loans face steep penalties if they pay off their loans early. Meanwhile, in response to the mortgage crisis, lenders have tightened their standards and made it harder for risky borrowers to qualify for new loans.
"It's a paradox, but the borrower who gets into trouble and has no equity is in a stronger negotiating position with the lender than the borrower who has equity," Guttentag said.
Work With the Lender
If refinancing is not an option, take a look at your mortgage statement and call the company that manages your loan. That call should be made quickly. The more time passes, the more a homeowner's credit tanks, limiting a lender's ability to work out a payment plan.
Lenders tend to be most amenable to the possibility of a forbearance, in which they suspend or reduce payments for a few months and then tack on portions of those payments to future ones. They will also consider lowering monthly interest rates, extending the life of the loan or altering the loan in some other way.
"Borrowers should seek modifications," said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America. "But the modification should not just keep the wolf away for a while longer. It should actually create an affordable loan."
So far, the number of mortgages modified has been modest. But the numbers are expected to rise substantially as more adjustable-rate mortgages begin to reset at higher rates at year's end, says Rod Dubitsky, an analyst at Credit Suisse.
"Right now, many people experiencing a reset have a lot of equity because of home-price appreciation at the end of 2005," said Dubitsky. "By the end of this year, fewer and fewer borrowers will have equity to refinance or sell their homes."
Lenders say it's in their interest to work with borrowers. Servicing a healthy loan costs them about $50 a year, and managing a delinquent or foreclosed one costs them about $1,000 and $2,000, respectively, said Robert Lacoursiere, an analyst at Banc of America Securities.
However, that does not mean there's a solution for every troubled borrower. Homeowners whose incomes cannot support their mortgage may get nothing more than a sympathetic ear -- if that -- from whoever handles their mortgage. The ultimate solution may be to walk way from the house.
"There's no incentive to work out payment arrangements if it only delays the inevitable," said Greg McBride, senior financial analyst at Bankrate.com, a personal finance Web site.
Instead, the borrower may be able to arrange a "short sale." With the mortgage holder's permission, a borrower can sell a home for less than the amount due on the loan and turn over the proceeds to the lender.
If the lender has reason to believe it can extract more value from the house, possibly by negotiating lower commissions from the agent involved, it may ask the homeowner to give it the deed of the house, surrender ownership rights and leave the property. This transaction is called a "deed in lieu of foreclosure."
To entice homeowners to leave quickly, some firms might even offer "cash for keys" -- a small sum of money that can help defray moving costs.
For lenders, all these deals typically reduce the cost of taking possession of the house.
In return, borrowers can shed their loan obligations, spare themselves the humiliation of a public foreclosure notice and protect their credit record. A short sale and a deed in lieu of foreclosure are far less damaging to a consumer's credit than an outright foreclosure.
But pay attention, says Richard Gottlieb, a consumer financial services attorney at Dykema Gossett. "A lender has every right to proceed against a borrower for the balance due on the mortgage loan," he said. "A borrower with significant assets is still at risk."
As a practical matter, most lenders will accept whatever money they get from a short sale or a deed in lieu of foreclosure, but borrowers need to make sure when they walk away that they are released of all financial obligations for the loan, consumer advocates said. That release should be put in writing.
If the lender forgives the shortfall, that has tax implications because it is considered income for the borrower, said Steven M. Buckman, a real estate attorney in the District. "And any time you have income, you have to pay income tax on it, federal and state." Lenders are required by law to report canceled debt to the IRS, and borrowers should be sure to get a statement of how much was forgiven on the loan.
A Last Resort
Anita McKenzie's lender suggested she do a short sale. But McKenzie does not want to walk away from her home. She said when she bought her townhouse in Germantown less than a year ago, she believed her agent and broker, who told her she could immediately refinance into a more affordable mortgage.
The refinancing never came through, leaving her stuck with a $3,650 monthly payment on her $40,000 salary. McKenzie fell behind on her payments. She's in danger of losing her house this summer.
"I don't know what to do except file for bankruptcy," said McKenzie, who has been working with HomeFree-USA, a housing counseling agency in the District.
McKenzie's counselor advised against it. Like many consumer advocates, she argues that bankruptcy proceedings should be used as a last resort because they damage a filer's credit, though less so than a foreclosure.
But in some situations, a bankruptcy filing makes sense, says Steven Ramsdell, a bankruptcy attorney in Alexandria.
"For people who have missed house payments, their credit has usually been dinged up already," Ramsdell said. "The credit ramifications of saving a house through bankruptcy should not be a deterrent if they can in fact save it."
Before filing for bankruptcy protection, consumers must attend credit-counseling sessions held by designated groups throughout the country.
Once they do, said Ramsdell, the kind of bankruptcy protection most effective in saving homes is Chapter 13, which immediately halts a foreclosure sale and freezes all collection actions for debts that predated the bankruptcy filing.
The court then approves a repayment plan that determines which creditors get paid back and when.
Under that arrangement, a person has up to five years to pay missed mortgage payments, essentially forcing the lender into a repayment plan and forcing a time frame that most lenders would not otherwise accept, Ramsdell said.
But while trying to make good on past debt, filers must keep up with their regular mortgage payments and other living expenses. For people without sufficient cash flow to make those payments -- plus contribute to the late ones -- this course of action is futile, Ramsdell says. It also makes no sense to file for bankruptcy protection when the house is worth less than the mortgage balance.
"If you owe $480,000 on a house that's worth only $400,000, it may not make sense to hang onto the house," Ramsdell said. "That's a hard thing for people to accept."
(Dina ElBoghdady, Washington Post)
Strapped Owners Find Help From Their Lenders
Ernestine Witherspoon managed to hang onto her house in Northeast Washington even after she lost her job and fell far behind on her mortgage payments.
Her lender, Countrywide Home Loans, was weeks away from seizing the house when Witherspoon called, explained her situation, and worked out a plan to repay the $9,800 she owed. She scraped together $3,600 -- only because she landed a new job -- and Countrywide then tacked $25 onto her monthly payments for the life of the loan to make up the difference.
"I was treated well," said Witherspoon, 51, a secretary at a Maryland hospital. "But when you are in the position I was in, you have no choice but to accept the lender's terms if you want to keep your property, and that makes you feel very, very vulnerable."
Witherspoon benefited from the increasing willingness of lenders to help troubled borrowers stay in their homes. After easing lending standards in recent years, mortgage companies are facing a rising tide of late payments and defaults, driven by subprime borrowers with blemished credit or other factors that make them a risk to lenders. More than two dozen subprime lenders have shut down, and the rest of the industry is seeking ways to limit the damage.
"We would much rather work with a borrower than go through the foreclosure process," said Steve Bailey, Countrywide's senior managing director of loan administration. "We lose money on a foreclosure, the borrower is out of their home, and nobody is happy. The math works against us."
The lenders' new leniency works in favor of some borrowers. But to take advantage, homeowners have to move quickly, even if calling a mortgage company seems intimidating or stressful. Many people facing foreclosure simply "shut down" out of fear, says J. Michael Collins, a housing specialist with PolicyLab Consulting Group in Ithaca, N.Y.
"The more stressed people are, the less they're willing to seek help and the less they feel that lenders are helpful," he said.
If homeowners can overcome their anxiety and act soon enough, they have more options that can help avoid foreclosure. Those include refinancing the house, altering the terms of the original loan, filing for bankruptcy protection or even selling the house at a loss. But borrowers lose leverage, credibility and precious time when they try to dodge the lender, as more than half of them do in foreclosure cases, according to a survey by Freddie Mac, one of the largest investors in U.S. mortgages.
"As soon as you see trouble coming, that's the time to take action," said Ric Edelman, a financial planner in Fairfax.
The Equity Factor
If you're a financially troubled borrower, there are a few steps you should consider before contacting your mortgage company, especially if you have not missed a payment. Think about refinancing or taking out a home-equity loan, if you have equity in the property.
If refinancing won't work, identify every opportunity to raise cash. Sell your childhood toy collection on eBay. Rent out a room. Seek help from your church. "Do whatever it takes to raise money. You don't want to tell a creditor that you're having a problem if you can avoid it," especially if all you need is a one-time fix, Edelman said.
Telling a lender about your financial woes could put you at a disadvantage if you have equity in your home, said Jack Guttentag, professor of finance emeritus at the University of Pennsylvania's Wharton School and author of the Mortgage Professor column.
"The lender may tell you to come back after you've missed two payments," Guttentag said. By that time, your credit is shot, making it tough to borrow money elsewhere. If the lender then forecloses, that lender is protected against loss because the equity in your home could cover the loan balance and foreclosure-related costs, he said.
The riskiest borrowers typically don't have much equity, often because they have put little or no money down to buy their homes or have taken out second mortgages. As the housing market has softened, and home prices stagnated, those borrowers have found it hard to sell or refinance their way out of trouble.
Even if they could refinance, many borrowers with subprime loans face steep penalties if they pay off their loans early. Meanwhile, in response to the mortgage crisis, lenders have tightened their standards and made it harder for risky borrowers to qualify for new loans.
"It's a paradox, but the borrower who gets into trouble and has no equity is in a stronger negotiating position with the lender than the borrower who has equity," Guttentag said.
Work With the Lender
If refinancing is not an option, take a look at your mortgage statement and call the company that manages your loan. That call should be made quickly. The more time passes, the more a homeowner's credit tanks, limiting a lender's ability to work out a payment plan.
Lenders tend to be most amenable to the possibility of a forbearance, in which they suspend or reduce payments for a few months and then tack on portions of those payments to future ones. They will also consider lowering monthly interest rates, extending the life of the loan or altering the loan in some other way.
"Borrowers should seek modifications," said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America. "But the modification should not just keep the wolf away for a while longer. It should actually create an affordable loan."
So far, the number of mortgages modified has been modest. But the numbers are expected to rise substantially as more adjustable-rate mortgages begin to reset at higher rates at year's end, says Rod Dubitsky, an analyst at Credit Suisse.
"Right now, many people experiencing a reset have a lot of equity because of home-price appreciation at the end of 2005," said Dubitsky. "By the end of this year, fewer and fewer borrowers will have equity to refinance or sell their homes."
Lenders say it's in their interest to work with borrowers. Servicing a healthy loan costs them about $50 a year, and managing a delinquent or foreclosed one costs them about $1,000 and $2,000, respectively, said Robert Lacoursiere, an analyst at Banc of America Securities.
However, that does not mean there's a solution for every troubled borrower. Homeowners whose incomes cannot support their mortgage may get nothing more than a sympathetic ear -- if that -- from whoever handles their mortgage. The ultimate solution may be to walk way from the house.
"There's no incentive to work out payment arrangements if it only delays the inevitable," said Greg McBride, senior financial analyst at Bankrate.com, a personal finance Web site.
Instead, the borrower may be able to arrange a "short sale." With the mortgage holder's permission, a borrower can sell a home for less than the amount due on the loan and turn over the proceeds to the lender.
If the lender has reason to believe it can extract more value from the house, possibly by negotiating lower commissions from the agent involved, it may ask the homeowner to give it the deed of the house, surrender ownership rights and leave the property. This transaction is called a "deed in lieu of foreclosure."
To entice homeowners to leave quickly, some firms might even offer "cash for keys" -- a small sum of money that can help defray moving costs.
For lenders, all these deals typically reduce the cost of taking possession of the house.
In return, borrowers can shed their loan obligations, spare themselves the humiliation of a public foreclosure notice and protect their credit record. A short sale and a deed in lieu of foreclosure are far less damaging to a consumer's credit than an outright foreclosure.
But pay attention, says Richard Gottlieb, a consumer financial services attorney at Dykema Gossett. "A lender has every right to proceed against a borrower for the balance due on the mortgage loan," he said. "A borrower with significant assets is still at risk."
As a practical matter, most lenders will accept whatever money they get from a short sale or a deed in lieu of foreclosure, but borrowers need to make sure when they walk away that they are released of all financial obligations for the loan, consumer advocates said. That release should be put in writing.
If the lender forgives the shortfall, that has tax implications because it is considered income for the borrower, said Steven M. Buckman, a real estate attorney in the District. "And any time you have income, you have to pay income tax on it, federal and state." Lenders are required by law to report canceled debt to the IRS, and borrowers should be sure to get a statement of how much was forgiven on the loan.
A Last Resort
Anita McKenzie's lender suggested she do a short sale. But McKenzie does not want to walk away from her home. She said when she bought her townhouse in Germantown less than a year ago, she believed her agent and broker, who told her she could immediately refinance into a more affordable mortgage.
The refinancing never came through, leaving her stuck with a $3,650 monthly payment on her $40,000 salary. McKenzie fell behind on her payments. She's in danger of losing her house this summer.
"I don't know what to do except file for bankruptcy," said McKenzie, who has been working with HomeFree-USA, a housing counseling agency in the District.
McKenzie's counselor advised against it. Like many consumer advocates, she argues that bankruptcy proceedings should be used as a last resort because they damage a filer's credit, though less so than a foreclosure.
But in some situations, a bankruptcy filing makes sense, says Steven Ramsdell, a bankruptcy attorney in Alexandria.
"For people who have missed house payments, their credit has usually been dinged up already," Ramsdell said. "The credit ramifications of saving a house through bankruptcy should not be a deterrent if they can in fact save it."
Before filing for bankruptcy protection, consumers must attend credit-counseling sessions held by designated groups throughout the country.
Once they do, said Ramsdell, the kind of bankruptcy protection most effective in saving homes is Chapter 13, which immediately halts a foreclosure sale and freezes all collection actions for debts that predated the bankruptcy filing.
The court then approves a repayment plan that determines which creditors get paid back and when.
Under that arrangement, a person has up to five years to pay missed mortgage payments, essentially forcing the lender into a repayment plan and forcing a time frame that most lenders would not otherwise accept, Ramsdell said.
But while trying to make good on past debt, filers must keep up with their regular mortgage payments and other living expenses. For people without sufficient cash flow to make those payments -- plus contribute to the late ones -- this course of action is futile, Ramsdell says. It also makes no sense to file for bankruptcy protection when the house is worth less than the mortgage balance.
"If you owe $480,000 on a house that's worth only $400,000, it may not make sense to hang onto the house," Ramsdell said. "That's a hard thing for people to accept."
(Dina ElBoghdady, Washington Post)
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