7 questions for your next real estate agent

By Beth Braverman

May 9, 2012

Even as the real estate market perks up, you need a savvy agent to nail the sale.  To find one, ask these questions. 

Photo: Jason Hindley

MONEY Magazine) -- After four years of sleepy sales during the traditionally busy spring and summer homebuying seasons, real estate experts are forecasting a pickup.

Record home affordability combined with a stronger economy may bring out bargain-hunting buyers and lure sellers who have been sitting on the sidelines. Already sales this winter were the highest since 2007.

If you're tempted to host or frequent an open house this year, keep in mind that navigating this market is not for the faint of heart. Sellers still face tepid demand in many areas and competition from banks unloading foreclosures and other distressed properties; buyers must grapple with tight credit. 

Pairing up with the right real estate agent can help you close the deal at the price you want. To make a good match, gather referrals, check reviews on sites like Zillow, Yelp, and Angie's List, and pose these questions: 

For buyers and sellers

 

How long was your drive over here? 

The less time the better. The crash has slimmed the ranks of agents (National Association of Realtors membership is down 26% from 2006); those who are left have more years on the job (a median of 12, up from seven). But not all experience is equal -- you want a realtor with hyperlocal knowledge, if not a home nearby. 

"If the agent hasn't closed deals on homes in your neighborhood recently, that could be a red flag," says Ginger Wilcox, head of industry marketing at Trulia.

Your ideal agent should be able to say off the top of her head how long homes in the area have been listed and why they have or haven't sold. If you haven't seen the agent's name on local FOR SALE signs, keep looking.

Can you tell me about your last three deals? 

The description of the people and places should sound like you and what you're selling or buying. The marketing approach varies for a million-dollar listing and a fixer-upper. Investors and first-time buyers have different criteria. And when you're scooping up a short sale or foreclosure -- or buying with all cash -- you need an agent who has negotiated with a bank or cleared the legal hurdles before.

 

For sellers

 

What's your URL?

 

Almost 90% of buyers shop online for a home, says the NAR. You want a realtor with his own homepage, as well as detailed and photo-filled listings on major real estate sites.

"Photos are really important to buyers," says Dorchester, Mass., realtor Julie Simmons, "and as a seller you want to have as many as you can." 

While you're vetting the site, dig deeper. Lots of homes with multiple price cuts could be a sign that the realtor isn't pricing them properly. What you want to see are homes that have been for sale for less than the norm in your area (ask other realtors what's typical). 

What's your batting average? 

Make sure a realtor is making sales, not just scooping up listings. Ask how many of his homes he closed on last year. There's no one right answer, especially in a slow market, but it's another data point for comparing agents.

Am I crazy to ask this much? 

Probably. "In some cases sellers are not going to like what they hear," says Denise Riordan, an agent in Montclair, N.J. 

Don't jump at the highest asking price. Better to get a frank assessment of changes you need to make and a price that would make buyers bite. Then verify by asking to see stats on comparable sales and the methodology behind the estimate. 

What is this going to cost me? 

The commission, paid by the seller and split by the buyer's and seller's agents, is traditionally 6% of the sale price. With homes sitting on the market for nearly 16 weeks, a listing agent who has to put in four months or more of work may not want to budge. But even now you can get it down to about 5% (your agent will typically still split it fifty-fifty and specify that on the listing). One way to bargain: Use the agent to buy your next home. 

For buyers

 

Can you let me in on any secrets?

 

The home you'd really like may not be listed -- sellers take homes off the market when buyers are scarce; others don't want to advertise for privacy reasons. The most connected agents know the homes that aren't officially on the market but whose owners would sell, says Steven Berkowitz, CEO of Move Inc. For the most options, find an agent who has the scoop. 

Going solo

 

You'll save plenty, but only 10% of sellers bypassed an agent last year. 

The costs of going it on your own include:

• MLS listing for six months -- $300
• Appraisal for pricing help -- $450
• Consultation with stager -- $350
• Lawyer to draw up contract -- $550

Versus a 5% commission on a $300,000 home - $7,500

Net savings -- $5,850 

Notes: Based on 5% commission; assumes seller pays 2.5% commission to buyer's agent. Sources: NAR, FSBO.com, Stagedhomes.com, MONEY research 

Source: CNN Money 

10 housing markets set for double-digit price gains

By Les Christie

May 9, 2012

NEW YORK (CNNMoney) -- Ten hard-hit housing markets will record double-digit price increases through 2013, according to a report Wednesday.

And with mortgage rates low, many house hunters have already started to pounce on bargains, said David Stiff, chief economist at Fiserv, a financial analytics company that prepared the forecast. 

 

"Some markets may have overshot to the downside, and people are jumping in to try to catch the bottom," Stiff said.

Nationwide, home prices will start rebounding late this year and gain an average of 4% a year over the next five years, Fiserv projects. 

In a separate report released Wednesday by the National Association of Realtors, the national median home price declined by just 0.4% in the three months ended March 31 compared with the same period in 2011.

About half of the 146 metro-area markets surveyed by NAR showed a price increase, as buyers make inroads into the supply of homes for sale all across the country. National inventory has dropped by 22% compared to a year earlier. 

 

"Given the steadily dwindling supply of inventory and notably higher listing prices that are being negotiated today, prices are expected to show further improvements in the near future," said Lawrence Yun, NAR's chief economist.

Home prices will also be driven higher as banks opt for short sales instead of repossessions. Repossessed homes sell for between 25% and 50% less than comparable homes sold by conventional sellers, according to Daren Blomquist, a spokesman for RealtyTrac, which markets foreclosed properties.

Bank repossessions often go through lengthy foreclosure processes and long periods of vacancy, during which they may deteriorate and lose value. 

Fiserv's Stiff forecasts that Madera, Calif., will produce the largest home price gain over the next two years. This market bubbled during the housing boom, with the median home price jumping above $300,000, according to the National Association of Home Builders.

Prices have since tumbled 53% off their peak, to about $125,000. Fiserv is projecting a price jump of 21.5% by the end of 2013 with 16.5% of that increase coming next year.

Other double-digit gainers will include Medford, Ore., with a 20.1% rise, Yuma, Ariz., with 16.7%, and Corvallis, Ore., with 11.4%.

Source: CNN Money

Another record low for mortgage rates

By Les Christie

May 10, 2012

NEW YORK (CNNMoney) -- Mortgage interest rates hit new lows this week as both the 30-year and the 15-year fixed-rates fell, according to a weekly survey by Freddie Mac. It was the second consecutive week that rates broke records.

The 30-year, the most popular mortgage product, fell by 0.01 percentage points to 3.83%. Last year at this time, it stood at 4.63%. The new lows can save borrowers $46 a month for every $100,000 borrowed. Over a 30-year term that comes to more than $16,000.

 

The 15-year fixed dropped by 0.02 percentage points to 3.03%, lowering borrowing costs to $692 a month for every $100,000 borrowed, a $38 savings compared with a year earlier. Borrowers would pay out only $24,565 in interest over the life of the loan.

Rates are tracking the downward trend in Treasury yields, according to Frank Nothaft, Freddie's chief economist, which have fallen in response to election results in Europe and a weaker than expected U.S. employment report.

"The economy added just 115,000 jobs, below the market consensus forecast and less than in March," he said. "And although the unemployment rate declined, it reflected fewer people actively seeking jobs."

Mortgage rates will likely not fall much further, according to Bob Walters, the chief economist for Quicken Loans. The low rates have sparked refinancings, which have accounted for upwards of 70% of all mortgage applications lately.

That flood of refinancings strain the capacities of mortgage lenders, especially since many have exited the industry over the past few years. When the remaining banks have trouble handling all the applications, they raise rates to discourage any more.

That means that when Treasury yields rise again, mortgage rates will follow at a slower rate, said Walters. Fewer homeowners will seek to refinance their loans and the banks will be better able to handle the lower number of applications.

"The spread between yields and rates will reduce when capacity comes into line," he said.

Source: CNN Money

More mortgage reductions in CA?

By Lily Leung

May 10, 2012

AP file photo

If you're a struggling homeowner in California with a mortgage owned by either Fannie Mae or Freddie Mac, then you may have a shot at a home-loan reduction through a $2 billion state program.

Officials with Keep Your Home California, which gives out mortgage aid, announced a key change earlier this week in its principal-reduction program that now allows both Freddie and Fannie to participate.

Starting in June, mortgage servicers will no longer be required to match program money dollar-for-dollar in order for a principal reduction to happen. However, servicers would have to agree to either a term or rate cut, or both. The state housing agency made the change to encourage more participation in a program that has gained little traction in the past year. 

"In response to this week's announcement by the California HFA (Housing Finance Agency,) the Enterprises will work with the HFA to apply its new program to Enterprise loans," according to a statement from the Federal Housing Finance Agency, which regulates Fannie and Freddie. 

What's important to note: Freddie and Fannie would not be paying off any loan balances in the Keep Your Home California program. With the matching requirement gone, the program itself would pay for 100 percent of the mortgage reductions.

Still, their participation in the state program could have a big impact considering Fannie Mae and Freddie Mac own more than 60 percent of mortgages in the state.

Fannie Mae and Freddie Mac made it clear to servicers in December that they could take part in mortgage-aid programs paid for by the Hardest Hit Fund, or the bailout, as long as they fit these criteria:

--The modification assistance program does not require the Servicer or Freddie Mac to make a financial contribution or match any assistance provided by the HFA

--Program participation and parameters for receiving assistance do not conflict with Freddie Mac’s modification requirements under the Guide or the Servicer’s other Purchase Documents, as applicable

--Receipt of funds does not impair the first Lien priority of the mortgage

--Funds are remitted to the Servicer from the HFA in a one-time lump sum payment

U.S. housing finance director Edward DeMarco, who regulates Fannie and Freddie, has been feeling the heat from California and federal leaders over the agency's unwillingness to cut mortgage balances of borrowers with loans owned or backed by Freddie or Fannie.

He has long said that mortgage write downs are not in the best interest of taxpayers and that the agency has determined other tools, such as the Home Affordable Modification Program, or HAMP, are already doing the job of helping at-risk homeowners avert foreclosure. 

Source:  UT San Diego

Now on sale at Costco: Mortgages

By Les Christie

April 26, 2012

photo: TIM BOYLE/GETTY IMAGES

NEW YORK (CNNMoney) -- Not only can Costco shoppers find bulk-packs of chicken wings, 24-rolls of toilet paper and large-screen TVs at a discount, they can now land themselves a mortgage. 

After a year of testing, Costco is rolling out a full-service mortgage lending program on its website in partnership with First Choice Bank, a New Jersey-based community bank, and 10 other lenders.

Costco's partners have issued more than 10,000 mortgages to members under the program. But Lauren Kutschka, Costco's manager of financial services, expects that number to swell as the warehouse retailer markets the service more aggressively to millions of members in its stores and in its weekly publication Connection.

"I went in to buy some bottled water, big bags of chips, cereal and some Nutri-Grain bars that I eat on my route," said Ray Sheets, a FedEx courier from Canton, Ga. "I saw a home loan brochure on my way out and picked it up." 

Sheets went onto Costco's site, put in his information and quickly accessed offers from four lenders. The rates, closing costs and terms were listed up front. And the closing costs -- of about $2,500 -- were about a third of what he would have had to pay through other lenders, he said.

Within a few weeks, Sheets refinanced his $170,000, 15-year fixed mortgage carrying a 4.25% rate into a 30-year loan with a rate of 4%. The move lowered his monthly payment by nearly $500 to $811 a month. 

Mortgages are just one of several financial products available to Costco's members. The warehouse club also offers health and auto insurance, as well as stock brokerage services, said Kutschka. 

Up next: Auto loans and student loans. 

"We've always known that our members wanted more financial services," she said. "Right now, we offer recreational vehicle and boat loans and we're going to add auto loans to that. We're also looking to offer student loans."

Costco had started offering mortgages a couple of years ago but the service provider it was using didn't share enough details about how it was dealing with Costco's members, said Kutschka. So Costco started over from scratch, partnering with First Choice Bank to build a new mortgage lending portal. 

Much like LendingTree, the site gathers quotes from various lenders. However, there is one key difference. Under the Costco program, the borrower's identity is revealed only after they officially select the lender, said John Alexander, business development director at First Choice. 

With many other lead-generation sites, the consumer fills out an application and any lender can make an offer and begin sending marketing communications to the applicant without restrictions. 

Costco members will still need to do their homework and compare offers, though, said Keith Gumbinger of mortgage information company HSH.com. Even after a year of testing, Costco's service is still new.

First Choice said it will police the other lenders to ensure they comply with Costco's policies, which include giving accurate rates and terms and following up quickly on questions and requests. The technology enables Costco to monitor individual applications and make sure they are handled properly and expeditiously. 

Costco takes no profit on the lending itself, but it does get paid to market the service. 

In Sheets' case, his lender, Bank of the Internet, sent a representative -- an attorney -- to his home to close on the loan, he said. She answered all his questions and explained all of the legal terms in the contract.

"There were no surprises," he said.

Gumbinger said the service may prove better for people like Sheets, who are refinancing than those who are purchasing homes. 

"The mortgage origination process is still a hands-on, face-to-face process," he said. "It involves a comfort level and you don't get that with an online service."

 

That may be true in the initial stages of the borrowing process, but once a Costco borrower has chosen a lender the level of service steps up, as Ray Sheets's lender did for him.

Given the size of Costco's footprint and its ability to squeeze great deals out of vendors, Costco members should at least "include the site in their search plan," said Gumbinger. 

Source: CNNMoney

6 ways to get a great mortgage deal

By Ismat Sarah Mangla

April 30, 2012

photo: thinkstock

(MONEY Magazine) -- Finding an affordable house is no longer a problem but qualifying for a mortgage can be. Six tips to getting a mortgage and a good rate.

Put your credit on ice. The higher your credit score, the lower your rate: The best rates go to those with a 760 or more, says credit-score expert John Ulzheimer. 

So keep that plastic in your wallet (and don't apply for new cards or other loans) for at least three months before you go loan shopping. One large balance -- even if it's paid off at the end of the month -- can ding your score by 20 points or more. 

Ask for time. Most sales contracts give you only 10 days to nab a loan or the seller can move on. Negotiate for an additional five to 10 days to give you some room to shop around.

Get at least six quotes. Rates on a 30-year fixed conforming loan can vary at least as much as a quarter of a percentage point. Get quotes from national lenders at mortgagemarvel.com and find out what your local credit union or regional bank is offering as well. Inquire about fees; while lenders aren't required to give you a good-faith estimate of closing costs (which average 2% of the loan balance) until you actually apply, some will provide it if you ask. 

Match the lock period to the loan. You now need 60 days or more to close a loan, says Wharton professor and mortgage expert Jack Guttentag of mtgprofessor.com, and getting an extension on a lock will cost at least a couple hundred dollars. Ask your lender how long it's taking to close loans like yours -- and don't lock for less. 

Opt for an ARM. If you know you're not going to be in a house for more than seven years, adjustable-rate mortgages can mean big savings, says Guttentag. The monthly payment on a $300,000, seven-year ARM at the recent rate of 3.23% is $1,302, vs. $1,455 for a 30-year fixed at 4.13%.  

Talk to a broker. Those who need a jumbo loan or have an unusual situation (say, you're self-employed) will get the best deal from a mortgage broker who has access to and experience with a lot of lenders. Find a fee-only one at upfrontmortgagebrokers.org.

Source: CNNMoney

Homeownership falls to lowest rate in 15 years

By Les Christie 

April 30, 2012

NEW YORK (CNNMoney) -- Homeownership in the U.S. fell to its lowest rate in 15 years during the first quarter as more delinquent borrowers lost their homes to foreclosure, forcing many to rent. 

The percentage of Americans who own their homes dropped a full percentage point over the past 12 months to 65.4% during the first three months of 2012, according to the latest Census Bureau data. That's the lowest rate since 1997 and down from the peak of 69.2% reached in 2004.

"As foreclosures grew over the last six years, many homeowners became renters," said Alex Villacorte, director of analytics for Clear Capital, a real estate valuation company.

The rental vacancy rate dropped to 8.8% during the first quarter, down from 9.7% a year earlier and from 9.4% in the last quarter of 2011, according to Census.

The growing demand has put pressure on the rental markets, said Villacorte. In many depressed housing markets, investors have been buying up distressed properties -- foreclosures and short sales -- fixing them up and renting them out.

The median asking rent last quarter was $721, up 5.6% from 12 months ago, according to Census.

Rents are highest in the Northeast, where the median is $932, followed by the West ($845), the South ($660) and the Midwest ($607).

Meanwhile, median home prices continue to fall. During the first quarter 2012, the median asking sales price for vacant units was $133,700. That's down from $143,700 during the first quarter of 2011, according to Census.

Homeownership has fallen for all age groups, races and regions since the housing boom, Census reported. 

It is lowest in the West, where it has dropped one percentage point over the past 12 months to 59.9%. The Midwest has the highest homeownership rate at 69.5%, down 0.9 point year-over-year; the South is second at 67.5% (down 0.9 point) and the Northeast is third at 62.5 (down 1.4 point). 

Source: CNNMoney 

We are thrilled that the market is climbing...but why is it??

 March 29, 2012

Posted by Emily Goodman, CPM, ARM, CAPS

Current demand for apartment buildings in the U.S. is booming, in contrast to the homeownership rate, which is stagnating at its lowest level since 1998. Linked to this, government-sponsored mortgage companies are providing record levels of financing for apartment properties. This confluence of events is fueling a rush by investors to purchase properties, allowing lenders to recover 75% of the value of defaulted mortgages, which are tied to multifamily housing – the highest rate for all commercial properties. The simple fact is that many potential buyers are not interested in, or cannot afford a long-term debt obligation, typically 30 years for a mortgage. In addition to this, many existing homeowners are seeking to downsize to more flexible housing arrangements.

The apartment rental market is expected to witness vacancy rates dropping below 5% - the rate that characterizes a landlord market, where high demand for rental properties justifies increased rental rates. The average apartment rental rates are projected to increase by 3.5% in 2012.

This boom in demand for rental properties has also prompted life insurance companies and commercial banks to increase their activity in the market. We are beginning to see these institutions compete for lending, in the relatively stable apartment sector, offering short-term mortgages and lending for ‘transitional’ properties, not fully occupied. To put this in context, if Freddie Mac were to finance a 4.5% interest rate for an apartment building, the capitalization rate would only be about 7.8% - a relatively low capital risk exposure.

Sources:

Homeowner rates - U.S. Census Bureau

“Marcus & Millichap’s 2012 National Apartment Report”

Source: MultiFamily Insiders

Short sales expected to surge this year

April 19, 2012

By Les Christie

NEW YORK (CNNMoney) -- Short sales are rising sharply, offering many struggling homeowners a better alternative to foreclosure in many of the nation's hardest hit states. 

In short sale deals, the sale price of the home is less than what the seller owes. Often, the bank that holds the mortgage takes so long to approve the sale that the deal falls through. But in recent months, the pace of short sales has increased, a trend that should gain momentum, according to RealtyTrac. 

In January, short sales rose 33% compared with 12 months earlier, the company reported. 

During the month, 32 states saw year-over-year percentage increases in short sales. Even more encouraging, short sale deals outnumbered foreclosures in 12 states, including some of the hardest hit like California, Arizona and Florida. 

January's numbers look to be just the beginning. "[W]e believe 2012 could be a record year for short sales," said Daren Blomquist, vice president at RealtyTrac. 

Banks are showing signs of being more open and willing to approve the deals -- even if it means accepting less money.  

The average sales price for a short sale was $174,120 in January, down 4% from December and 10% year-over-year.

Typically, banks get about 20% less for a foreclosed home. Foreclosure can also take years to unload, during which expenses, like property taxes, insurance and other expenses, mount up.

Short sale process to speed up. One of the biggest roadblocks for short sales has been the time it takes to get deals approved. That time shrunk slightly during the first quarter -- to 306 days from 308 days the previous quarter -- but many deals still fall through because the buyer eventually walks away. 

However, that could all change come June 1 when a set of new rules are put in place that will require lenders to make a decision about short sale requests within 60 days.

Earlier this week, the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae (FNMA, Fortune 500) and Freddie Mac (FRE), announced the new guidelines, which will also require lenders to review and respond to short sale requests within 30 days and provide weekly status updates to the borrower if the offer is still under review after that time. 

Also helping to speed things along is the government's Home Affordable Foreclosure Alternative program, which launched in late 2009, according to Charlie Engel, a spokesman for RealtyTrac.

The program pays incentives to those who sell their home in a short sale rather than let it fall into foreclosure. 

Source: CNN Money

Mortgage payments at lowest level in decades

April 23, 2012

By Beth Braverman

(Money Magazine) -- For today's homebuyers, the weight of the monthly mortgage bill is the lightest it's been in decades.

Put 20% down on a median-priced ($154,400) existing home, and your payment will come to $616 a month, only 12.1% of the median U.S. family income. 

In 98 of the top 100 metro areas, it's now cheaper to buy than rent. 

"If you have good credit," says IHS Global Insight economist Patrick Newport, "this is the best time in 40 years to buy."

Want to trade up? You may think the buyer of your current home is getting a deal, but you might get an even better one on your next place. 

Prices for bottom-tier properties have improved since 2011, reports Zillow, while top-tier prices keep falling. 

Want to invest? To get the best rate (a quarter to a half point higher than for your primary residence), you'll have to put at least 25% down, according to federal guidelines. 

 Source: CNN Money

Mortgage rates remain below 4% mark

April 12, 2012

Written by Lily Leung

Mortgage rates dropped this week and remain below the 4-percent mark amid a weak jobs report, based on the latest numbers from Freddie Mac.

The 30-year fixed rate averaged 3.88 percent this week, down from 3.98 percent last week. A year ago, it was 4.91 percent. The all-time low was 3.87 percent, set in February.

The 15-year fixed rate fell to a new all-time low at 3.11 percent, falling from 3.21 percent last week. This rate was at 4.13 percent a year ago. The previous low for the 15-year mortgage rate was 3.13 percent in early March, Freddie Mac's records show.

The falling rates coincide with a weaker-than-expected jobs picture. The country gained 120,000 jobs instead of the expected 200,000. 

San Diego economist Kelly Cunningham told U-T San Diego jobs reporter Jon Horn that high gas prices and increased shopping on the web hurt retail sales, which factored into the latest jobs numbers. 

Here's what Freddie Mac economist Frank Nothaft had to say about rates in relation to the broader market:

Fixed mortgage rates eased for the third consecutive week following long-term Treasury bond yields lower after a weaker than expected employment report for March. Although the unemployment rate fell to the lowest reading since January 2009, the overall economy added just 120,000 new jobs in March, nearly half that of the market consensus forecast. On a more positive note, the Federal Reserve reported hiring was steady, or showed a modest increase, across many of its Districts in its April 11 Beige Book of regional economic conditions.

Every week, Freddie Mac officials calculate average mortgage rates by compiling rates from lenders across the U.S. on Monday through Wednesday. The rates can vary drastically every day and don't include points, which are add-on fees. One point equals 1 percent of the total loan amount.

Source: UT San Diego

Why people walk away from home loans

April 14, 2012

Written by Lily Leung

Wikimedia Commons | Credit: respres

This bank-owned house on Oakpoint Avenue in Chula Vista was repossessed in 2011. Photo was taken in early February. — Scott Allison / U-T San Diego staff

Peter Safronoff could afford his mortgage payments on his Rancho Bernardo condo, but the cost of keeping it was pushing him into the red each month and eating into his retirement savings. So like an increasing number of borrowers in San Diego County and elsewhere, the 64-year-old financial adviser chose to walk away from his home.

What Safronoff did, widely known as a strategic default, has not only become less of a social stigma, it’s also considered a wise business decision among a growing number of consumers, especially those who are severely underwater on their homes. 

An estimated 35 percent of the U.S. home-loan defaults in late 2010 were considered strategic, increasing from 26 percent in March 2009, based on figures from the University of Chicago’s business school. This year, the nation could see an increase in the volume of these defaults when compared to last year, according to 46 percent of bank-risk experts surveyed by FICO analysts in February.

Now that the country is about five years into one of the worst economic periods in its history, it’s become more clear what factors motivate the financially able to stop making their mortgage payments. Homeowners say they are unable to modify their home loans with difficult lenders, need to move but can’t sell their homes, and can’t keep justifying paying for a home that’s already lost so much equity.

Narrowing down why borrowers walk away is important because it could guide banks and lawmakers on how to address a problem that continues to bleed out. The body of studies on strategic defaulters is far from comprehensive but keeps growing. Academics and businesses have found numerous factors that push people to walk away from their mortgages.

The findings indicated that strategic defaults weren’t just about financial factors, “but also ideological and emotional ones.”

Financial reasons

Peter Safronoff was able to pay his mortgage payments on his Rancho Bernardo condo, but the cost of doing so was high. After doing the math, the realized he was losing more than $1,000 each month due to a drop in income and a special tax assessment on his home.

In late 2008, he began to work with his lender to lower his mortgage rate. After a yearlong process of dealing with more than 70 different workers, Safronoff gave up. He stopped making his payments, continued to live in his home and eventually was foreclosed upon.

“I didn’t feel guilt,” said Safronoff, whose credit took a brutal hit because of the foreclosure. “I had to take care of myself.”

“The idea of walking away was scary,” he continued. “I was taught not to do that ... what swung me was, on a financial basis, I had to.”

The majority of clients share common characteristics: They bought at the height of the real estate market and are now severely underwater, or they need to relocate but are saddled with a home that won’t sell, said company CEO and co-founder Jon Maddux.

“I think people intend on paying their mortgages and intend to follow through with the mortgage, but things don’t always work out as planned,” said Maddux, whose company has worked with about 8,000 defaulters nationwide.

Almost 23 percent of U.S. homes with a mortgage were underwater at the end of 2011, based on numbers from real estate data company CoreLogic. That’s about 11.1 million properties. In San Diego County, that share is about one in three homes with a mortgage, DataQuick research show.

How much a homeowner is underwater on their mortgage appears to influence the likelihood of defaulting strategically, based on a June 2011 study co-written by Paola Sapienza, a finance professor at Northwestern University’s school of business management.

Of the homeowners surveyed, 23 percent said they would walk away from their mortgage if the mortgage exceeded the home’s value by $100,000, even if they were able to afford the payments. That’s up from 8.9 percent, in a situation where the shortfall was only $50,000.

A similar result occurred when survey takers were asked about the relative value of the shortfall.

“The willingness is clearly increasing over the relative value of the short fall, with only 7.4 percent of the people willing to default when the shortfall is 10 percent of the value of the house and 12.4 percent when the value is between 40 percent and 50 percent.”

Social and emotional reasons

When Peter Safronoff walked away from his Rancho Bernardo condo about two years ago, his family was disappointed in his decision.

“They were discouraged,” said Safronoff, who recently moved to Boca Raton, Fla. “Ultimately, they understood what happened. They weren’t happy campers, but they understand it now.”

The stigma against strategic defaulters has softened in recent years, as more borrowers have successfully walked away from their homes and even lived in properties mortgage-free. So sets in the “social contagion” effect, according to the paper co-authored by Paola Sapienza, of Northwestern University’s school of business management.

“We know in non-recourse states, banks are not going after borrowers,” said Sapienza, who also is on the board of directors of the American Finance Association. “… If their neighbor has done it, and they’re still in touch with the neighbor, then, you’ll learn that nothing happened.”

Anger, specifically toward banks, is another key motivator.

Safronoff wanted to cooperate with his lender through a loan modification, but a year of back-and-forth eventually wore him out.

“They didn’t seem to operate on good faith,” he said. “I thought, ‘This is the way I’m going to be treated?’”

Public anger is even quantified by one indicator co-released by the University of Chicago and Northwestern University. More than 60 percent of people surveyed said they were angry or very angry about the economy, according to the latest results released in January from the Financial Trust Index, a quarterly look at how Americans feel about financial institutions. 

“This is the highest level of anger we’ve measured since March 2009,” according to Sapienza, who co-authors the index. “In an election year, this certainly indicates the importance of the economy to the political agenda.”

Borrowers’ feelings toward lenders also emerges as a theme in the 2011 study co-written by Sapienza. In that paper, 44 percent of those surveyed felt less moral obligation to pay their mortgage if they knew their bank was involved in predatory lending, and it was 28 percent if they realized the bank had received financial support from the government.

The results indicated that strategic defaults weren’t just about financial factors, “but also ideological and emotional ones.”

The consequences

Reasons aside, lenders must deal with the high possibility that borrowers will continue to consider strategic defaults. It’s unclear how they’ll address the issue, especially considering the unprecedented negative equity that’s suffocating U.S. homeowners.

Paola Sapienza, of Northwestern University’s school of business management, said it’s possible that if strategic defaults become rampant, then banks could consider tightening their borrowing standards more than ever.

“We may move to a more European system, where credit is harder to get, and that will harm those who are truthful,” she said.

Analysts at FICO believe future strategic defaults could affect future borrowers.

“Regardless of legal or ethical issues around strategic defaults,” said the first-quarter FICO’s survey of professional risk managers in a report released Wednesday, “Lenders must account for this risk when they evaluate mortgage applications in declining markets.”

Source: UT San Diego