HOW TO - Break The Cycle of DEBT

With all that has happened over the last three short years; from the housing crisis causing mortgage companies to go out of business (or get absorbed) ceasing lending as we knew it, to the stock market crash and the Credit collapse…to our personal rising debt trying to make ends meet in this crap economy where layoffs and downsizing are the norm. Not to mention the Trillion Dollar debt of our own government which have been “surfing” their debt for years with no solid plan to deal with it…has given me a sore distaste for borrowing money.

Let’s face it, if we all lived within our means, only bought what we could afford, and saved up instead of borrowed money to buy large items, none of us would be suffering right now.

Up to this point, I have never thought of debt as a negative but rather a tool to create more wealth. That was, of course, until I lost the means to pay that debt off. I now understand that we as a society have it all wrong. DEBT IS NOT OK and we cannot continue down this road and expect to be fine.

One can argue that the only exception to this are mortgages on investment properties, but due to the drastic drops in home values, we are learning the negatives of leverage the hard way on that as well. If you have purchased or refinanced within the last 4 years, chances are you are now upside-down on your equity.
-Average homeowners stay in their homes for 7.1 years [NAR®]. With an average 7% mortgage, they will sell their homes still owing over 90% of the principal. If they continue this trend, they will NEVER pay off a home in their lifetimes!
-85% of Americans have a true net worth of less than $250! - Social Security Administration
-The average savings of a retired couple is only $7,000!
HOW DO WE BREAK THE CYCLE?!?
Step 1- You have to stop taking on new debt.
If you cannot stop the flooding, how can you keep from drowning? Which brings us to…

Step 2- Make a list of ALL your expenses. Click here to download my spreadsheet
This is vital as you need to know exactly how much you are spending every month and compare it to your net income. If you have money left over (discretionary income) then you are on the road to financial freedom. If not, look hard to see what can be cut or adjusted. Even if you only have $1 left over, you are on your way!

Step 3- Invest in a program that will guide you to financial freedom.
Make no mistake; this undertaking will require discipline and determination. The idea is to payoff your highest rates or highest monthly payments first to free up cash flow that can then be applied to your next debt paying it off quicker and so on until you are debt free.

Step 4- DO IT AND LIVE IT! Becoming debt free will not happen overnight, but imagine 8-13 years from now with NO Mortgage, NO credit card debt, NO car loans, and taking ALL that money you would have spent on interest and investing it in a safe 2-5% return over the next 10-20yrs. We are talking Hundreds of Thousands of dollars set aside for your retirement!

This is real and this is the pyridine shift we need to make as a society if we ever wish to regain balance and power.

Short Sale FAQ

Question: What is a Short Sale?
A short sale occurs when the proceeds of a real estate sale fall short of the balance owed on the property. In a short sale, the mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the owner. This negotiation is all done through communication with a bank's Loss mitigation department.

Question: Can I do a Short Sale myself?
Negotiating a short sale is a long and complex procedure that requires a strong knowledge of the process and should be left up to a professional. In this difficult market, it would be in your best interest to use a competent Realtor to find a buyer and negotiate the sale. Mishandling a file can cost you precious time and put you in danger of foreclosure.

Question: So if I choose to list my property with a Realtor, who pays your commission?
The bank will pay the commission along with all the other usual closing costs. A properly executed short sale should cost you nothing!

Question: I just missed a payment and I know I will miss more...how long does the foreclosure process take and is there time to do a short sale?
Typically, the process begins in the 90-120 days late area and can take an additional 4-6 months after that. Nowadays lenders are very willing to postpone or prolong foreclosure if you have listed the property and have a willing and able buyer. Hiring a knowledgeable Realtor who can handle this for you is extremely important.

Question: If I pay mortgage insurance and default on my loan, why wouldn't that cover the deficiency amount?
The mortgage insurance is not there for your protection, just the mortgage lender.

Question: Do I have to have my home "Approved" by the lender prior to offering it for sale as a short sale?
No. Technically speaking there is no such thing as being "Short Sale Approved." The actual approval only happens with an accepted offer.

Question: Will I still have to pay property taxes if I do a short sale?
Property taxes will always have to be paid as part of any accepted short sale. Whether it's you or the lender depends on their policies and the specific agreement you reach while negotiating the short sale.

Question: I owe more than my home is worth and I can't make the payment. Do I have to somehow qualify for a short sale?
The simple answer is NO. If someone can't make their payment and they are otherwise insolvent, they qualify for a short sale. Note: insolvent simply means their total debts are great than their assets.

Question: Do I have to pay income taxes...I have heard that I will get a 1099. Will the loss the bank takes be treated as a taxable gain to me...the seller...is this true?
It WAS true, now it's not. Consult your Tax Attorney or Qualified CPA. Very recently the tax law was modified and now most people who do a short sale will have no taxes due.

Question: Do I have to miss a payment to do a Short Sale?
No, most lenders will consider a short sale without being in default assuming you can still show hardship and do not have the assets to pay down the mortgage.

Question: I want to do a short sale and have a 2nd mortgage, does this make me ineligible?
No. Both of your lenders will need to be satisfied in some way to complete the short sale. If your first lender will be paid off by the sale, then we just negotiate the terms with the second lender. Most short sales do involve 1st and 2nd lien holders.

Question: How long do bankruptcies and foreclosures stay on a credit report?
Bankruptcies and foreclosures can remain on a credit report for seven to 10 years. This is one of the main benefits of a Short Sale and also a reason why you should not wait to the last minute to do one. The more proactive you are about your situation, the better off your credit will be...

If you have any questions, feel free to contact me at (954) 441-5366 or email me @ HomeCounselor@bellsouth.net for a no obligation consultation.
I am here to support you!

FANNIE AND FREDDIE TO ASSIST OWNERS IN FORECLOSURE

- On Monday, November 10, 2008, Fannie Mae and Freddie Mac announced they are going to work with homeowners that are in default of their mortgages. Where TARP and Hope For Homeowners have sorely disappointed to date, Fannie and Freddie are taking a real first step at trying to address the number of foreclosures. Fannie and Freddie will be modifying loans by temporarily or permanently reducing the interest rate and / or extending the loan, and deferring a portion of principle interest free to bring the debt to income ratio to 38%.

The homeowner must meet the following criteria to qualify:

1. The loan must be owned by Fannie Mae or Freddie Mac
2. It must be the borrower's primary residence. (They must still live in the property)
3. The loan to value must be greater than 90%
4. The homeowner must be at least 3 months behind on their mortgage loan
5. The borrower has NOT filed for bankruptcy
6. The borrower must have reliable and verifiable income

Hope for Homeowners...What is it?

Hope for Homeowners is HUDs response to the foreclosure problem. While it's far from perfect, it is a start in what needs to be a more aggressive solution by all lenders to address this problem.
The basic idea is that HUD will insure FHA financing up to 90% of the current value of your home IF (and that's a big if) your current lender is willing to reduce your payoff and forgive the balance of your debt. Essentially it's a short refinance but the problem is that this is optional for lenders and most lenders won't help you unless you are in default.

SIDE NOTE: One reoccurring theme you will notice is that if you are one of the few that is not in default, you are essential punished by the lender because they will not even listen to you or try to help you out. Even if you can prove that you are in trouble and are just barely getting by in this economy, if you are not defaulting, the lender will do nothing proactive to keep it that way.

OK, so back to H4H.

Here is a list of what you need to know:
· Property must be owner occupied
· Your mortgage must have originated on or before January 1, 2008
· Your mortgage debt-to-income ratio must be over 31%
· You CANNOT be on title to any other property
· You did not "intentionally" miss mortgage payments

And here is the catch, you still have to actually qualify for an FHA loan AND participate in Equity Sharing. You can contact me to see if you can qualify for an FHA loan (or any loan for that matter) but let me breakdown how the equity sharing works:

Examples of How Equity and Appreciation Are Shared

Let’s say your home appraised for $200,000 at the time you receive your FHA mortgage. So your mortgage is 90% of this, or $180,000. The initial equity is the difference between 1 and 2, or $20,000.

In this example, you and the FHA share this $20,000 when you sell your home or refinance your loan.

Here’s how that $20,000 would be split:

If you sell or refinance:
Year 1 FHA gets 100%, or $20,000.......You receive 0%, or $0
Year 2 FHA gets 90%, or $18,000........You receive 10%, or $2,000
Year 3 FHA gets 80%, or $16,000........You receive 20%, or $4,000
Year 4 FHA gets 70%, or $14,000........You receive 30%, or $6,000
Year 5 FHA gets 60%, or $12,000........You receive 40%, or $8,000
After Year 5 FHA gets 50%, or $10,000...........You receive 50%, or $10,000

So, if you sell or refinance right after receiving the new loan, the FHA keeps the equity that was created, and you don’t receive any of it. On the other hand, let’s assume you stay in this loan and don’t sell or refinance for ten years. At that point, you’re entitled to half of the equity – in this example, that’s $10,000 – and the FHA is entitled to the other half.

In addition to this equity sharing, you will have to share any future home price appreciation with the FHA. This means that, if your home has gone up in value between the time you receive your FHA mortgage and the time of your home sale (or other disposition), you will share the amount of this increase with the FHA (less closing costs and a portion of any improvements you have made).

This is a 50/50 split that does not change over time.

But what if the value of your home continues to go down?

Because the appreciation is actually negative (the home has depreciated), so there is nothing of financial value to share, neither you nor the FHA would receive anything.

To keep it simple, these examples assume that there are no closing costs when you sell your home and that you have made no improvements to your home.

Again, keep in mind that these are just examples, and your actual experience will vary depending on factors such as: How much your home is worth when you get a new HOPE for Homeowners loan, how long you stay in your home, and how much your home is worth when you sell.

Credit Crisis. Let's clear up what happened in Florida.

I think it's best to start this blog with an explanation on how we got here so that we can try to figure out were we need to go from here.

The headlines are all very clear; Florida is number one nationwide in mortgage fraud and number two nationwide in foreclosures. For obvious reasons, it is likely that these two facts go hand in hand.

Looking back, the entire spectrum of mortgage fraud has taken place in Florida. From expansive flipping scams involving brokers, lenders, appraisers, real estate agents and title companies to loan originators and/or borrowers simply lying about the qualifying income; Florida has seen it all.

It would be irresponsible to not point out that much of the increase in the number of foreclosures rests solely on the fact that many Floridians acted like so many of their American counterparts. They simply bought above their heads. Many stretched their wallets and equity lines to buy second homes and investment properties with the dream of quick cash and early retirements.

Mortgage fraud is nothing new. For as long as there have been mortgages, there have been originators and borrowers looking for ways to defraud and beat the system. So why do America and Florida continue to see an implosion in the banking and lending industries? Additionally, why are there so many foreclosures? The answer to both of these questions is the same; sub-prime mortgages.

When the bust first started, and foreclosure numbers started to rise, all finger pointing was directed towards the mortgage brokers. The mortgage brokers were forced to fend for themselves against state and federal legislation designed to punish them.

For over a year, the disregarded victim of the bust was the broker. The media and legislators blamed them for the condition of the mortgage market. They did not care that thousands of small businesses folded under the unearned weight of blame.

Then, bit by bit, the ugly truth began to shine through. First, a wave of local and national retail lending firms folded as their lines of credit, heavy with unsold sub-prime mortgages, failed. Then we saw many Wall Street investment banking firms, which in many cases owned their own sub-prime lending companies and securitized their own mortgages, begin to fail as their real estate backed securities went bust.

Shortly after these Wall Street firms began to fail, both Freddie Mac and Fannie Mae announced they had become insolvent. In a mad rush to stop the bleeding, the federal government rushed in and took control of these two giant semi-private firms. Both Freddie and Fannie attributed their losses to sub-prime loans. The most recent victims of the bust have been huge banks. Quiet while the brokers were taking the blame, these huge banks had loaned billions in sub-prime loans and were taking huge losses. What they needed, and what they hoped for, was a quick market recovery. With time working against them the added weight of sub-prime losses quickly became more than many could bear.

I have outlined the results; now let's take a look at the cause. In the late nineties President Clinton set a goal to increase the availability of mortgage loans to low and moderate income Americans. Congress passed the Community Reinvestment Act, which forced Fannie and Freddie to lower lending guidelines in support of President Bill Clinton's goals. With expanded guidelines, more and more Americans were able to qualify for mortgages. The increased rates of these expanded guideline loans proved a winner on Wall Street. The perceived security of these mortgage-backed securities (MBS) was gobbled up by investors. Based on these results Wall Street began to seek out mortgage lending firms that could supply these higher risk, higher reward mortgage-backed securities. President George Bush echoed the call from his predecessor and encouraged more lending to more Americans.

Therefore, with the support of Congress, the President and the leading GSE's (Fannie and Freddie) more and more lenders created more and more sub-prime products. With additional sub-prime products a greater number of Americans could qualify for mortgages. More buyers meant less inventory and prices skyrocketed.

Some of you may read this and think the true villain is greed. I would agree that as the market run-up was taking place many parties, from originators to securitizers, were indeed blinded by greed. However, it was not the free market "running amuck" that caused the current problem. No, it was the intervention of government in the free markets that lead to our current situation. Our federal legislators decided to push more loan products into the market in order to allow more people to qualify for home loans. Many, on both sides of the congressional aisle, declared the majesty of the new America. The new America where everyone could own a home.

This shortsightedness, the forcing of now disgraced Fannie and Freddie to lend outside of their well-established lending parameters, lead directly to the crash we see today. The saddest part to me is that Congress blames everyone but themselves. "It's the brokers, no it's the investment banking firms, no it's the greedy CEOs of America's banks and insurance companies. It's the poor management of Freddie and Fannie." So where do we go from here? First, the Federal government needs to allow the free market to clean up the mess it helped create. The best bailout Congress could offer the American People is to get out of the way. Sure, some large firms will fail, but most of the dying firms will be broken apart and purchased in pieces by other more stable firms. Second, Congress needs to release Freddie and Fannie back to the private sector. Not as the ugly, double-headed, semi-private duopoly monster Freddie and Fannie has become, but as 50 or 100 smaller private mortgage securitizing companies that can compete openly in the secondary mortgage market.

*Thanks to Ritch Workman, President of the Florida Association of Mortgage Brokers for this fine article.