The Subprime Primer

I just discovered a wickedly funny little power point presentation over at the Inman Blog, in which foul-mouthed little stick figures explain the sub-prime debacle. And when I say foul-mouthed, I mean foul-mouthed. If you don't like bad words, please don't click through it.

F-bombs, stick figures, and humor aside, the "Primer" does a great job of putting the whole mortgage mess into fairly simple terms. Apparently this was circulated among Wall Street traders earlier this year, though I'm not sure of the original source.

Link Round-Up: Creative Financing Edition

Here's how to:

... owe $416,000 on a home you only paid $153,000 for. - The Housing Bubble Blog

... make money by walking away from over $3.9 million worth of home loans. - New York Times

... have a negative net worth and buy a home without even realizing it (and still manage to make the payments on it). - Milwaukee Journal Sentinel

Quote of the Day

"For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage"

- Dr. Austan Goolsbee, in an editorial last year in The New York Times

Link Round-Up: Deep Thoughts Edition

Are HELOCS the new sub-prime? Calculated Risk

Are FHA loans with payment assistance programs the new sub-prime? MSNBC

Are conventional loans the new sub-prime? WSJ

Am I totally obsessed with what may or may not be the new sub-prime?

Quote of the Day

"There's no doubt that due to the mortgage crisis, everything has tightened up ... A year ago, if you could fog a mirror, you could get a loan."

- Mandy Wachtler, president of the Greater Nashville Association of Realtors in an article in The Tennessean

Hat tip to Josh Flory for the article.

Lose Some Pride or Lose Your Home?

It's been a long week and it's only Tuesday. So, let me unwind after a hard day in the housing mines by telling you a little story...

I recently listed a very nice home in a very nice neighborhood. The owners were very nice people. Everything, in fact, was awfully nice and swell until my phone rang early one Friday morning:

Caller: Hi, is this Suzy Trotta?

Me: Yes, how can I help you? [I have very good phone manners]

Caller: I'm calling about the foreclosure property you have for sale.

Me: Um, I don't have any foreclosure properties for sale.

Caller: Have you looked in today's News Sentinel? Cuz you do now.

Sure enough, an examination of the KNS foreclosure notices showed that my nice little listing was due to be auctioned off on the courthouse steps in two weeks. I called the number given in the notice, thinking this must surely be some bizarre mix-up. I mean, my sellers were such nice people.

The helpful woman at the law firm told me that yes, indeed, my listing was going to auction and the reason was that the current owners had not paid their mortgage in 7 months.

7 months.

I was completely dumbfounded. My nice little sellers? Those sweet folks whose dining room table I had sat at just a few weeks before? What the fudge?

I decided to call my clients to figure out what was going on.

Me: Hi, Mrs. Seller. Great news. We had two showings this week. And by the way, did you know your home is possibly going into foreclosure?

I waited.

One Mississippi...

Two Mississippi...

Three Mississippi...

Mrs. Seller: Why, yes, we did.

So there it was. They knew. They knew! My next immediate thought was, "Why in the world didn't they tell me?"

I know, I know, the simple answer was because they were embarrassed. But is suffering embarrassment worse than going into foreclosure?

Luckily we wound up being able to do a short sale and everything turned out pretty ok. Instead of going into foreclosure, those folks will now have to pay taxes on the amount of money the bank lost on the short sale and suffer the damage of the missed mortgage payments on their credit report. Still, much better than foreclosure, trust me.

My role in this situation was not to judge. I never really found out what prevented them from paying their mortgage, but that wasn't my business anyway. The fact was that my clients were still really nice people. They were just really nice people who go in over their head financially. Scheisse passiert as the Germans say.

No, my job was to sell that home before auction and I somehow managed to pull it off. Yes, that's the sound of me tooting my own horn. Toot! Toot!

But I'm not just telling you this story to show off my superior home selling skills. There is a actually a moral in this story that I think is very important:

If you are in trouble with your home financing and have missed payments or know that foreclosure is looming in your future, do not keep this information to yourself when listing your home. I know you want to try to sell it and pay the bank off and hope the whole mess just goes away without any of your friends and neighbors ever finding out. And I get that. I really do.

But the fact of the matter is that while real estate agents can certainly help you in this situation, we can only help you if you ask us to. If we know up front what your situation is, we can start working the phone immediately. Calling your loss mitigation coordinator. Calling investors. Calling other agents who know other investors. We can try to help you work with the bank to try and arrange a short sale. And a short sale, while not being the answer to your prayers, will still be much, much better than foreclosure.

So swallow your pride and ask for our help. Losing a little pride is a much better option than losing your home to foreclosure.

A House (and Senate) Divided

Even as I've busted my behind the past week to do a short sale for a family who is about to lose their home to foreclosure, my feelings about how best to fix this mortgage mess are very mixed. Apparently the House and Senate Democrats are divided as well.

Among several other things, the House wants to provide first-time homebuyers a 10% credit towards the purchase of a home.

The Senate, as a part of it's larger plan, wants to offer a $7,000 tax credit to people who buy forclosures or homes in danger of going into foreclosure.

Am I missing something? As much as I'd like to make more sales and more commission by selling to all of those firsts-time buyers and investors, I fail to see how either one of these ideas helps people who are already in trouble. Sure, helping first time homebuyers is great, but didn't we get ourselves into this mess by allowing people with absolutely no money to buy homes? And maybe I'm dense on the Senate plan as well, but since when do investors need any sort of incentive to buy a foreclosure or pre-foreclosure property at roughly 80% of it's normal market value?

But what the heck do I know? I'm just the bozo out working until 9:00pm every night to keep you from losing your dang house.

Question of the Week: What is a Short Sale?

Q: What is a short sale?

A: A short sale occurs when a seller does not have adequate funds to pay off their loan and the lender agrees to accept a lower amount, usually in order for both sides to avoid foreclosure.

In a normal sale, the seller must come up with the full loan balance in order to pay off the bank. In a typical short sale, the seller is allowed to sell the property for less than the outstanding loan amount, with the lender agreeing to accept the loss.

Banks will sometimes agree to a short sale when it will be cheaper and faster than going through the foreclosure process. However, not all lenders will even consider short sales, and even if they do, it is not a simple process.

In order for a lender to consider a short sale, the seller must provide proof of economic hardship to their lender, usually in the form of a written hardship letter as well as an exhaustive financial report detailing all earnings and spendings. According to Realestatejournal.com:

you must prove that you really can't pay your loans -- and that the reason is new, not something that you concealed from your lenders when you originally applied for the loan.

In addition, the seller must also provide the lender with an estimate of how much the sale will cost the lender. This is usually done by providing an estimated HUD-1, which tallies sales price, loan balance, accrued interest, closing costs - including agent commission if applicable, and unpaid property taxes.

If you have more than one mortgage, loan, or lien on your property, odds are you will have to go through this process for each lender or institution you owe.

While the essence of a short sale is that the lenders allows the seller to "come up short" when paying off their loan balance, not all lenders are so forgiving - and the government definitely isn't. According to Realestatejournal.com:

Some hard-nosed lenders may insist that you pay the difference between what the buyer pays for the house and what you owe on the mortgage. Others may forgive that portion of the debt -- but unfortunately, Uncle Sam won't. "Forgiven" debt is considered taxable income.

A short sale is not an easy way to get right side up in your upside down home. There are risks and downfalls. It will go on your credit report, although it will not be as devastating as a foreclosure would be. There is a lot of negotiating and hard work involved, and as the bank is often willing to pay a real estate agent's commission, having an agent help you through the process is a good idea.

Below are some more resources with information on short sales -keep in mind that short sale procedures vary from lender to lender and region to region, so make sure to check with a real estate professional in your area if you have any questions.

The New Exit Strategy: A Short Sale [Business Week]
After the Short Sale: Taxing What Isn't There [REALTOR.org]
Short Sales Set Sail Again [Realty Times]
Short Sales in Real Estate [About.com]

Riskiest Real Estate Markets

Here's one Forbes list I'm glad Knoxille didn't make it onto: America's 10 Riskiest Real Estate Markets. The 10 unfortunate winners are:



1. Detroit, MI
2. Orlando, FL
3. Cleveland, OH
4. St. Louis, MO
5. Miami, FL
6. Las Vegas, NV
7. Sacramento, CA
8. Denver, CO
9. Tampa, FL
10. Phoenix, AZ

How risky are these markets? This quote from Forbes.com says it all:

There's roulette and there's skydiving. Then there's investing in Detroit and Cleveland real estate.

Ouch.

Repeat after me: there's no place like Knoxville!

This Week's Poll: Who's to Blame for the Mortgage Meltdown?

This week's poll is up. Please to enjoy to your left over there.

And yes, I'm totally phoning it in this weekend.