Monday, January 16, 2012

Mortage mod madness

Mortgage mods are touted by both the government and the so called "help" organizations. But are these mods really helping anyone. I think if you've read this blog for any length of time you know how I feel about this mod business. Mods are helping banks and that's it! All mods do is keep people paying for a an asset that is worth less than they owe on it. They become trapped by this debt.

Here is a perfect example of why loan mods suck for most people. I have one friend that did a short sale in 2008 to get out from under his upside down house. He is now free, happy and his credit score has fully recovered. He could easily buy any house he wanted (and could afford). I have another one that did a mod in 2009. He did the loan mod for a couple of reasons. He liked his house and had spend a fair amount of money upgrading (although he did use a heloc to do these upgrades). He also foolishly believed that prices would rebound enough to where he could sell if he needed to. Over 2 years later he still owes way more than his house is worth. Although he can afford the payments he now needs to sell and move due to an impending divorce. Unfortunately for him this means either a short sale or just letting the house go. The loan mod probably added a year or two to his marriage but it also trapped him in that house. So who is better off? Had he let the house go two years ago he would probably be single and free of debt, possibly able to buy another home already.

To anyone considering a loan mod I would encourage them to consider the possibility that they may want or need to move in a few years. If there is even a remote chance of that then don't do a loan mod. No matter how much you love the house, get the hell out of it. You can rent for a couple of years and then if you desire you can purchase another home that you will not be a thousand feet under water on.

The whole mortgage mod thing is absurd when you stand back and look objectively at it. Someone has sold you something at an inflated price, but because they are willing to change the loan terms slightly you agree to keep paying on that inflated price. That might be reasonable if you bought a TV (although even on TVs most retailers will give you a refund if you find that TV cheaper) but I digress we are talking houses here. We are talking about tens or hundreds of thousands of dollars depending on how long you pay the note for. It's not an insignificant amount of money, yet most people only look at that monthly payment and that's about as far ahead as they look too. No thought is given to next year or 5 years from now.

Mortage mods will only serve to extend this fiasco of a market!

Thursday, January 12, 2012

Will 2012 be the "real" year of the short sale?

If you have an underwater house you are thinking about dumping you might want to get off your duff and list the thing. You see normally when you sell a house for less than you owe on it you get a nasty little surprise from Uncle Sam, a tax bill for the difference. During the bust legislation was passed to put this tax on hold to make it easier for people to short sell. However that legislation expires at the end of 2012. Both the Federal government and the California State gov passed these acts so currently there are no tax consequences from a short sale.

Of course the debt forgivness act could be extended. But what if it isn't? This would probably mean fewer short sales and a lot more foreclosures. There are no tax consequences from foreclosure because in Cali most of those loans are non-recourse (but I'm no tax expert so don't listen to me).

The unfortunate thing is that most people have no idea about this tax thing and may not feel the need to hurry up and get out while the gettin's good.