Monday, June 22, 2009

What happens in California stays in California

What happens in California sometimes stays in California, and sometimes it doesn't. It is way too soon to tell with regard to The California Foreclosure Prevention Act that took effect last week.
The intent is to require mortgage lenders to prove they worked with the homeowner to make a loan modification before they can begin foreclosure procedures.

This is with all the best of intentions. Yet, already there are 2 schools of thought on this.
One is that it could provide enough options to make a difference and prevent some people from losing their home and somewhat reduce the number of foreclosures. This in turn helps to keep property values higher when an area has fewer foreclosures to pull down the average home price.

The other thought is that not everybody facing foreclosure can be helped enough to make a difference and that is only delays the inevidible while costing the owner facing foreclosure more time and money.

Similar measures have already been attempted in California over the years and, obviously, were not completely successful. This time around, people from other states will also be monitoring to see if there is any (or enough) positive impact on the marketplace over the next few months. If there is, look for other states to look into this.

Meanwhile, I have seen several stories and heard from a few different sources which are not endorsing many of the "loan modification" programs now being made available. It appears some are being started by people looking to make a fast buck at the expense of home owners too stressed out to take a serious look at the potential long term impact of a loan modification.

Whatever your feeling, it is important to note that consumers do not pay for a legitimate loan modification program if and when it really does make sense. There are some web sites and advertisements out there looking to confuse consumers into thinking they need to pay an up front fee to get a certain loan modification program. Not true.

Legitimate entities, such as some banks, offer a loan modification program with no up front cost since they understand that those in need to not have the funds needed to preserve their current mortgage. Keep that in mind.

You may have noticed that some lenders are now offering a 40-year mortgage in addition to the conventional 30-year. They make it look appealing for the short term by showing monthly savings sometimes as much as $200 per month above the 30-year. However, some 40-year mortgages require an upfront payment to implement. When factored out, it reduces the monthly savings. For example, a $2,000 fee to save $200 per month comes out to $167 per month for the first year. Do the math with those figures and it amounts to a $33 per month savings for the first year. Without knowing what mortgage rates will be like in 1 year.

If you respond by saying "but in 1 year I could refinance", you would be right, but you would also be faced with still another fee to refi. That assures you would have spent to save a bit more than $1 per day.

Note that this is only for the short term with a 40-year mortgage. For the long term, needing 10 more years to pay also serves to increase the amount of interest you would be paying on the property.

Put this all together and it shows why financially challenged home owners should explore other options besides a loan modification to prevent foreclosure and to hopefully maintain (or not decrease) their credit status.

It becomes time to not be concerned about a profit and to be concerned with getting the loan balance paid off. If the house is valued at $300,000, but there is $200,000 left on the loan, the distressed owner would be out of his/her/their obligation with a sale for $200,000. A potential buyer, and it only takes one, would be more apt to "steal" the home for $200,000 than to wait until the $300,000 asking price comes down to $250,000 in 3 months.

The seller frees up the obligation, and could then rent or live within their means for as long as needed.

With single family home auctions now available through which the seller has a right to refuse the "winning" bid, situations such as this are now possible.

Simply put, it does not need to cost any more to avoid foreclosure.

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