Bail Me Out!

Like many homeowners, the Petersons find themselves in a predicament. They purchased a home in 2007 for $450,000. They like the home and the neighborhood. Both Mr & Mrs Peterson have stable employment and can afford the home. But some of their neighbors are not so fortunate.

There have been a few foreclosures and short sales on their block. In fact the home on the corner had an open house last weekend. It's a short sale for a larger home on a nice size lot. The Peterson's always liked the exterior of the home, so they decided to walk down the block and take a peak inside.

They liked what they saw. Not only was it a larger house, but it had nicer upgrades: granite countertops, stainless steel appliances, wood floors, and beautiful landscaping in the back yard. This seemed much nicer than the Petersons' home. Mrs Peterson picked up the flyer and her eyes widened as she read the list price, $325,000! If this house was going to sell for $325,000, then what would their more modest home sell for? $250,000, or maybe less. Mr Peterson did some quick math in his head. They were probably around $150,000 upside down. He thought they might be slightly upside down, but nothing this severe. The Petersons' hearts sank.

The agent that was holding the open house introduced herself to the shell-shocked couple. After some quick pleasantries, she got the story out of the Petersons. It doesn't matter whose idea it was, but after 30 minutes the three of them came up with a plan.

The Petersons would purchase the house on the corner which they love. They would do an FHA loan with minimal down (3.5%). They would put their current home up for rent, and with their income they have no problem qualifying with both payments. But here's the kicker, in reality after closing on the new home, they will end up listing their current home as a short sale.

The plan makes perfect financial sense for the Petersons. They can get a bigger, nicer home with a smaller mortgage and lower monthly payment. And they get out from underneath a mountain of debt on their current home. This should be perfectly okay, right?

Wrong. This is a common strategy which has a name, "buy & bail." Mortgage lenders quickly caught on to this in recently years. A prudent underwriter for a mortgage company would deny the Petersons' application for the FHA loan on the new home. The reason is that they are likely going to default on their current mortgage. Why should the mortgage company care about the old loan?

The Petersons are going to pay the new loan as agreed. But most loans have a government guaranty or backing of some kind (FHA, Fannie Mae, Freddie Mac, VA, FDIC, etc). Therefore the industry is sensitive to any mortgage being defaulted, even for other mortgage companies. One should also be aware of their potential tax and deficiency liability will be when selling a home as a short sale or going into foreclosure. Consulting an attorney is recommended.

Home Buying Benefits for the Troops

Many people are aware of the home loan program for veterans created by the Veterans Administration. The VA loan program allows veterans to finance 100% of the purchase of a home for their primary residence. It's really the only zero-down mortgage that still exists.

There is also another benefit for military personnel that have recently served. Remember the first-time home buyer tax credit? That expired for us civilians last spring. But for military personnel that were deployed between January 1, 2009 and May 1, 2010 they have until April 30, 2011 to purchase a home to qualify for a tax credit of up to $8,000.

Here is a list of the reasons why Veterans and active military personnel have an amazing home buying opportunity:

• Tax Credit of up to $8,000 for purchasing a home by April 30, 2011
• Historically low interest rates
• Home prices reduced by 50% or more from their highs a few years ago
• Zero down payment required for those eligible for a VA home loan

If you or someone you know is a veteran or active duty military and is interested in buying a home. Please contact me at Homeowners Financial Group. 480-305-8509 or cmozilo@homeownersfg.com.

America's Future Economic Growth - Not What We've Come to Know

Here is an exert from a daily update I received last night from Jay Goldinger with the Early Warning Wire. It provides incredible insight into our economic future as a country.

The chart below is the most important of the year. It clearly shows the dramatic change in US borrowing from the private to the public sector. The red bars shows the dominance of business borrowing until the beginning of 2008 when it was replaced by the government (blue). While most believe we are at the precipice of inflation as persistent government borrowing forces the private sector to pay more interest for new loans I see it as the start of a new chapter in the US economy. Since we only see the future from our own past experiences most US businesses have spent the last three years stockpiling cash and reducing or ending leverage. Instead of the federal government "crowding out" private sector borrowing these record savers will spend the next decade financing growth slowly and internally through profits and using their cash hoard. Of course growth will be slower and unemployment higher than in any recovery since the 1940's but it will have more traction and not be dependent on access to the credit markets which propelled the real estate market into a crash landing. The government will slowly (very slowly) reduce its debt in the next decade mostly by not having to renew existing debt. It is not what we are used to nor is it our first choice but sometimes life is best enjoyed when we learn to take the path of least resistance (low debt) rather than go back to the route most familiar but fraught with risk. Those that adapt to the new paradigm will profit while those that fear change will see assets dissipate and not understand why.

Visit the Early Warning Wire to subscribe to Jay's updates, and to learn about Food on Food, a philanthropic organization to help the homeless in L.A. transition to life off the street.

The Buy Versus Rent Debate

One of the effects of the now burst housing bubble is the psyche of the potential homeowner. Is homeownership no longer a desired dream in America after someone experiences foreclosure? Are young people less likely to want to own a home when they see their parents lose their home to the bank? Is the American dream of homeownership dead?

Many investors believe that more young people will grow up to be renters rather than homeowners. There are advantages for renting: mobility; low maintenance; less responsibility. Experts say that young people today show a greater desire to rent than own because of these advantages.





But eventually young people grow up. They get married, have children, and then they want some stability. Their kids enroll in school and they become less mobile and must take on more responsibility. The trends that experts say will result in more renters, in my opinion are simply characteristics of young people.





The Housing Bubble is a major set back for many people. It has and will likely continue to reduce the rate of home ownerhsip in America. But I believe that most Americans still want to own a home. And when they are in a financial position to own a home they will do so.





The real estate website, Trulia.com recently conducted a study on the Top 10 Cities to Buy vs. Rent. They studied the top 50 cities by population and came up with this list of the top 10 cities where it is more affordable to buy versus rent.

1. Minneapolis, MN
2. Arlington, TX
3. Miami, FL
4. Fresno, CA
5. San Antonio, TX
6. Mesa, AZ
7. Jacksonville, FL
8. Phoenix, AZ
9. El Paso, TX
10. Las Vegas, NV

Short Sale Warning

Be careful when participating in a short sale. Part of the negotiation with the lender may involve paying back a deficiency. It is important that people selling their home as a short sale understand the liability they may still have after the sale. It's probably a good idea to involve an attorney to make sure the short sale is in your best interest. Here's a story in today's Arizona Republic...

Some Arizona homeowners still owe after short sale

The Impact of Fannie Mae Guideline Changes

Here are some upcoming guideline changes that Fannie Mae is implementing and will be filtering down to the banks and mortgage lenders:

· Minimum Borrower Contribution – The minimum borrower contribution requirements for all Fannie Mae conforming products (except DU Refi Plus, High Balance loans, interest only, 2-4 units and second homes) will no longer require a minimum 5% contribution from the borrower. The borrowers minimum investment may come from gift, grant or community seconds to meet this requirement.

· Foreclosure – Increased waiting period to seven years.

· PreForeclosure/Short Sale/Deed-in-Lieu – if the credit report reflects an account that may have been subject to a preforeclosure, short sale or deed-in-lieu the borrower will have to wait two years until applying for a new loan. Fannie Mae uses the terms “preforeclosure”, “deed-in-lieu” and “short sale” interchangeably.

· Revolving Debt – All revolving debt will be included in the dti calculation regardless of the number of payments remaining.

If you have any questions about these changes and how it may impact you or your clients, please contact me at 602-690-1462. Thank you.

Applying for a Mortgage - Not as Bad as Airport Security

I've never been happier to stay home for Thanksgiving. In the past few days, stories about the new TSA security procedures at the airport have the masses ready to revolt.

If you've flown recently you have probably seen the x-ray machines that aren't there for you bags. They're there for us. They exist because the old metal detectors can't detect many types of explosives that contain little or no metal. It makes sense that the TSA needs to be able to detect explosives that aren't metal, so they introduced these machines that can see through our clothes.

Apparently some people don't want TSA agents to see them naked. I've seen some of the images the machines generate and they don't seem very graphic. And you certainly would not recognize images of any specific individuals. However, they are vivid enough to make folks uncomfortable.

The alternative to the naked image is a rather thorough pat-down from your friendly neighborhood TSA agent. Personally, I prefer being the subject of a risque security photo.

I don't mind having the image taken of me. On a recent trip I had to have my x-ray image taken at the Oakland Airport. The agent instructed me to raise my hands over my head (similar the the image above). Knowing an image was being taken, I found myself flexing. Is that vain? I don't know who was looking at my image, but I wanted to look my best.

What does this have to do with home loans? Nothing really. Sometimes home loan borrowers complain about the amount of documentation we collect: tax returns, bank statements, pay stubs, and letters to explain all sorts of happenings. But I promise that we never ask to see what's underneath our customers' clothes.

Happy Thanksgiving!