Too Little Equity Traps Homeowners

Many would love to sell their houses but are trapped due to relatively low prices and high debt.  Our real estate market won’t truly normalize until this changes and trapped home owners can easily sell.  Why are they trapped?  Lack of equity prevents selling as a non-short sale, and refinances can be difficult, due to low or absent equity and/or poor credit, leaving many to scratch their heads for a good solution.  Eventually the situation will resolve, but it will take awhile.

In round numbers, we’ve lost about 1/4 of our value in the real estate market in Eugene Springfield, since peak values in summer of 2007.  If real estate appreciates at a typical value of 3-4% per year, it will be years, not months until we’re back at previous values.  So, prices will eventually rebound, but over time.  Reduction of mortgage debt is also part of the solution.  With every payment, the amount of the home mortgage decreases, which also helps.  Rebounding home prices and a reduction in the mortgage amount are one cure for the problem.  How long until these trapped sellers are set free?  I’d guess perhaps 5 years.

Just how big is the problem?  Nationwide about 1 in 4 mortgages are underwater, which is to say that more is owed than the house is worth.  In Portland, it’s thought to be about 1 in 5.  Statistics aren’t available for Eugene Springfield, but it’s reasonable to assume we’re somewhere between the national average and Portland.

So, what can the trapped homeowner do?  Refinancing is great if you can do it.  We’re at very low mortgage interest rates, and if you can refinance it may well indeed lower your monthly mortgage payments.  Refinancing can involve a myriad of rules and requirements and lenders are the best ones to answer questions.  Some general information on different types of refinancing is below:

FHA Streamline refinancing

  • Your current loan has to be insured by FHA.
  • Often, no appraisal is required.  This means house value, in particular if you are underwater, isn’t considered.
  • Your mortgage payment history is key.  Paying over a month late hurts.
  • A good credit score may not be necessary.
  • Income verification is not necessary.

VA Streamline refinance

  • The VA program is called IRRRL (pronounced “earl” by lenders) which stands for:  Interest Rate Reduction Refinance Loan.
  • You need to have an existing VA loan.
  • No appraisal is required.
  • No income verification is required.
  • You don’t need to occupy the home currently, but do need to have occupied it in the past.

HARP

  • The mortgage must be owned by Freddie Mac or Fannie Mae. The mortgage must have been acquired by Freddie Mac or Fannie Mae on or before May 31, 2009.
  • You may avoid an appraisal (it’s case by case, determined by Fannie or Freddie), but they will refinance your loan even if you’re way underwater.

HAMP refinance

  • Your loan must have been originated before or on January 1, 2009.
  • You must have sufficient documented income to support the payment.
  • You must have a documented hardship.
  • Designed to help people in danger of foreclosure.

The above loan programs actually have more specific rules and guidelines, and I just mentioned a few of the highlights.  A good lender will know more and be able to answer your questions.

I have worked with clients who want to convert their current residence with a mortgage to a rental then purchase another house to live in.  It’s not that it’s impossible to do this, but it is much more difficult than it was in the past.  Each situation is unique, but some of the problems that derail this plan are:  too much debt to income, inability to count rental income if there is insufficient equity in the rental house, and needing in some cases 6 months PITI for the rental and new purchase.  Mitigating factors such as a job transfer helps in this plan.  It’s worth investigating turning your house into a rental, but it’s a more arduous task these days.

When home owners need or want to sell when they’re underwater, some will turn to a short sale.  In some ways, short sales are similar to a regular sale:  the house is listed with a Realtor and offer(s) are accepted by the seller.  In other ways, they are much different:  sales proceeds are short of what is owed (short sale; clever, huh?) and the sale is contingent on the lender’s approval of the short sale.  The lender will want documentation to prove that the seller can’t afford to write a check for the deficiency (difference in sales proceeds and mortgage debt.)  The timing is also much different.  Non-short sales typically close in about 5 weeks from the accepted offer.  Short sales are typically 3 to 6 months.  As I understand it, in Oregon, lenders aren’t allowed to seek deficiency judgments on the first mortgage of a primary residence; this is not the case for second mortgages, though.  Sometimes, but not always, lenders will do “cash for keys,” which is when they give you a small amount of money to assist in moving out.  I always try for this on my short sales, but honestly don’t often get it.  Surprisingly, your credit seems to recover pretty rapidly after a short sale.  I have a client right now that is purchasing a new home after I short-sold her last house 24 months ago.

Foreclosures or a deed transfer in lieu of foreclosure are the last resort, at least in my opinion.  They are said to do the most harm to your credit rating and the effects persist the longest on your credit report.  If all other options are exhausted, though, this may be your last out.  It will certainly get you out of an unwanted house, but is a rather blunt instrument to solve an otherwise delicate problem.

Sometimes it can help to brainstorm with a good lender and/or Realtor when you find yourself trapped in a house with little equity.

My clients are purchasing this home 24 months after a previous short sale.

My clients are purchasing this home 24 months after a previous short sale.

Dowtown Springfield Oregon

Downtown Springfield the new hotspot?  Maybe so.

Commercial property is interesting.  Changes in rules & regulations or changes in traffic patterns can make the once lively die; or the slow and out of the way into the next hot spot.  At one point in time, Sixth and Seventh streets in Eugene were part of Highway 99 which ran from Mexico to Canada.  Properties along those streets were prime real estate, but that began to decline with the construction of I-5 in the early 1960’s when much north-south traffic bypassed Eugene entirely.

Similarly, the downtown core area of Springfield used to be the center of town and the most desirable place to be, but this was decades ago.  What started the decline isn’t precisely clear, but increased ease of transportation and building of satellite shopping centers or malls didn’t help downtowns.  At one point in time, downtown Springfield was the Gateway Mall of its day, and when I grew up here, the Gateway area was merely wet grasslands, laying fallow, bathed by the noise and exhaust of I-5.  Time shows us nothing if not that things change.  Gateway is hot.  Downtown Springfield is on its way back up.

Mayor Christine Lundberg in her 2013 state of the City speech was very positive on Springfield’s possibilities and progress.  She even joked that she’s looking forward to having a Logger Lager at the soon to be opened Planktown Brewery.

Probably the start of the Wildish Theater project in 2001 marked the beginning of Springfield’s renaissance.  The 284 seat theater took 5 years to complete at a cost of some 3.2 million dollars.  LTD opened it’s highly visible and cool looking transit facility in 2004, which gave the area a further boost.

Jim's Landing in Springfield is awaiting a new use

Jim’s Landing in Springfield is awaiting a new tenant

Three downtown bars had their liquor licenses pulled and closed in 2010, which was said to improve things.  One of the bars, Jim’s landing, had been in business since 1934 and there was always a bar in that location since the construction of the Fry and Rankin building in 1911.  There was also a real estate office in the same building–hmm–sounds like a good idea to me.  Neither I nor anyone I know thinks the closing of Jim’s Landing was a good idea.  However, the area is on its way up, even if the wheels of progress are sometimes indiscriminate on what they roll over.  The spot is for lease, and I’d be glad to show it to you if you have interest.

Washburne Cafe in Springfield, Oregon

Washburne Cafe in Springfield, Oregon

The Washburne Cafe opened kitty-corner to Jim’s Landing in 2010.  The brainchild of Karen Hageman, a longtime area builder, it has a cool urban feel to it.  I had breakfast there this morning  and will definitely come back.  The building was originally the Springfield Armory, built about 1921.

The Plank Town Brewery is a couple of doors down from The Washburne.  The target opening date was last Fall, but they seem to be running a little behind.  Plank Town is on the ground floor of the IOOF Building, which was built in 1907 for $10,995.  The Oddfellows still occupy the second floor.

Planktown Brewery, Springfield, Oregon

Plank Town Brewery, Springfield, Oregon

Is this the genesis of the next Barmuda Triangle or Whitaker?  Time will tell, but Downtown Springfield is on its way up.

Historic Oddfellows Building, Springfield, Oregon

Historic Oddfellows Building, Springfield, Oregon

Short Sales 2012 & 2013

Distressed home sales, those that are short sales or foreclosures make up between 1 & 4 and 1 & 5 sales, nationwide, which matches the rates of distressed sales in greater Eugene Springfield.  The NAR is predicting the rates of distressed sales will fall this year because the number of seriously delinquent mortgages is declining.  3% of Fannie and Freddie mortgages are delinquent in Oregon.

Oregon Freddie Fannie Mortgage Delinquency Rate:  3%

Oregon Freddie Fannie Mortgage Delinquency Rate: 3%

However, the number of Fannie Mae and Freddie Mac short sales reached an all time high with 34,000 being reported for quarter 3 2012.  From 2008, Fannie and Freddie have reported some 391,000 short sales.  If the average loss per sale were 50K, which is a guess on my part, the loss would be some 19.5 Billion dollars, which is a number on the order of burgers served by McDonalds.  Yikes.

Fannie & Freddie Short Sales:  2012

Fannie & Freddie Short Sales: 2012

The number of REOs by Fannie and Freddie has declined to about 158K in September 2012 down from 241K in 2010, so that appears to be improving.

So, short sales and foreclosures will remain for the next few years but appear to be declining.  This is in keeping with the increased real estate prices we are seeing in 2012 & 2013.  If you would like more information on short sales or foreclosures in Eugene Springfield Oregon, please contact me.