Homeownership in a Foreclosure Economy: American Dream or Nightmare?
September 2006 - “Why rent, when you can own?” It was familiar advice,
frequently adopted by homeowners and would-be homebuyers in one form or
another; “why waste money paying rent when I can pay a mortgage on my own home?
For many, this perspective has been and continues to be undeniably sound logic, what some might call a “no brainer.” However, more recently, rising interest rates and falling home values are causing some to abandon the American dream of home ownership in favor of paying rent each month, thus escaping the fear of unexpected expense from rising taxes, unforeseen repairs, and changes in the economy.
According to Foreclosuresmass.com, 2006 foreclosure filings against Massachusetts homeowners increased to nearly 13,000 through September of this year, a 54% increase in comparison with the same period last year. Experts predict that the worst may be yet to come, as the real estate market continues to be a “buyers’ market” and mortgage rates continue to adjust upwards.
As a consumer bankruptcy attorney practicing in Salem Massachusetts, I am currently receiving an average of three or more telephone calls per week from individuals and families facing foreclosure. Most of the caller’s stories describe similar scenarios and share a number of common factors.
No Luck Trying to Sell Their Home
The home has often been on the market for some time, and despite numerous decreases in price, there have been virtually no offers. The asking price cannot be further reduced. As it is, if the property sells tomorrow there will barely be enough proceeds to pay off the mortgage and the real estate broker.
One or More or More Adjustable Rate Mortgages
According to Harvard’s Joint Center for Housing Studies, Massachusetts homeowners took on more than $121 billion dollars in new mortgages in 2003. Many of these mortgages were Adjustable Rate Mortgages, “ARMs,” with low “teaser” rates fixed for the first two years, after which the loan adjusts at potentially higher rates. Many of these loans are recently hitting the adjustment period. As these rates continue to increase, these homeowners may find themselves with high-rate mortgages, in some cases perhaps even double the original teaser rate.
Little or No Equity in The Home
In many cases, the home was purchased during the housing boom (years prior to 2004) when interest rates were at a historical low. For some, this appealing opportunity proved to be a trap, tempting homeowners into purchasing homes that they could not truly afford. Unlike homebuyer’s of past generations who generally would not consider purchasing a home without at least a 5 or 10% down-payment, these homebuyers came to the closing table with very little and in many cases, no money down. Some banks offered greater than 100% financing, allowing buyers to leave a real estate closing with keys to a new home and a check, in exchange for their signature on a loan.
For many, this did not cause an immediate problem; on the contrary, some were fortunate enough to see their home values increase substantially in a very short period of time. Unforunately, there were credit cards to pay off and home improvements to make. It was all too easy for many to use up this new found equity by borrowing more money.
At the time, it may have seemed very sensible to pay off high interest credit cards or invest in a home remodeling project. Equity lines and 2nd mortgages with initially low, adjustable rates of interest were easy to come by. Now that home values are declining and interest rates continue to rise, too many homeowners find themselves with unexpectedly high monthly mortgage payments and owing mortgages totaling more than their home is worth.
Stuck with a Home You Can't Afford to Keep, or Lose
Under these circumstances, if the home is sold at foreclosure, the bank is likely to be repaid only a portion of the money owed on the mortgage. If that happens, the bank will look to the homeowner pay the difference, along with costly foreclosure fees. A “deficiency” debt of this type can be financially devastating to a homeowner, forever destroying their credit and leaving them with a debt they may never be able to pay. It is at this point, that for some, the American dream of homeownership has transformed into the American Nightmare.
A Hard Look at Reality
Homeowners facing foreclosure can generally be divided in to two separate groups or types:
- The first type has fallen behind on mortgage payments due
to a distinct event, or occurrence, which has temporarily diminished their cash
flow. A typical occurrence of this sort might be a temporary illness or job
layoff. In this situation the best solution is often Chapter 13 bankruptcy, which allows a homeowner to pay off mortgage arrears with a monthly
payment plan extended over a three or five years.
- The second type of homeowners facing foreclosure are those that simply cannot afford their homes. They have fallen behind on mortgage payments because they are truly living beyond their financial means.
This is of course, a highly stressful way to live, juggling debt, using one form of credit to pay another, spending sleepless nights worrying about how to make the next mortgage payment. Unfortunately, even the best of jugglers cannot continue to keep all the objects in the air indefinitely. Eventually, when finances come crashing down, it can be overwhelming.
In many cases, after we have met and reviewed the household income versus expenses, both the client and I are amazed at how they managed to keep up with their payments as long as they did. This has often been accomplished by the use of credit cards and loans from banks, family and friends to supplement the household income.
I explain to my clients how important it is to avoid denial of the obvious. If the budget shows that the household is running at a substantial deficit each month and there is little or no equity in the home, it is not sensible to delay the inevitable. In these cases, the best solution is often to give up on the idea of saving the home. It is in this case that the protection of a Chapter 7 bankruptcy can allow the homeowner to let the house go to foreclosure and walk away with a clean slate, relatively unscathed.
Dealing with Emotional Attachment
Initially, for most homeowners, there is an understandable resistance to the idea of letting go of their home. Emotional attachments and a natural fear of change often cause homeowners to want to hang on, no matter what the cost. After all, who wants to give up on the “American Dream?”
In my experience however, those who are able to keep an open mind and explore the alternatives are sometimes pleasantly surprised with the outcome. Coincidentally, while writing this article, I received an email from clients of mine, a young couple, absolutely overwhelmed with house related debt. They have a reasonable income, but their mortgage payments are very high. They have both been working night and day to keep up, and still there’s just not enough money. The other day in my office, they were in tears at the thought of loosing their home.
Today, their email was filled with enthusiasm and relief about the great rental they found, “just as nice as their home and $1,000.00 per month less than their current mortgage.” They can’t wait to “escape” the burdens of home ownership. They would be the first to admit that their dilemma was nobody’s fault but their own, but who knew that housing values were going to plunge, or that interest rates would double. Thankfully, the federal bankruptcy laws allow for a second chance so that this couple can start again, with a clean slate. Someday, when they are truly ready financially, they will likely be able to purchase another home. For this couple and many others like them, it is not the ideal of homeownership, rather it is the ability to get a second chance, the opportunity to put mistakes behind them and start out fresh. That is the true American Dream.
Should I Stay or Should I Go?
If you are among those homeowners who have fallen behind with mortgage payments and potentially facing foreclosure, try to step back and make an honest assessment of your situation. Get an estimate of your home's value from a reputable real estate broker. Based on today’s market, is there really any equity in the home? Sit down with pen and paper and make a detailed comparison of your monthly living expenses versus net household income.
Can you truly afford the home? Go out and take a look at existing rental properties in your area. Currently, rentals are plentiful in most neighborhoods and there are many new rental communities being built ranging from moderate to luxury living. Obviously it is much easier to consider the idea of moving if you know you have a comfortable and reasonable alternative.
A consultation with a qualified bankruptcy attorney will inform you to whether not you can avoid foreclosure with a chapter thirteen, or if you are eligible to file a chapter seven which will allow you to walk away from the property. A qualified attorney can also assist you in evaluating other possible alternatives, such as arranging for a forbearance agreement with the bank, or giving the bank a “deed in lieu of foreclosure”.
Most importantly, try to avoid the temptation to procrastinate, or delay. This problem isn’t going to go away on its own and in most cases if the home is already in foreclosure, lawyer’s fees and other related assessments are accruing on a daily basis. As I explain to my clients, the sooner I know about a pending foreclosure, the better chance I have of assisting them with a solution.
Take the first step toward financial freedom today
Call Peter Kaplan at 800.611.5126 or email him for a free consultation. He'll put you on the right path to financial freedom.