Underwater mortgages cause defaults - not unemployment
According to the Congressional Oversight Committee (COP), unemployment is presently driving a fifth wave of foreclosures, but analysts at Amherst Securities say that negative equity is far more predictive of home loan defaults than unemployment. The question is critical, because the policy response depends on the answer: if coming defaults are caused by unemployment, then the relevant response would be to subsidize mortgage payments, says Laurie Goodman, head analyst on the team. On the other hand, if negative equity triggers defaults, then principal reduction must receive a higher priority.
Goodman presents two pieces of evidence to make her point. The first is a matter of timing: default transition rates picked up long before unemployment; and the second a matrix of transition rates. The latter led to three conclusions: One, even in the lowest unemployment column, high debt to asset ratios are associated with markedly higher default transition rates. Two, when borrowers have positive equity, unemployment plays a negligible role. Three, unemployment does impact borrowers with substantial negative equity, but far less than does high debt to asset ratios. Carrying the analysis a step further, Amherst broke the data into owner-occupied and non-owner-occupied (investor and second home) categories. The same patterns emerged. Even for owner-occupied houses, unemployment only has a large impact where debt to asset ratios > 120%. For borrowers with very negative equity, unemployment is a catalyst that can kick defaults up, but it’s not a cause.
Dealing with Junior Liens & Second Mortgages
One of the major myths surrounding short sales is that a property with a junior lien or second mortgage is simply off-limits. While many investors or agents that deal in large numbers of short sale properties may move beyond the headache and hassle associated with junior liens and second mortgages, they represent prime purchasing opportunities for those with more time than money on their hands.
Learn how to generate major profit potentials and avoid common pitfalls by recognizing the major motivations required to address junior liens and second mortgages.
Fact #1 – Junior liens and second mortgages often get wiped out entirely during an estate auction, bankruptcy or other related actions. This is a critical issue to keep in mind when approaching a lender that holds a junior lien or second mortgage on a potential short sale property. While the primary mortgage holder or lender will understandably desire to recuperate as much of the original mortgage as possible, they have the upper hand by essentially controlling the underlying asset. Should the property go to bid, the lender is first in line for satisfaction. All other junior lien holders must hope and pray there is enough left over to cover their loan. As you might suspect, lower sales prices often leave junior lien holders with nothing….and more open to negotiation for low pay-offs than you might suspect. It’s not uncommon to offer a fraction of the cost of the original note in order to secure a timely acceptance letter.
Fact #2 – It’s often worth a little to gain a lot. While it is entirely possible to have a junior lien totally wiped clean, it’s often worth the time and effort to offer a $1,000 or some other reasonable amount (depending upon the total cost of the lien) in order to secure a timely acceptance and negotiation.
Fact #3 – Other alternatives exist! A second mortgage or lien holder that refuses to negotiate a low pay-off might be willing to remove the lien from the property and attach it to the homeowners name as an unsecured note. This should be clearly explained to the seller since it will result in a debt even after the home has sold. However, sellers with relatively reasonable second mortgages as well as those that desire to minimize debt in order to restructure may find this a highly agreeable option. If worst comes to worst, the seller is now left with an unsecured debt which is subject to normal bankruptcy laws.
Fact #4 – One offer isn’t always enough. Don’t be afraid to counter-offer or reduce your initial offer as new information come in. It may delay the process and isn’t always desirable but as the date draws closer or other information becomes apparent, junior liens are at increased risk for walking away with absolutely nothing. Don’t be surprised to find they are willing to accept an offer originally rejected just a few weeks before.
Fact #5 – Second mortgages are not easy to deal with but they are “do-able”…third and fourth mortgages are often downright simple. Remember, the lower they are on the totem pole the less likely they are to see anything from the property. Make this clear and present your case effectively in order to save time and money. Many will settle for little to nothing (literally) if you understand how to effectively present your case and the calculations. Not sure where to start? Sign-up for more information or sit in on one of the video seminars to learn how you can start profiting from short sale properties.
