In the wake of the economic crash of 2008/2009 we look ahead to 2010 bracing ourselves for what may come. Unemployment is around 10%….and that number reflects only those jobless claims that are reported, so will the number continue to grow? Has the housing market found the bottom?
Questions like these plague many regardless of their economic status. Workers can’t find work and employers are reluctant to hire until some important questions get answered. Also, prospective home buyers are needed while supplies of unoccupied homes remain high. All the while, existing homeowners are in a quandary about what to do about their home that is worth much less than what they owe on it.
A new study published by the Federal Reserve Bank of New York recently commented on the sad reality of typical loan modifications these days. The study revealed that when a borrower’s monthly mortgage payment is cut by 25% by only reducing the interest rate, the borrower is 11% less likely to default within the year. However, if the monthly payment were to be lowered by reducing the principle 25%, coupled with a small interest rate reduction, the chances of the borrower defaulting in 1 year drop by almost 27%!
The conclusion of the study was that borrowers that have a LTV of 115%+ (meaning they owe 15 or more percent more than their homes are worth), run a 51% higher risk of re-defaulting after the loan modification. At the end of the 3rd quarter of 2009, 10.7 million or 23% of all U.S. homeowners owed more on their home than it was worth.
County Treasurer for Cuyahoga County, Ohio, Jim Rokakis, comments: “Things are not getting better, they’re getting worse. Vacant foreclosure properties not only impact the homeowner, they harm entire neighborhoods and communities. The situation we find ourselves in is akin to the 1930s. This is our Dust Bowl.” Bottom line, unless the government steps in and forces lenders to lose money, we can expect a FLOOD of foreclosures in 2010!
The intelligent answer to this problem is for lenders to come to grips with the inevitable loss and work with homeowners to short sell their homes. This will avoid further expenses associated with foreclosing and perhaps save the costly repairs that come with vacant houses. As an experienced real estate investor and landlord, I can assure you that the cost of maintaining a vacant property will only cause lenders to suffer even greater losses. So, it behooves lenders to aggressively seek successful short sales in 2010 and stop the bleeding now. It is unrealistic to wait for the market to reverse itself and the longer banks and other lenders remain in denial, the housing situation will simply fester like an open wound.