This entry is part 3 of 3 in the series How To Walk Away…

The skinny little runt who spit in your beer
has a look in his eyes, ain’t nothing like fear
Well there’s a time to punt and a time to pass
He’s a Silat warrior gonna kick your ass
So pack your drunken machismo, and leave on the double
That blond you been hittin’ on, ain’t worth the trouble!
– K.W. Bowlin

Walking away from your mortgage is easier than you might imagine. There’s no big bad boogieman out to get you. Your credit won’t forever be destroyed. You won’t have to wear a scarlet letter around your neck that proclaims “loser,” and you won’t be doing anything that hasn’t been done by banks, investment firms, businesses and politicians. If anything, you’re probably suffering from a conscience which many of the former seem to lack. Before you walk-away from your mortgage you need to answer three important questions:

  1. Does my moral obligation require me to stay?
  2. Does walking-away make financial sense?
  3. What are the ramifications of walking-away?

Moral Obligation to Financial Frankenstein

I can’t help you much with this first question. You’ll have to answer it yourself. A moral decision is one based on what somebody’s conscience suggests is right or wrong, rather than what rules or the law says should be done. I can play devil’s advocate though. In a real estate mortgage, the security for the loan has, and always will be, the underlying real estate. Lenders make 30 year loans knowing that real estate has historically kept up with inflation. It is a reasonable security for a large loan. However, home loans are written to protect lenders and deliver incredibly huge profits. Banks use “compound interest” when determining a house payment. Once, when I was a teenager and my family was driving by downtown Los Angeles, my father pointed to the buildings and said, “See whose sign is on the top of each building? It’s a bank. That’s what compound interest does.”  Of course as a teenager, it didn’t mean anything, but later, as an accountant and mortgage broker I marveled at the banks metaphorical Frankenstein; a true money monster. The person who invented compound interest is a genius and we’re all kind of like children following the pied piper for buying into it. Have you ever looked at a 30-year, loan amortization schedule? You’ll notice that most of your payments go towards interest and not principle (at least for the first 20 years? On a $300,000 home loan at 5.5 percent interest, in the first 5 years you will have paid $22,700 towards the principle balance and a whopping $79,000 towards interest. If you pay the loan out over 30 years, you will pay $613,212! Is it any wonder that the logos on top of sky scrapers are usually banks?

By Farcaster @ Wikimedia Commons

Figure 1-1
By Farcaster @ Wikimedia Commons

Do you have a moral obligation to stick with a banks and their loan? What if the question were reversed? Does the bank have a moral obligation to stand by you even if you run into trouble? Let’s put it this way, did banks have any problem borrowing from you and I when they got behind and were ready to lose everything? I don’t think so. In the summer of 2008, banks lobbied hard for government relief from their own “pending foreclosure.” Did we bail them out? Of course, and for that, have they become, kinder and gentler? Have their collection policies become any more lenient now that they’ve been temporarily rescued?  Try negotiating with the likes of J.P Morgan Chase, Bank of America and Wells Fargo. Their collection and legal teams are nasty, they’re mean, they’re indifferent and they could care less that you have a family of five and have a home and a dog and a nice kitchen. In the early 2000’s, banks and Wall Street entered in what 60-Minutes described as a program of “money chasing people” where institutions with money were literally chasing people who needed it.

Do you have a moral obligation to stay? I think you have a moral obligation to tell the truth, to refrain from stealing, and to play fair. Banks have the same commitment. When you signed the promissory note to the bank, you agreed that the security for the underlying mortgage was the real estate, not your personal assets and the bank understood this. This is why when you purchase a home with a mortgage, and lose it in foreclosure; in most states, there is no legal deficiency judgment against you even if the bank sells it for a loss. This is the law of the land. If you walk away, I think you have a moral obligation to return the property to the bank in good condition. You have an obligation to hand them over the keys and not make their recovery any more difficult than it has to be. In fact, I think you should clean the house, vacuum the carpets, make any minor repairs that are needed and put a big bow in the kitchen that says “Dear Bank, sorry we had to leave. Hope you do better than we did with it. It’s all yours now. Good Luck!”

Does it Make Sense? 

To answer this question, you need to be a bit of a number cruncher. I can help you here. I spent a third of my professional career as an accountant and love to analyze numbers until they turn into powder. Working the numbers is something you can put your finger on. It’s tangible and real. Before you jump into the number processing machine, you should consider the state of affairs in real estate. If the loss in property value is just temporary, then all bets are off the table. My advice would be: “weather the storm for a year or two, and you’ll be right back to where you were,” BUT — it ain’t gonna happen!

In a study reported in Moody’s Economy.com, analyst Celia Chen wrote: “The correction will be not only deep but also lengthy.” She continued “The national price level will not regain its 2006 high until 2020, a peak-to-peak housing cycle of 14 years.” This might even be a bit of an understatement in light of the economic data we’ve seen in the past few years. Chen wrote that after the Great Depression, national housing prices took nearly 20 years to return to their peak. Chen added that 15 years have passed since Japan’s residential market lost half its value and there are no signs yet of a recovery. The report goes on to say that some areas that have experienced declines of more than 46% won’t get back to 2006 prices until 2023. Case-Shiller reports that: “The Fiserv analysis indicates the markets that experienced the greatest price bubble, including certain metro areas in California, Florida, Arizona and Nevada, won’t see home prices return to peak levels until 2025 or later. That represents an unprecedented market cycle that will last a full generation from the top of the market in 2006-2007. Many other markets, including major urban centers in the Northeast and industrial Midwest, may need to wait a decade or more until prices return to their market peaks.” This is somber news.

Home Ownership is Overrated

We’ve always been accustomed to gyrations in the market and have experienced slowdowns in the past, but this time, things are different.You don’t have to buy into the motivational incantations of the real estate industry. Most of these well meaning professionals just don’t understand that there is another option and that is “rent low and invest the difference.”

For decades, insurance giant A.L Williams made a fortune giving young couples the advice to buy term life insurance, and invest the difference they kept by not investing in an “owner” or whole-life policy. A term-life policy with a face value of $500,000 on a young man might run $300 per year as a level premium for twenty years. A comparable “whole life policy” for the same coverage might cost $3,000 per year. The difference is that the whole life policy invests a portion of the premium in an investment account, and at the end of twenty years has an accumulated value. A whole life policy is akin to owning a home. The problem with whole life is that insurance companies don’t pay a very good rate of return. Buying a cheaper renters policy like term life, allows the insured to invest the difference into a solid investment account like a mutual fund where the rate of return is much higher than the return offered in a life insurance policy. In the case above, the $2,500 difference in premium each year could be invested, and with compound interest be worth substantially more than the cash value in a whole-life policy.

Rent Now, Invest the Difference

The same principle that A.L. Williams used in revolutionizing the insurance industry now applies to real estate: “Rent Now and Invest the Difference.” Here’s why:

Renting a home in your neighborhood will cost substantially less than the cost of ownership. This applies to someone who is completely upside down in a mortgage and still paying the high cost of ownership AND/OR a new purchaser who buys a home. Use the following worksheet to determine how much you’ll save by renting versus owning:

Worksheet 1 - Rent vs. Own Analysis
[jazzy form=”rent_vsownanalysis”]

The above example is for a homeowner who purchased a home in Las Vegas in 2006 for $600,000 and used 100 percent financing ($600,000 loan at 5 percent interest). As of the summer of 2011, the home had plummeted in value and was worth $350,000. Comparable rents for the area were around $1900 per month. Use the Reset button to restore this example in the worksheet.

There are several reasons why owning a home doesn’t make as much sense as renting.

So we return to our second question. Is walking away the right thing for you and your family?

Complete the worksheet and find out what your own numbers look like. If there anything like the example we showed above, you’ve got to be nuts to stay in your home. By renting and investing the difference in even a simple money market fund, you’ll potentially end up with an extra hundred thousand dollars of “cash in hand” at the end of 5 or 10 years. This is much different than “home equity” which takes time and money to liquidate.

Common Questions and Answers:

Q. By making house payments wouldn’t I be building up equity as opposed to renting?
A. It depends on how upside down you are. In many cases, people owe substantially more than their property is worth so paying down the principle doesn’t accomplish much and it is an unwise allocation of your available cash.
Q. My accountant says it makes more sense to own a home because I get larger tax write offs.
A. This was true in the past but we all need a bit of a paradigm shift when it comes to owning a home versus renting. Accountants need to remember that the standard deduction has grown to $11,700. When considering the advantages of itemizing your deductions, an accountant should consider that there is still a standard deduction even if you rent. Also, by completing the worksheet shown in these pages, you can compare the true “after tax cost” of owning versus renting.
Q. When I rent, I can’t put holes in the walls or make a home special.
A. Most landlords could care less if you decorate and spruce up your home. If you plan on painting or adding permanent fixtures like lighting and shelving, you should get permission first from them first.
Q. By owning a home, I know what my payments will always be and they won’t go up unlike they will if I rent.
A. Have you ever heard of a long term lease, say 3-5 years with built in extensions? Contact your real estate agent about how to structure your lease. Also, since the cost of owning is so much higher than renting I’m not sure what your point really is. Would you rather be sure of the cost even though it’s costing you thousands of dollars more?
Q. By owning a home I’m building up my credit rating.
A. Yea, but it’s costing you thousands of dollars to do it and in the long run, as long as you pay your rent on time you can get an excellent credit reference from your landlord. Want to build up credit? Take the savings you’ll be earning and go buy a nice car.
Q. My home is my nest egg.
A. No, your home is more like your prison and if you stay, you’ll be serving a 15-30 year sentence.
Q. My father owns his home outright.
A. You know, if you save the difference between renting and owning over the next twenty years, you’ll be able to pay cash for your own home at that time and not use bank financing. Papa will be proud!
Q. Isnt' owning a home is the American Dream?
A. Yeah, and Mickey Mouse lives at Disneyland and George Washington never told a lie. If you rent versus own, you’ll become more financially independent in the next 10 years. Isn’t that closer to the American Dream?

 

The housing market isn’t rebounding.

According to many studies, the housing market won’t rebound for another 20 years. It’s been 15 years since Japanese housing lost 50 percent of its value and has still never recovered. The New York Times reported on July 19th 2011 that “Homeowners, especially those who bought their houses after the real-estate bubble burst, are still having trouble accepting just how much the values of their properties may have fallen…Current sellers who bought their homes in 2007 or later…are overpricing their properties by an average of 14 percent. (3)”  The Elliot Wave Study also showed in an article written in March 2011 that: “Conquer the Crash said to expect a 90% decline in average real estate values and to bide your time until your dream house became available at ten cents or less on the dollar. Today I received a flyer in the mail. It reads, ‘Bank Foreclosed Property—Now Available at Pennies on the Dollar! All properties will be liquidated; first come, first choice.’ One example is 6.2 acres of wooded mountain property with 700 feet of stream-front for $29,900, which is more than 75% off its previous asking price. Some mansions in Coto de Caza, California are overgrown, ghost houses, worth half of what they cost to build.

Ramifications

We finally come to the third question. What are the ramifications of walking away?

First, my caveat is that I’m not an attorney and can’t offer legal advice. Since walking away from a home involves some potentially big numbers, it’s always best to seek an attorney’s advice before acting. $300 an hour is expensive, but in the long run, it’s well worth the investment at twice the price. So before you make any decision, ask an attorney for his or her advice.

Deficiency Judgment

A deficiency judgment is where a lender comes after you for the difference between the amount owed them on the mortgage and what the house sells for in foreclosure. In most cases, lenders don’t seek deficiency judgments. In some nonrecourse states like California, the only recourse a lender has on a purchase money loan or non-cash-out refinance is the property itself. This means they can’t come after you if they come up short.

Most purchase-money real estate loans written, describe the security of the loan as being the underlying real estate. This means, if you default, the lender has the right to swoop in and take the property back and sell it in a foreclosure sale, but it also means if the lender nets less than the property is worth, he can’t come back to you for a deficiency judgment. For example, if you owe $400,000 and the lender forecloses and sells the property for $300,000, he can’t seek a deficiency judgment against you for the difference ($100,000.)

There are exceptions to this rule. If the property is located in a state that allows for recourse in the event of a foreclosure or if you borrowed money on a second mortgage or equity line or even refinanced your first mortgage to pull out cash. If you did that subsequent to your purchase, the lender might seek a deficiency judgment for the “cash out” portion. For example, if you used a $200,000 loan to buy a home worth $300,000 and then subsequently took out second mortgage for $50,000, if the lender takes the property back and only sells it for $175,000 in a foreclosure sale, the lender could come back to you for a deficiency judgment in the amount of $50,000.

While this isn’t common, this is one of the few times you might decide to throw up the white flag and declare a personal bankruptcy. By declaring a bankruptcy (BK,) the lender’s collection process against you ends immediately. If you’re concerned about your credit, I understand, but if you follow my advice in this book, you’ll be saving enough money to eventually pay cash or put a huge down payment on a house within ten years. You’ll be renting instead of owning; paying cash instead of using credit, and be much happier for it.

Relief of Debt Provisions

A valid question and concern for anyone considering a strategic walk away is the tax impact it might have. The IRS has a provision that’s been on the books since the dawn of man that says anytime a taxpayer is relieved of a debt; he must consider it income on his tax return in the year relieved. This could have catastrophic implications on a person who walks away from his debt. However straight out of the IRS handbook as long as your home loan debt is less than $2 million, you should be okay:

“The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.”

Now after reading this if your real estate debt is larger than $2 million, you might have a problem and along with a tax attorney, you might want to seek the advice of a tax negotiating specialist who can help navigate around the IRS collection process.

Renting Ramifications

I’ve found that when working with landlords, as long as you can verify your income, have job stability, and a first and last and security deposit, you shouldn’t have a tough time renting or leasing a property. Most landlords will understand your need to walk away from an upside down mortgage. Of course it helps if you’ve kept the rest of your credit on things like car loans and credit cards intact.

One good strategy for finding a rental is to do it BEFORE you walk away from your current home. The explanation that you’ll be saving a thousand dollars a month should be sufficient.

Also, nothing convinces a landlord to choose you as a renter more than a two or three month security deposit, instead of the requisite one month.

Banking Accounting Dilemma

Under current accounting rules, a bank doesn’t have to write down the value of real estate that secures its home loans. In other words, let’s say a bank makes a $200,000 loan on a house that was originally appraised at $400,000. No problem; this means the bank has a loan that is secured against a property that is worth twice the amount of the loan.  This looks very secure on a bank’s balance sheet. But what happens if the value of the house drops to say $150,000? Under traditional accounting rules, called “Mark to Market,” when the value of an underlying asset secured by a loan decreases, the bank was supposed to show the decrease on its books. That’s only fair. The bank made a loan on an asset and the asset went down in value, so to be transparent, they should reflect the decrease on their books. But uh oh — now things don’t look too good for the bank. Now they hold an outstanding loan against a house that’s WORTH LESS THAN THE LOAN! This looks terrible on a bank’s balance sheet, and if it has too many of these, it wouldn’t look very “bankish” in the eyes of its customers.

When the real estate market crashed in 2008, banks were suddenly showing billions of dollars in upside down assets i.e., loans made against properties that lost well over 50 percent of their value.

Thanks to some heavy duty lobbying on the part of banks and business icons like Steve Forbes, Congress agreed to re-write the rules on how banks showed their securitized assets. Mark to Market accounting laws were repealed and banks didn’t have to show a “mark down” on their security until they took a property back in foreclosure. In other words, even if a loan held by the bank hadn’t seen payments for an entire year, the bank could still show the asset and loan at their original value. Is it any wonder that banks were reluctant to foreclose on certain properties?

Lender Foreclosure Procedures

Well of course banks still foreclose on properties, but it often depends on the banks current inventory of bad loans as well as the banks current financial reporting period.

In order for a bank to foreclose on a property, they must follow specific procedures. There are basically two types of foreclosures: non-judicial and judicial. A non-judicial foreclosure involves a trust deed and is foreclosed outside of the court system and a judicial foreclosure involves a mortgage and is foreclosed through the court. The state where a property is located determines the type of foreclosure. In either case, once a foreclosure is started, it takes several months to complete. In California for example, once a foreclosure is started, it takes around four months to complete. Even after a foreclosure is completed and a new “buyer” obtains title, they must go through an eviction process to remove the old owner (if the old owner has decided to stay.) Table 1 at the end of the chapter shows the type of foreclosure process used by each state, and also the processing time required for a typical foreclosure.

Stop Making Payments

Realtors aren’t allowed to offer this advice, so I’m going to tell you what they can’t. Many delinquent homeowners simply stop making payments and continue to live in their house. In most cases, this can go on from six months to well over a year. Here’s how it works: Banks usually don’t start foreclosure right away; they wait for several months before they even file. Then, once they do, as we mentioned above, most foreclosures take four to six months to complete and then — the bank must follow a formal eviction procedure in order to remove the old owners from the property. The following is an approximate time-line:

Number of months delinquent before banks file foreclosure: 4-6
Once foreclosure is filed, number of months in foreclosure process: 4-6
Once foreclosure is complete, number of months to eviction:  1-2
Total Months  ** 9-14

** Foreclosure times vary as do eviction procedures, so contact
your real estate attorney to determine the process is in your area.

As you can see, in many cases homeowners can stop making payments and still live in their house for almost a year, and in some cases longer. I have a good friend who owns a ridiculously upside down home in San Clemente California who went a whole year, of not making payments before the bank even filed a foreclosure.

A Bank’s Collection Process

Don’t be too worried. They’re just posturing. Remember what we discussed earlier about their accounting rules. THEY DON’T WANT YOUR PROPERTY BACK, and will delay their foreclosure proceeding as long as possible. It usually works something like this (but don’t hold me to it):

(*) This is an excellent time to change your phone number. Be sure your new number isn’t listed.
(**) You can verify if the foreclosure has started by contacting a local title company who can search the county records to see if the proper notices have been filed.
(***) Verify with your attorney or real estate broker for the approximate time-line involved once a foreclosure has been initiated by the lender. This is also a good time to start looking for a new place to rent or lease.

Homeowner’s Insurance

During the time that you stop making loan payments to your lender, be sure to continue making payments to your insurance agent. This is in case the house burns down or you, or someone else has an accident on the property. If you were making impound payments for insurance with your loan, verify with your insurance agent when the next annual insurance payment is due. For example, you might be paying $100 per month towards homeowners insurance; the lender may have recently paid the annual installment which means you’re covered. Don’t leave this up to chance. Know what the status of the coverage is and when the next installment is due. In all likelihood, the lender will also make an insurance payment if one is due, because they want to cover their own butt. If they have, you don’t need to make the payment twice.

Pocket the Skipped Payments

It’s pretty easy to see how much money you’ll save by not paying the lender each month. One year of skipped payments at $3,000 per month is $36,000. Reserve a good chunk of this for making a nice deposit on the property you’ll rent, once you move out.

Rationalization

Banks created their own set of problems with shoddy lending practices, hidden fees, and misleading loan features. To this day, banks don’t have to disclose the “back-end” rebates they receive on new loans they originate. WTF! For example, a bank will give you a choice of taking a rate at 4 percent with a one point cost or 4.5 percent with ‘no points,” however what they don’t disclose is that at 4.5 percent, they might be receiving a 3 point (percent) rebate from their secondary wholesale banker. This means on a $300,000 loan they might be receiving a “rebate” of $9,000, but they don’t have to disclose it! Mr. bank — isn’t that deceiving?  Oddly, small loan brokers must disclose these “back-end rebates.” It’s a dirty little secret in the industry and an embarrassing issue at a time when full disclosure and transparency are being stressed across the country. Banks also pushed loans like Option Arms unmercifully. For some huge lenders like Washington Mutual, World Savings, and Wachovia, these loans comprised the bulk of their residential portfolio.

These were the loans that gave borrowers four-payment options each month. I’ve included an in-depth look at Option Arms in Appendix 1 — but if you’re on Xanax, take one before you read this sentence:

“Option ARMs allowed less-than-interest-only payments as low as 1 percent interest, but this wasn’t the actual rate because the actual rate was closer to 5 percent, but the minimum payments were fixed each year and capped at 7.5 annual increases to a limit of 125 percent of the original loan balance with an underlying adjustable interest rate that fluctuated based on either the London Interbank Loan Rate or 1-Year Treasury Bills.” 

I hold a bachelor’s degree in finance, have been a real estate broker for 30 years; I’ve owned an accounting and tax practice and have held several federal securities licenses, and it took me months to even come close to understanding these monsters.

The fraud and malfeasance in the lending industry was so wide-spread that companies like Bank of America actually halted foreclosures while they sorted through the mess.

Individuals who are upside down on their mortgages have stopped making payments because in doing so they are simply protecting their own net worth. Individuals have not, and will not receive bailouts like banks did when banks were in trouble. Much has been written about the back room panic meetings that were held between bank officials and government officials at the Fed. Two excellent books on the subject include “The End of Wall Street,” by Roger Lowenstein and “The Great Depression Ahead,” by Harry S. Dent Jr.

By discontinuing making your house payments when your house is upside down, you’re creating your own personal bailout! The government won’t give it to you, so take it for yourself.

Cash for Keys

With foreclosures at levels not seen since the Great Depression, banks are getting creative with the foreclosure process. Foreclosure is an ugly thing and often times there is tremendous animosity between a person who is losing his home and a lender. In order to soften the transition of the eviction process, several lenders have instituted a “cash for keys” policy. This isn’t something they publish, but it’s increasingly utilized just the same.

When a lender takes a home back as the result of a foreclosure action, the lender becomes responsible for the property. The longer the lender waits to sell the property, the more it has to spend to repair damage and/or to maintain it, and therefore the greater will be its ultimate loss.

The lender wants out, but they want out in “one piece” without holes in the walls, graffiti and missing appliances.

It’s usually in the lenders best interest to make some form of deal with the former owner to cover things like the owner’s looming security and utility deposits, moving expenses, temporary living expenses, and even a bonus for a quick moving date. This is to avoid the inevitable minimum 3 to 6 month delay associated with eviction proceedings. In most circumstances, the lender would prefer the former owner to vacate the property peacefully within a certain number of days, and leave the property in “broom-swept condition”, with all debris removed from the interior and the yard, and to leave all the fixtures and landscaping intact, and in the end, turn over the keys.

Generally, the amount offered to tenants varies and is usually negotiable. Anecdotal reports from those who have had experience with “cash for keys” programs report that $500 is generally the minimum and $5,000 the maximum amount offered to tenants for their keys.

The amount an owner is willing to pay for a tenant’s keys depends on several factors, including the value and physical condition of the property, and the plan(s) the lender has for the property. Other factors include the amount of time the tenant needs to move out.

Tenant Rights

As recently as early 2008, in the absence of a written lease agreement requiring greater notice, California law required that an owner provide only a 30-day notice to a tenant to vacate the property for any reason (other than the failure to pay rent, which required a 3-day notice)? However, recent legislation has changed the rules. Signed as an urgency measure in 2008, Senate Bill 1137 gives tenants at least 60 days after a foreclosure before they can be asked to vacate the property.

Federal legislation was enacted effective May 20, 2009, requiring property owners who have taken a residential property by foreclosure, to give their tenants at least a 90-day notice to vacate the property before beginning the eviction process. This federal law is applicable nationwide, and it is known as “Protecting Tenants At Foreclosure Act”.

The Act provides that if a tenant is renting under a lease entered into before the notice of foreclosure was communicated to the tenant, the tenant may remain in the property until the lease ends, unless the owner sells the property to a purchaser who will occupy the property as his primary residence. In that case, the owner may give the tenant a 90-day notice to vacate. While the Act provides greater protection to tenants than State law, local law may provide even more protection.

If a particular property is subject to local “rent control” or “housing assistance” laws,  or so-called “just cause for eviction” ordinances, those laws may provide even greater protection than the Act itself. As an example, even the Act itself provides that the  owner of a residential property which is subject to a “housing assistance contract”, and who has a lease with a tenant in that property, is subject to any additional protections in the housing assistance contract (this typically applies to “Section 8” properties).

Finally, there is a bill pending in the California legislature that would require tenants be told of their rights when the property they occupy is foreclosed. Senate Bill 1149 requires that tenants who are living in foreclosed homes be given notice of their rights and responsibilities under these state and federal laws by requiring a cover sheet be attached to any eviction notice that is served within one year of a foreclosure sale. The cover sheet would delineate the laws and rights a tenant may have in cases where the property he or she occupies is foreclosed upon. The bill also seeks to help protect tenants who would otherwise have a negative mark on their rental history by prohibiting the release of court records in a foreclosure-related eviction unless the plaintiff landlord prevails. Whether the bill is signed into law will not be known until October 2010.

Protect Yourself

Tenants and owners who stay in foreclosed properties must take a significant amount of personal responsibility in this matter. They should become acquainted with federal and State law concerning foreclosures and tenant evictions, and also with local laws which apply to their particular situation. For example, in the City of Los Angeles, beginning December 17, 2008, tenants who are current in their rent payments cannot be evicted because of a foreclosure. Many cities in California, including Santa Monica, West Hollywood, Beverly Hills, Oakland, and Berkeley, are subject to local “rent control” and/or “just cause for eviction” ordinances, which may provide even greater protections. Without a working knowledge of applicable local law, a tenant is at a distinct disadvantage. Tenants and resident owners should make sure that any “cash for keys” offer is coming from the new owner of the property, which is often a lender or a government sponsored mortgage investor, such as Fannie Mae or Freddie Mac. Tenants and resident owners should insist on verifying the identification and authority of the person making the “cash for keys” offer. They must insist on receiving a written “cash for keys” agreement, and carefully read and understand that agreement. They should have a trusted and competent attorney, real estate licensee, family member or friend review the agreement and provide counsel concerning its duties and obligations.

Before signing the agreement, a resident owner should call his or her lender directly to confirm the authority of the person making the “cash for keys” offer. A tenant must be especially careful. The tenant should call his or her landlord and ask about the foreclosure and the identity and contact information for the new owner. It would not be unusual for the landlord to tell the tenant to continue to make rent payments directly to the landlord. That should not be done if the landlord is no longer the owner of the property. And finally, a tenant or resident owner should never hand the keys over unless the money is delivered. Cash is best. If paid by check, the tenant or resident owner should make certain the check is good and/or clears. If the keys are handed over, and the owner fails to pay the money, or if the owner’s check bounces, the written agreement should be sufficient to allow the tenant to prevail in a small claims action against the owner. But obtaining a judgment is far easier than collecting it. Without a written agreement, the chances of obtaining a judgment are substantially reduced. A fair and equitable cash for keys agreement will mutually benefit both the new owner of the property and the resident former owner or tenant residing in the property.

[etable th=”1″ caption=”Estimated Foreclosure Processing Time and Type by State” tablesorter=”1″ sort=”asc” class=”table table-striped” attr style=”background-color: #ffffcc; height: 18px; ” ] State Name,Processing Time,Sale Period,Type of Sale
Alabama,49-74,21,Trustee
Alaska,105,65,Trustee
Arizona,90,41,Trustee
Arkansas,70,30,Trustee
California,117,21,Trustee
Colorado,145,60,Trustee
Connecticut,62,NA,Court
Delaware,170-210,60-90,Sheriff
Distrist of Columbia,47,18,Trustee
Florida,135,NA,Court
Georgia,37,32,Trustee
Hawaii,220,60,Trustee
Idaho,150,45,Trustee
Illinois,300,NA,Court
Indiana,261,120,Sheriff
Iowa,160,30,Sheriff
Kansas,130,21,Sheriff
Kentucky,147,NA,Court
Louisiana,180,NA,Sheriff
Maine,240,30,Court
Maryland,46,30,Court
Massachusetts,75,41,Court
Michigan,60,30,Sheriff
Minnesota,90-110,7,Sheriff
Mississippi,90,30,Trustee
Missouri,60,10,Trustee
Montana,150,50,Trustee
Nebraska,142,NA,Sheriff
Nevada,116,80,Trustee
New Hampshire,59,24,Trustee
New Jersey,270,NA,Sheriff
New Mexico,180,NA,Court
New York,445,NA,Court
North Carolina,110,25,Sheriff
North Dakota,150,NA,Sheriff
Ohio,217,NA,Sheriff
Oklahoma,186,NA,Sheriff
Oregon,150,30,Trustee
Pennsylvania,270,NA,Sheriff
Rhode Island,62,21,Trustee
South Carolina,150,NA,Court
South Dakota,150,23,Sheriff
Tennessee,40-45,20-25,Trustee
Texas,27,NA,Trustee
Utah,142,NA,Trustee
Vermont,95,NA,Court
Virginia,45,14-28,Trustee
Washington,135,90,Trustee
West Virginia,60-90,30-60,Trustee
Wisconsin,290,NA,Sheriff
Wyoming,60,25,Sheriff[/etable]

Figure 1-2

Note: States that use trustee sales as the method of foreclosure usually have non-judicial sales which means deficiency judgments are not available to the lender. The exception is on cash-out loans such as cash-out refinances or 2nd mortgages such as equity lines of credit. Deficiency judgments are also rare in states that use sheriff or court sales. Every situation is unique and if you’re unsure of the process, you should contact your local real estate broker or attorney.

The Absolute Stupidity of the Lending Industry

This is my chance to vent on the lending industry. It’s my book, I’m gonna have a field day! So far, you may have gathered I’m a bit peeved with the bozos that make home loans. Here’s an example of why they’re stupid, moronic imbeciles: Many people are upside down on their mortgages but have never missed a payment. In many cases these individuals have an existing interest rate that’s in the 5 to 6 percent range. Current rates are in the 4’s or even lower. Can the borrowers do a straight interest rate reduction? NO! Lenders won’t permit it, even though the debt won’t change and the borrower would be lowering his payments. In some cases, this could be as much as $200-$300 per month! This makes sense. After all, lenders received a no-interest bailout from the government, yet they still refuse to lower a borrower’s interest rate to the prevailing market. Note to lenders — this will lesson, not increase foreclosures. In actuality it’s Fannie Mae (FNMA) who should be approving this. Lenders should be able to re-write the loans and sell them to the secondary market with FNMA’s blessing but it’s not happening. Ironically if the borrower stops making payments, he suddenly gets the attention of the lender, erstwhile who’s been ignoring his requests for help. I’ve actually heard lenders say that borrowers need to stop making payments before they’ll consider helping. It’s a stupid screwed up system!

Here’s more. Lenders don’t use an ounce of sense when making loans. They’re so scared of mistakes they can’t see the bulls from the bullshit. You might have $200,000 in cash reserves, have never missed a payment in your life, have credit scores that put you right below the patron saint of borrowers, and have income that could support a small town, yet a lender won’t approve a loan if you own more than ten properties. Why, because FNMA won’t insure it. I threw in the towel as a mortgage broker because common sense disappeared in the industry. The lending industry turned into a mealy mouse, pitiful creature that’s afraid of its own shadow. If you applied for a loan in 2011, you know what I mean.

I had a client who was an attorney, made low six-figures, credit scores above 800 (which is gold-plated) and had reserves over $250,000. It took the lender 3 months to approve the loan because he was self-employed and didn’t fit into their neat little box. His interest rate went up in the process, and he ended up pissed off at me because it took so long. This scenario has occurred time and time again.

More still. Lenders are also scared shitless about appraisals even though in 2011 they’re ordered through a neutral pool of third party firms who have no connection to the borrowers or their loan broker. We’re talking an independent, certified appraiser who goes to a property, checks the comparable sales, takes pictures and renders a professional opinion of value, and yet the lender still charges the borrower a $150 review fee, or worse request a second appraisal. NO problem, just add another $375 charge to the borrower.

The lending industry was fraught with a lot of fraud in the boom of the early 2000’s but an “A” rated borrower is still easy to spot, and lenders have abandoned common sense when underwriting loan approvals. Anyone who’s putting down a substantial down payment (say 20 percent or more) who has spotless credit and good job stability should be rubber stamped as an approval. These days, borrowers go through a gauntlet of weird conditions and unnecessary lender requests.