As the U. S. economy continues to tank and the Chimperator and his advisers - the same folks who stood by as the crisis developed due to non-regulation and a wild West approach in the financial markets - talk about stimulus packages, this news story (http://news.yahoo.com/s/nm/20080117/us_nm/usa_housing_prime_dc;_ylt=AiMYJlVEMghWb_OFgARdMm6s0NUE)looks at what may be the next phase of the real estate market melt down: more affluent families that ran up their second mortgage equity lines who are now maxed out and unable to refinance. If this phenomenon dose take place, an already ravaged real estate market will see even more dramatic problems. Keeping up appearances and borrowing against one's home in order to drive high end vehicles may have a severe down side.
Interestingly, the story mentions "short sales," the process of negotiating with a lender to take less than a full payoff in order to avoid foreclosure. I am handling a number of short sale purchases and will be giving seminar talks to real estate agents and investors on how to do these transactions. These transactions are actually a win-win-win situation in relative terms. The homeowner avoids foreclosure and/or bankruptcy; the purchaser gets the property for a lower price; and the lender avoids ending up owning and holding residential property that may sit on the market for many, many months, thereby compounding the loses for the lender. Here are some story highlights:
HINSDALE, Illinois (Reuters) - A house in this wealthy Chicago suburb is far beyond the reach of most Americans. Unfortunately, Hinsdale may also now be too expensive for some of the people who already live here. "There is a section of the population here that over-extended themselves to buy here and then keep up the facade of wealth," said Sharon Sodikoff, a broker associate at local real estate agency Prudential Homelife Realty. "In the next year or so they'll be forced out in dribs and drabs."
[E]ven here, far from the housing crisis' epicenter, high earners with good credit may be heading for trouble as their adjustable rate mortgages (ARMs) adjust beyond their means, local real estate agents and others say. In a normal housing market they'd be able to sell, but now they are stuck. "The next wave of problems will come from prime borrowers who bought too much house or borrowed too much against it," said Michael van Zalingen, director of home ownership services at Neighborhood Housing Services of Chicago. A "prime" borrower is one with good credit.
Real estate agents warn that some high-income borrowers have already been forced to sell or leave their homes and more will follow. Especially those who used their homes as ATMs, withdrawing cash via home equity loans. "For those who utilized home equity loans for five to ten years to finance their lifestyle, the chickens are coming home to roost," said Chicago-based real estate agent Marki Lemons.
Unlike subprime borrowers, however, wealthy home owners are more likely to try to cut a deal with their lender, rather than end up in foreclosure. The alternative solution available to them is to opt for a short sale. Under a short sale agreement, the borrower sells below the mortgage value and the lender writes off the difference. The lender gets less than originally anticipated, but is not stuck with a foreclosed property. The borrower's credit rating is damaged, but not as badly as if they had lost the home.
"You won't see many foreclosed homes here because that would involve public embarrassment," Prudential Homelife Realty's Sodikoff said. "But they will call their realtor and get them to quietly broker a deal to get out of their homes."
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