Posted on Monday, January 25, 2010
• Negative Equity
? As of June 2009 32% of all US mortgaged homes underwater.
? Expected to reach 48% by Q1 2011.
? 42% drop from peak in some markets.
? Some areas as much as 89% underwater. Miami 48%.
• Impacts of Negative Home Equity
? Reduces spending
? Inhibits mobility
• Number of Strategic Defaults
? Only about 1/4th defaults are strategic.
? Other ¾ triggered by divorce, illness/death, job less (see MHA report)
Most defaults involve sub-prime.
As of Q2 2009 47% of subprime loans default, only 5.44% of prime.
• Top Reasons for Default;
? 34% loss of income, 20% over extended, 8% unemployment, 6% illness, 6% marital. Also depends on areas; Miami investment properties lead to default rate twice unemployment.
• Considerations when deciding to default:
? Cost to rent. Rule of thumb; when home price exceeds 15 or 16 times annual rent, person is better off renting.
? Current home value. Mortgage balance/LTV
? Tax savings to own v. rent
? Interest rate
? Overall how much will be saved or lost to walk v. stay
? How long it would take to recover equity and what it would cost to stay that long
? How long you plan to stay
? Cost of buying a new home.
? Average appreciation/depreciation verses expected
? Historical home appreciate 3 to 4% annually
? Fear of deficiency judgment
? Fear of cost of having bad credit;
? Lower income tend to be more concerned.
? Can have good credit again if had before within 2 years – above 660.
? 100 to 150 point hit per late payment. Average 300 to 400 hit.
? 7 years for foreclosure to disappear from credit report.
? If caused by employment or similar event, can get FHA loan in 3 years, 5 if not.
? Can take steps in preparation.