Most homeowners will sail through just fine. Two groups of borrowers should look ahead to see if they're heading toward a reef that could sink them.
Homeowners most at risk of being underwater:
- The first group consists of homeowners who are making the minimum payments on interest-only mortgages. Not all of these folks are at risk. The ones who should especially watch out are those who bought homes in the last year or two in markets where house values are falling, and who made no down payment or a minuscule one.
- The other group consists of people who are making minimum payments on pay-option ARMs on homes that they bought within the last two years after making a down payment of 10 percent or less.
Pay-option ARMs are adjustable-rate mortgages that allow borrowers to decide how much to pay each month. Under some conditions, the minimum payment doesn't even cover that month's interest, so the loan balance rises. According to an analysis by Comstock Partners, a Yardley, Pa.-based asset management company, 70 percent of borrowers who took out pay-option ARMs in the last year owe more now than they did when they got the loans.
Fathoming the water's depth
How much more? Comstock estimates that 15.2 percent of 2005 home buyers owe at least 10 percent more than their houses are worth. Those people made minimum payments on pay-option ARMs, or their homes' values dropped or both. However it happened, they are underwater, more than a fathom deep.
A lot of people are understanding their predicament only now.
"The market has changed in the last three, four, five months -- dramatically -- and they're not getting from their houses what their neighbors were getting 12 or six months ago," says John Hayes, president and CEO of HomeVestors, the company with the "We buy ugly houses" billboards.
As short-term interest rates have risen in the last two years, the underlying rates of interest-only and option ARMs have gone up, too. Sooner or later, the minimum monthly payments could rise abruptly, past the point of comfort. It's time to refinance, if possible. (It might be impossible to refinance if you are underwater and you don't have cash to spare.)
Lots of refi choices
There are plenty of loans to choose -- from plain-vanilla 30-year, fixed-rate mortgages to 40-year loans to hybrid ARMs that give you a three- or five-year fixed-rate period before the annual adjustments begin, to more esoteric programs.
Michael Moskowitz, president of Equity Now, a mortgage lender in New York City, touts a relatively new product, the 30-year, fixed-rate loan in which the payments are interest-only in the first 10 years. "For someone who is long-term in the house -- really long-term -- this is the best product," he says.
Such a loan comes with a big payment shock after the loan's 10th anniversary. By that time, Moskowitz says, the borrower's income has risen enough to handle the higher payment, or the homeowner has refinanced the loan or sold the house.
Some people won't be able to refinance, especially if they are underwater and low on cash. If that's the case, and the monthly payments are starting to get uncomfortable, says Jim Svinth, vice president of capital markets for HomeLoanCenter.com, "Do everything possible to remain current on their loan by cutting back spending."
Sell the boat
When he says cut back, he means paring to the bone. Don't stop at eliminating restaurant meals and unsubscribing from premium cable. "Do you really need two cars? Do you have a boat? Really make tough decisions in order to stay current on the loan."
If that's not enough, talk to the loan servicer as soon as you can. "Let them know all that you have done to stay current on the loan," Svinth says. "That gives you, as the borrower, a great deal of leverage."
If you aren't yet 30 days late in making a house payment, but you're worried that you soon will be, don't let the customer service rep brush you off by telling you that no help is available until your payment is a month overdue. Say, "Please escalate this call and let me speak to a supervisor." Once your payment is 30 or 60 days past due, your options shrink.
Sell the house
Depending on your situation and whether the originating lender sold the loan, the servicer might give you a break on the mortgage payments in exchange for putting the home on the market immediately.
"If someone is starting to feel they're starting to get underwater or are getting concerned, now is the time to sell," Garfinkel says. "I'm not saying they're going to make a boatload, but they can get out."
Hayes advises hiring a real estate agent, discounting the price and selling the house as fast as possible. Naturally, as head of HomeVestors, he suggests calling his company. "We provide solutions to ugly real estate situations, and we're often able to help people."
Garfinkel cautions against acting out of desperation. "First and foremost," the lawyer says, "you've got to be careful of scams. There are companies out there that will prey on homeowners who are starting to experience some backlog in payments." He suggests talking to a trusted adviser such as a lawyer or an accountant -- someone who has a legal duty to provide advice in your best interests. A mortgage lender doesn't have such a fiduciary duty.
Short sales make a comeback
There is a type of sale called a "short sale," in which the house is sold for less than the mortgage balance, and the difference is either forgiven or paid off over time. You can't do a short sale without the cooperation of the lender. If you can afford to -- and you probably can't afford not to -- hire an attorney to negotiate the details of a short sale with the lender.
Because of rapid price appreciation, Garfinkel hasn't handled a short sale in years. Now that prices are falling in some markets, especially on the coasts, short sales might make a comeback.
A short sale can be painful, but it's not as bad as a foreclosure, when the borrower is evicted from the house and it is sold, often at auction.
In many cases, a foreclosure can be traced to a lack of communication between the borrower and lender.
Hayes says his company often hears from people after the foreclosure process has begun, when it's too late to avert an auction. "When we say to them, 'Why didn't you call your lender or respond to phone calls?,' they say, 'They just want to take my house from me,'" Hayes says. "That's not true. They don't want to take your house."
No one wants to sell a house that's underwater. |
