To Short Sale or Foreclose? A Business Decision…

There are many ways to think of short sale and foreclosure.  One constant remains for each client that meets with the Litchney Law Firm regarding theses issues…  Every client is significantly upside down on their home value.  What this means is that the property is not worth what the market indicates.  Provided that the loan on the property is also for a greater amount than the property is worth the client would have a few options.  Option 1 is to attempt a loan modification or to bring a lawsuit against the lender to reduce the payments in an effort to keep the house.  However, sometimes, keeping the house is not the best business decision anyway.  That leads to Foreclosure or Short Sale. 

For the purposes of this blog entry, I am not going to discuss the individual differences and credit impact of the foreclosure / short sale decision, but we will just explore the decision of keeping your home versus walking away.

According to recent Sacramento statistics (see below):

Real Estate Changes Sacramento County

 From one year ago the Sacramento region has lost 11.2% from the median asking price.  In addition to this, the median* price of home sales has dropped more than 55% since the reaching its highest price point in August 2005 ($392,750). The areas that have been the least affected by the downturn in the economy are older gentrified areas – 95819 – East Sacramento, 95816 – Midtown, 95818 – Land Park that represent Sacramento’s core neighborhoods that surround downtown.  These areas were all built before 1950 and seen as desirable places to live. 

The hardest hit areas showed more than a 70% drop from the high are the older areas of North Sacramento 95815 – Del Paso Heights and 95838 – Marysville Blvd. and South Sacramento 95820 – Stockton Blvd. North of Fruitridge, 95824 – Stockton Blvd. South of Fruitridge, 95822 South and East of the Executive Airport.  These areas also are older with homes dating predominantly from the 1930’s to the mid 1960’s and surround the least affected zip codes on the North and South.

So for argument sake, let’s say that your property was average and that you bought before top of the market or after it started coming dow.  Let’s just assume that you have 30% negative equity.  For example you currently have a loan for $400,000 principal balance but your house is worth $280,000.  The main question is [b]“How long do you need to stay in your home to have it be an investment again”[/b].

[b]“How long do you need to stay in your home to have it be an investment again”[/b]
The short answer is: A long long time.

If you are paying interest only because that is all your monthly cash flow will afford – this means that you will continue to owe $400,000 (in the example) for the rest of the time that you own the home.  So we would need to do the math to project when the $280,000 value will be grater then than the $400,000 owed. 

Lets assume that the property values continue to decrease by 3% for the next 5 years (this is a conservative estimate because there are a lot of foreclosure on the market on the horizon!)
After that let’s assume that property value starts increasing at 7% per year (national average was under 5% so this is a pretty aggressive rate of increase)

The following table shows you how the value will change:

YEAR	HOME VALUE
2011	$280,000
2012	$271,600
2013	$263,452
2014	$255,548
2015	$247,882
2016	$240,446
2017	$257,277
2018	$275,286
2019	$294,556
2020	$315,175
2021	$337,237
2022	$360,844
2023	$386,103
2024	$413,130

 

So in this example, it would take 13 years to make that $400,000 mortgage worth $280,000 an investment again.  All the while the client (you) will be paying a high mortgage and also incurring costs of property taxes, maintenance fees, etc.  To find out how much money it truly costs you to keep your home you would need to look at what rents are for a comparable property, take the difference between that rent and your mortgage, add in any property taxes and estimate maintenance fees, and I bet keeping a house at this level would cost more than $12,000 per year over renting.  So over the 13 year break even point that would be about $156,000 that could be in your pocket to use as a down payment for your next home when the market turns. 

 

Of course these are all estimates and each case is different but the way that things have been in the real estate market thinking about housing from a business perspective may shed some light on the situation.

Litchney Law Firm announces Facebook Page

The Litchney Law Firm announces a new Facebook page for our fans. 

Please click the link to visit Litchney Law Firm on Facebook.  You may also visit www.facebook.com/LitchneyLawFirm.  The page is dedicated to providing information to clients and California residents on various legal matters.  We will leverage our staff and attorney expertise as well as multiple other sources to provide the best information possible in the legal arena.  In addition to our facebook page you may also visit us on the web at http://www.litchneylaw.com/ and http://www.litchneylawfirm.com/.

Durbin, Cohen and Others Introduce Legislation to Restore Fairness in Student Lending

U.S. Senators Dick Durbin (D-IL), Sheldon Whitehouse (D-RI) and Al Franken (D-MN) today joined U.S. Representatives Steve Cohen (D-TN), Danny Davis (D-IL), George Miller (D-CA) and John Conyers (D-MI) to introduce legislation in both the Senate and the House that will restore fairness in student lending by treating privately issued student loans in bankruptcy the same as other types of private debt.

 Before changes were made to the bankruptcy code in 2005, only government issued or guaranteed student loans were protected during bankruptcy. This protection has been in place since 1978 and was intended to safeguard federal investments in higher education. Today’s bill would restore the bankruptcy law, as it pertains to private student loans, to the language that was in place before 2005, so that privately issued student loans will once again be dischargeable in bankruptcy.

 “Students, especially those at for-profit schools, who find themselves unable to get enough government aid to pay their high tuition are turning to private loans to fill the gap,” said Durbin who first introduced this legislation in June 2007. “Unlike federal student loans, there are few consumer protections available for these private student loans leaving some students stuck with this debt for the rest of their lives. Today’s bill will restore some fairness in student lending, by allowing financially distressed borrowers of private student loans to discharge those loans in bankruptcy, just as other types of private debt can be discharged.”

 “People who seek higher education to better their futures should not be dissuaded from doing so by the threat of financial ruin,” said Cohen. “The bankruptcy system should work as a safety net that allows people to get the education they want with the assurance that, should their finances come under strain by layoffs, accidents, or other unforeseen life events, they will be protected. My bill takes a modest but important step in achieving this goal.” Congressman Cohen held a hearing on the dischargeability of student loan debt in bankruptcy in September 2009. He is a longtime advocate of making a higher education more affordable and accessible, most notably through the establishment of the Tennessee Lottery.

 For the past decade, private student loans have been the fastest growing and most profitable part of the student loan industry. The interest rates and fees on private loans can be as onerous as credit cards. There are reports of private loans with interest rates of at least 15% and higher rates are not unheard of. This can place a tremendous burden on student borrowers with private loans and unlike federal student loans, there is no government-imposed loan limit on private loans and no public regulation over the terms and cost of these loans.

 “By repealing special treatment for private lenders, we will hold big banks accountable, protect young people from abusive lending practices, and provide relief for graduates trapped by loans that can too often carry high interest rates and unfair terms,” said Whitehouse.

 “At a time when people all over the country are struggling to find jobs, we need to make the lending process more fair and make it more affordable for Minnesotans to invest in their education,” said Franken. “This bill will force private student lenders to follow the same rules as other private lenders and make it easier for people who need student loans to get them without putting their entire financial future at risk.”

 “The 2005 bankruptcy restrictions penalize borrowers for pursuing higher education, provide no incentive to private lenders to lend responsibly, and likely affect African American borrowers more negatively than other borrowers,” said Davis. “I am proud to join with my colleagues to ensure that our statutes do not unintentionally burden particular groups of people. Private education debt is no different than other consumer debt; it involves private profit and deserves no privileged treatment. I will work actively with Senator Durbin and Congressman Cohen to protect student borrowers.”

 “The dream of a college degree should not require students to mortgage their future,” said Miller, senior Democrat on the Education and the Workforce Committee. “But with college tuition continuing to rise, private loans are becoming a necessity for some students and unfortunately, they can become unmanageable. For borrowers in financial trouble, bankruptcy is the last resort. This legislation ensures equal consumer protections exist for student loan borrowers as they do for borrowers of other private debt.”

 “There is no principled justification to treat private, for-profit student loan debt differently from other kinds of unsecured debt such as credit cards, payday loans, or personal loans under bankruptcy law,” said Conyers. “Yet, by not allowing private student loan debt to be discharged in bankruptcy, except in the most extreme circumstances, current law is working against these borrowers.”

 Private loans involve only private profit and do not have the protections that government borrowers enjoy, including caps on interest rates, flexible repayment options, and limited cancellation rights.

There are very few types of debts that the bankruptcy law subjects to a different standard, allowing for discharge in only the most extreme circumstances. For example, the bankruptcy code makes it especially difficult for people to escape child support responsibilities, overdue taxes, and criminal fines. Privately issued student loans should not be on that list.

 Today’s legislation is supported by 35 groups and organizations including the American Association of State Colleges and Universities, American Council on Education, American Federation of Teachers, Americans for Financial Reform, Consumer Federation of America, Consumers Union, The Institute for College Access and Success, National Association of Student Financial Aid Administrators, National Consumer Law Center and U.S. PIRG.

It might be time to talk double-dip recession

By John Cassidy, contributor

Last year I dropped by a birthday party for Nouriel Roubini (a.k.a. “Dr. Doom”), the New York University economist who shot to fame after predicting, in 2006, a housing and credit bust. Somebody brought out a cake. On top of it was a big frosted “W,” representing the double-dip recession that Roubini had been trumpeting since the summer of 2009, when the recovery had hardly begun. Beaming, he blew out the candles and poured champagne. But as the global rebound proved more durable than he (and others) expected, Roubini backtracked. Last August he put the probability of a double dip at 40%, which meant it no longer qualified as a genuine prediction. Going into this year, he said the U.S. economy would expand by close to 3%. And Roubini wasn’t alone. The economics group at Goldman Sachs, which had been notably bearish, reversed course and said GDP would rise by 4% in 2011.

As if on cue, the economy took a downward lurch. In the first quarter, GDP expanded at a rate of just 1.8%, and house prices fell. Recently factory output has slipped. Yes, there are conflicting signals. Employers still appear to be creating jobs — 54,000 in May. Consumer spending, which makes up two-thirds of overall spending, has held up. But could the doomsters end up being proved right after all?

It isn’t out of the question. The default state of the economy is expansion. America boasts a growing population, flexible goods and labor markets, a sprawling financial system that provides more than ample credit, and policymakers who habitually react to bad news by turning on the monetary and fiscal taps. In the absence of a major shock — the Fed raising interest rates sharply, the bursting of an asset price bubble — this commitment to growth ensures that GDP generally keeps rising.

But these aren’t normal times. Consumers are still heavily in debt and are worried about the future; businesses remain reluctant to invest; banks are nervous about lending; states are laying off workers by the tens of thousands. In such circumstances it is conceivable that small shocks could tip the economy back toward recession. Take the rise in gas prices to $4 a gallon (closer to $5 in my forecourt), which acts like a tax increase. Higher gas prices, if sustained, could knock a full percentage point off economic growth over the next year.

Falling house prices and the possibility of a big slowdown in China, the locomotive of the world economy, are other worries, as is the possibility of the European debt crisis spiraling out of control. But my biggest concern is the coming reversal in U.S. policy, which the markets are probably underestimating. Since the fall of 2008, policymakers at the Fed, at the White House, and on Capitol Hill have had but one aim: heading off an economic disaster and ensuring a recovery. Now other concerns are starting to predominate: the deficit, the dollar, and inflation. As Congress shifts from passing stimulus programs to cutting spending and the Fed abandons quantitative easing  — pumping extra money into the financial system — critics of these emergency policies may discover why they were so necessary. (For another view, see “Taking a Stand on Bonds.”) Absent the federal government acting as the buyer of last resort, businesses will be even more reliant on exports. And without the Fed stoking the markets, Wall Street could be facing more tough times.

Is the private sector ready to stand on its own two feet? We are about to find out. Roubini, perhaps realizing that he hopped off the double-dip train early, appears about ready to clamber back on board. Speaking at a hedge fund conference in early May, he trimmed his 2011 growth forecast to less than 2% and said unemployment could head back up to 10%. “Things,” he declared, “are going to be much more difficult than they have been so far.”

Correct Spelling of Litchney Law Firm / Litchney Law / Litchney

Many people misspell “Litchney Law Firm” in the search engines. Quite often this makes it difficult for people to find us online. Some common misspellings for Litchney Law Firm include: Litchey Law Firm, Litchny Law Firm, Lichney Law Firm, and Lichney Law Firm. Therefore, please if you would like to contact us, please call 1-916-983-2941 or visit our website at LitchneyLaw.com or LitchneyLawFirm.com.