Hi folks. Today I want to talk a little bit about credit scores and how they may be affected by the credit crunch we are experiencing. Lenn Harley wrote a post last week that touched down on some of this, titled "ANOTHER DRAG ON THE ECONOMY?? AN UNTOLD STORY. The loss of consumer credit." If you haven't read Lenn's post please take a minute to do so. 

Lenn's post is about the effect of foreclosures, short sales, late payments, etc....on a person's credit score and how this will affect their ability to get jobs, open bank accounts, buy cars, find affordable insurance and so forth. What her post doesn't mention is the negative effect of credit scores for folks that do pay their bills on time. 

Your credit score is based on several factors....including: paying debts on time, amount of debt AND available credit. The last one is the kicker. Having a couple of credit cards is a good thing. Owing more than 50% of the available credit is a bad thing. 

Let's say you have 3 credit cards with available credit of $60,000, but, because you are very good with your finances, you keep your total debt at about 25% or $15,000. This is a good thing. It shows you are able to manage credit in a responsible manner. Now let's say you get your bills next month and the credit card companies have decided to "freeze" your credit at the amount owed or $15,000. You are now maxed out on your credit cards and your credit score will drop!!! 

That's right folks.....you have done everything right and your credit score has dropped because the credit market is in turmoil. Does this suck or what?

I wrote this article in July of 2006. In light of where we are at today I'd say my concerns were valid.

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No money? No problem.

Negotiated a deal on one of my listings yesterday. The Buyer is purchasing using 100% financing with the Seller paying closing costs. My market is affordable housing with the majority of homes priced from $190s to $250s and it seems like most of the Buyers lately have been purchasing with no money down.

Now don't get me wrong I am in favor of home ownership for everyone but I fear a lot of the Buyers are going to have financial difficulties in the near future. With high insurance costs, property taxes and mortgage payments I am seeing payments of close to $2,000 per month for a starter home. That's a pretty big nut to crack every month, in my area, where most families are regular working class people and don't have any reserve funds if they should encounter a financial setback.

Also, a good number of these purchases are being made with ARMs with the Buyers basing their ability to pay on future raises at work or a part time job that they may or may not be getting. In my opinion Mortgage Brokers and Realtors are being overly aggressive in selling these folks on the advantages of home ownership without really taking the time to counsel the Buyers on the true costs involved. And since they don't have to come up with any money at closing they are sitting ducks for Mortgage Brokers who are charging them sometimes outrageous fees for doing these types of loans.

So my challenge to REALTORS(R) who are dealing with first time Home buyers, with a little or no money down, is to really take the time to explain the pros and cons of purchasing a home. If the Buyers are fully informed and are wanting to move forward then help them to negotiate fees or guide them to the myriad of programs available that can help them with financial assistance. Placing a Buyer in a home he can't afford can damage them for years. It can cause bankruptcies, divorces and even illnesses. So let's "Protect the public" it's what REALTORS(R) are supposed to do.

Hi folks. My friend, Bill Archambault, put up a post earlier today expressing his dismay over "When mortgage and real estate people start talking about people with out large down payments being undeserving a home of their own....." Take a minute and go read Bill's post. 

Did you notice this statement? "Truthfully, big down payments protect no one except the bank! Little or no down payment may even protect the home buyer, by maintaining his liquidity and putting the bank mutually at risk with the home buyer." 

That statement is what this post is about. This is a real life example. 

I have a Seller right now who bought her home in Poinciana in late 2006 for $179,000. She's from NY and in early 2006 came into $100,000. You'd think that would be good thing but the money came from a lawsuit related to the wrongful death of her only son. 

The stress of her son's death and the ensuing lawsuit placed her in a position of wanting out of NY. So, as many people do, she moved to Florida! She used every bit of her $100,000 as a down payment and took out a mortgage for $79,000. 

Everything went well for about a year and then life, being unpredictable, dealt her a hand that caused her financial hardship. She was no longer able to keep up with her mortgage payments. She fell into default with her lender.

I met her about a month ago and valued her property at $75,000!!! This means that after selling expenses she is in a short sale situation. Could you imagine putting almost 60% down on a home and still being upside down in less than 2 years? That's incredible. 

How much better off would this lady be if she had bought with even 20% down? She would still be upside down on her home BUT she would have cash reserves to help her weather the storm. 

Now this is an extreme case but it truly illustrates how "Little or no down payment may even protect the home buyer, by maintaining his (her) liquidity..."

I wonder if her REALTOR® or mortgage broker mentioned this to her when she went to purchase? I wonder if I would have said anything to her? Should we?

Hi folks, today, I'm writing to pick your collective brains a little. With the huge amounts of distressed property owners in this current real estate environment a "new" business opportunity seems to have been born, The Short Sale Negotiator. 

If you are like me, I'm sure you get numerous emails from these companies, offering to assist you with short sale negotiations. They go something like this: 

• "Why spend your time negotiating with Lenders when you could be spending your time listing and selling real estate. We are a National company helping real estate agents and homeowners deal with short sale negotiations. Our services are FREE!! We get paid by taking 1% of the purchase price at time of closing. If we do not successfully negotiate a short sale on your behalf then we do not get paid." 

Here is my question: 

• Must these companies be either licensed real estate brokers or attorneys, since they are getting paid by commission only? 

I must admit that at one time these services seemed very appealing to me. I have since changed my mind. My problem is, I feel having another party between me and my sellers is opening up the door to unnecessary liability. I also feel I am giving up too much control. I'm a control freak and the thought of having to go through another party for updates just does not do it for me. 

Short sales are time consuming enough without adding another layer of frustration. 

Now having said all that, I'm positive some of these companies are very good at what they do BUT.......how do I find out who is good or not without having to put one of my sellers at risk to, find out? 

I need some help with this. What are your thoughts? 

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Hi folks. I was on the phone early today speaking with a Legal Process Server, you know, the people that serve foreclosure papers. This server, Tammy, was talking to me about her job and how busy she has been, swamped, was the word she used. According to her she has been spending most of her days delivering papers in Poinciana and Davenport FL. 

Poinciana, of course, is my market area and Davenport is an area near Disney World that is predominately short term rental vacation homes. This market has also been hit real hard. With the declining economy, folks are just not spending money on vacation and the owners of these properties, mostly from the UK, are not generating enough income to pay the mortgages. 

I would not want Tammy's job. She said she gets cussed at, screamed at and threatened by homeowners just for doing her job. She also bumps into tenants that are very surprised to hear that even though they have been paying their rent every month, their home is now being foreclosed due to the landlord pocketing the rent instead of making their mortgage payments. This is a HUGE problem in my area. 

A friend of mine is the property manager for a large real estate company in Kissimmee and was telling me how she is spending quite a bit of her time relocating tenants due to foreclosures. 

I can't even imagine how pissed I would be to find out I had to move from my home even though I had been honoring my lease. But what can they do? They have no recourse, as lenders do not have to honor leases, once the property is foreclosed. No eviction process is involved. It is my understanding, that once the property is foreclosed on, the tenant has to move. Not only will they have to move but they can kiss their deposit and any advance rents good bye. Ouch!!!!

Here's an interesting article that will shed some light on what a tenant may be able to do to postpone the inevitable. 

So, what can we as REALTORS® do, to protect tenants, if we are working with them? I think the first thing I would do is research the property. If I see the property was bought in 2005 for $250,000, was on the market for 2 years "for sale" and now is being rented for $900.00 a month, I'd be very, very concerned. This property is probably owned by a "flipper" that "flopped", who is now making a last ditch effort to recoup some money. I believe I would suggest my customer/tenant take a pass on this one. 

Maybe we could have the lease worded so the rent is being paid to an escrow company who is making the mortgage payments on the owner's behalf. It would also make sense to have the security deposit and advance rents paid into escrow as well. Do you have any ideas? 

If you're a tenant, who has just been served, I would contact an Attorney ASAP. This problem is not going to just go away. Be proactive. 

OK that's all I have for you now. Any thoughts? 

Hi folks. Richard Zaretsky wrote a great post yesterday titled "Back to Basics...a Review on Short Sales". If you haven't read it please take a few minutes to do so. It is a very good perspective on Short Sales from an Attorney.

Richard's post brought up two very good points for me. Both were light bulb moments.

The first was the 1099 "thingie". Whether you receive a 1099, or not, has no bearing on whether you have income to declare. Well...duh!!! Why would it. All a 1099 does is reports the income to the IRS for you. If it's not done for you....it is still YOUR obligation to report it. A perfect example of this is the way Title Companies, at least in Florida, handle our commissions. They are not required to 1099 me for commissions paid....BUT...I still have to claim the income. So wouldn't the Seller have the same obligation? They certainly may not have to pay any taxes BUT they would still have to claim the income.

The second light bulb moment was the promissory note. Some lenders will require the Seller to sign a promissory note for all of the "short" or part of it. So my thought was, why not sign it if the alternative is a foreclosure? What difference does it make? You would go from having a foreclosure on your credit to having a "no pay" promissory note.

I had a Seller, several months ago, whose property was foreclosed on. She owed $270,000 on a property worth about $139,000. We attempted to get a short sale acceptance at $130,000. The lender agreed assuming the Seller would sign a note for $140,000. I was able to negotiate the note down to $40,000. The Seller's attorney advised her not to sign it and to just let the property go into foreclosure, which it did. By the way, the note would have been interest free and for 15 years.

Was this a mistake? After reading Richard's post I believe it was.

My plan in the future is to just send these Sellers over to Richard. I'll let him handle the heavy lifting. That way I can concentrate on listing and selling. All this other stuff is just more than I need to know. What say you?

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Bryant Tutas
Broker/Owner
Tutas Towne Realty, Inc
Licensed Florida Real Estate Broker
http://www.brokerbryant.com/
***The content of this blog is solely my opinion*** 

Hi folks. This post was inspired by Lenn Harley's excellent featured post "CALIFORNIA SUBPRIME BORROWERS MAY GET RELIEF? - More Questions than Answers. If you haven't read Lenn's post, you need to. Make sure to read all the comments as well. She has a great discussion going on over there.

Anyway, I had left a long winded comment on Lenn's post pointing out a few of the different types of Sellers I speak with on a daily basis and what they have done to create their problems. One of the things I pointed out was that Sellers in my area are just walking away from their properties instead of staying and fighting to keep them. Their properties are worth quite a bit less than what they owe on them and since they have no equity left there is no reason to stay.

Lenn wrote this in response to my comment: "There is, indeed, good incentive to make the payments - their good credit".

Lenn's response brings me to the reason for this post. In my opinion, Lenn's statement "nails" where the Lenders made their mistake. If Lenders had been dealing with folks that had proven their good intentions, by paying their bills on time, homeowners in default would indeed have, "......good incentive to make the payments - their good credit".

Unfortunately, a buyer with a 550 credit score, purchasing a home with no money down does not have the incentive necessary to secure the Lender's investments. The Lenders were basing their investment on one thing and one thing only, rapidly increasing property values.

Lenders knew, without a doubt, that these loans would default. They also knew they could make billions of dollars by writing these loans and selling them off on the securities market (mortgage back securities MBS). They also figured that when these sub-prime borrowers got into trouble they would be able to refinance them(starting the MBS process all over again) making more money. The sub-prime borrower would have an incentive to stay because they would have equity in their property.

The mistake, the Lenders made, was in thinking that values would continue to increase. A homeowner, who has already proven that they do not pay their bills on time (sub-prime borrower) is NOT going to stay and fight. They will and are walking away from the financial noose around their neck. They have NOTHING to lose. Their credit already sucks and there is no equity to try and save. Why try to keep their home by working out a loan modification? A loan modification would not change the fact that they are paying way too much for a property that has lost value. Why pay $1,800 a month when they can rent the identical house down the street for $800? To save their credit? Nope. To honor their obligations? Nope. If they believed in "honoring their obligations" their credit score wouldn't be 550.

The mantra, at least in my area, for owners in default is "Easy in....easy out!"

This post is one of the reasons why I feel "Big Gov" needs to stay out of this mess and let the market run it's course. It won't be easy and it won't be quick. But, just maybe, our new mantra will be "No pain....no gain".

This post is 100% my opinion. What's yours?

Here are a couple of links to related posts I had written earlier this year.

Your home is your Castle. Not an ATM machine!

Three blind mice.

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