By Bob Stahl, MyPhoenixMLS.com For REALTOR.com®

In my last post here on REALTOR.com® Blogs, I blogged about the value of homeownership – both the touchy-feely (like the pride that comes with having a place to call your own) and the financial (like how leverage can make an investment in a home more beneficial than a stock market investment).

But if homeownership is so great, why are an increasing number of people walking away from their homes? The answer is short-term economics, which have made homeownership a financial drag for some people. For homeowners who owe much more than their homes are worth (more than 50 percent of homeowners in the Phoenix real estate market), making that mortgage payment every month can feel like a waste.

Several economists and academics have made good cases for the economic logic behind what they call strategic mortgage defaults – walking away from the obligation to pay one’s mortgage. I see how defaulting can make economic sense for some homeowners in some cases.  But I say that with two huge caveats:

 1) Even homeowners who feel like it makes economic sense to default on their mortgage should only do so with eyes wide open to the potential consequences of a mortgage default. Those consequences almost always include:

• A significant decline in the homeowner’s credit score. A person with a foreclosure on his record should expect to wait at least 3-4 years to purchase a home again. If the homeowner can negotiate a short sale, the negative effects on his credit score are initially about the same, though his score will recover more quickly, and he might be able to buy a home again in 2-3 years.
• In some states, the mortgage lender can hold the homeowner liable for mortgage debt not covered by the sale of the home (the deficiency). Arizona is an anti-deficiency state, which means that lenders cannot hold homeowners liable for mortgage debt after a default as long as that debt was used to purchase the homeowner’s primary residence.  Homeowners considering default should consult a real estate attorney to learn about the laws in their state.
• Depending on how long the homeowner lived in the home and whether the mortgage was used exclusively as purchase money, a homeowner who defaults may owe taxes on any debt that the lender forgives (typically, the difference between what is owed on the mortgage and what the lender sells the home for). The Mortgage Forgiveness Debt Relief Act does exclude forgiven mortgage debt from taxable income in certain cases.

 2) The second caveat is that, while I understand U of A law professor, Brent White’s point that social norms impose guilt on people who default on their mortgages (but not, say, on businesses that do the same), I do think that there are important moral considerations at play here. Furthermore, mortgage defaults can depress housing values in a neighborhood, which imposes hardship on neighbors and on the real estate market as a whole (keeping real estate mired in the depressed-prices rut).

The bottom line is that of course I don’t advocate for deeply underwater homeowners to walk away from their mortgages. I do believe that there is a moral component to the issue. I also acknowledge that for some homeowners, in some situations, a strategic mortgage default is a smart financial decision. I just hope that the trend doesn’t spread – after all, homeownership has tremendous value, far beyond motherhood and apple pie.

 I have to mention that I’m neither an attorney nor a tax professional and nothing I’ve written here should be construed as advice.  If you’re considering mortgage default, please consult an attorney and a tax advisor.

Bob Stahl is a REALTOR® at Keller Williams Arizona Realty in Phoenix, AZ.

Many seniors use it to supplement Social Security income, meet unexpected expenses, make home improvements or simply provide greater financial security. Since your home is usually your largest single investment, it’s important to know more about reverse mortgages, and decide if one is right for you.

Stacy Torrey blogs about what you need to know about reverse mortgages.

“A reverse mortgage is a special type of home loan that lets a homeowner convert all or a portion of their home’s equity into cash.

Unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower no longer uses the home as their principal residence.”

A reverse mortgage could be a great investment for senior homeowners. And there is a lot of documentation and information available to any homeowner considering such a transaction.

Click through now to read Stacy Torrey’s blog.

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There are many factors that come into play during the process of home financing. Gone are the days of being able to have a “mortgage burning” party. You should be sure to make at least one copy of each and every document you have.

Harry Khayalian gives us his top 10 home finance mistakes you can’t afford to make.

“Don’t choose the wrong mortgage: With the advent of instant refinancing, home loans are no longer the lifetime obligations they used to be. Still, you don’t want to be saddled for even a short period of time with the wrong mortgage.

Don’t confuse ‘preapproved’ and ‘prequalified’ with a loan commitment: These are debatable terms in real estate because not all lenders define them the same way. In fact, one leading real estate dictionary contains neither expression because their definitions are uncertain.”

Home financing is a very complicated and complex process, and you want to be sure you have smart, qualified and dependable professionals working with you throughout the process. Be sure to read through Harry Khayalian’s blog, and you will get a leg up when it comes to home financing.

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Rather than go through the process of selling or foreclosing, they are simply walking away and leaving their home behind to take the pressure off their shoulders. But when you look at the repercussions of this act, walking away is actually not so “simple.”

Beverly Meaux blogs about the implications of walking away from a mortgage, and shares some potential alternatives.

“One in four homeowners in this country today is underwater on their mortgage- they owe more to the bank then their home is actually worth. A million people last year simply got up and walked away from their mortgages.

Do you stick to your commitment and pay your mortgage until you can get a workout with the bank to keep the home, do you do a short sale, or do you just walk away, ruin your credit and help ruin your neighborhood by helping bank-owned foreclosured properties increase, which decreases value on the block? It’s a hard question for many to answer. What would you do?”

Everyone has their own situation, and for some it may be more grim than for others. But “simply walking away” from a mortgage may not be so simple after all. Although the immediate problem may be taken care of, the repercussions that follow may not be worthwhile.

Click through now to read Beverly Meaux’s blog.

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I’ve written before about the growing trend of what’s become known as “strategic defaults” – when a homeowner can afford to pay his mortgage, but decides to walk away (typically because of a huge gap between what he owes on the mortgage and what the home is worth).  Allan Glass wrote an incredibly detailed blog about the issue.

While every homeowner’s, seller’s, or buyer’s situation is different, the rise of strategic defaults – which, before last year had been practically unheard of in residential real estate – has got me thinking about the value of homeownership.  With an increasing number of people jumping ship (though still a very small percentage of homeowners), is it time to reevaluate the value of homeownership?

The short answer is yes, maybe.

First let’s look at what we typically consider to be the value of homeownership:

• Mortgage interest and property tax deductions.  Depending on the size and terms of your mortgage and the amount you pay in property taxes, you could end up deducting tens of thousands of dollars from your income at tax time – that could mean thousands of dollars in tax savings.
• Monthly payments build equity.  If market-rate rent payments are comparable to your mortgage payment (they should be, provided that you have good credit), then the money that you pay toward your mortgage (which you would otherwise use to pay rent) actually works for you – it helps you build equity in your home.
• Stability.  Most landlords won’t sign leases longer than 3 years (and some much shorter) because they want the flexibility of being able to raise rent, find new tenants, or sell. While it’s certainly possible that you could rent the same property for years and years, there’s no guarantee.  When you own a home, it’s your home forever.
• Pride of homeownership.  Paint the walls pink (or purple, or green, or any other crazy color that suits your fancy).  Build a tree house in the backyard.  Let your kids go crazy painting a “mural” in the hall.  When you own your home, you can do whatever you want – no frowning landlord to say “no.”
• Home value gains.  I know as well as anyone that home values have plummeted since the high-flying real estate boom busted.  But home values are still right around pre-boom levels (meaning that people who bought before the boom or after/during the bust should be just fine).  The chart below shows the trend in home price values nationwide – still clearly up.

The homeowners who are hurting most now are those who either bought at the peak of the real estate bubble or did cash-out refinances then to tap the equity that those rising prices had created.  These are the homeowners who are now underwater – owing more than their homes are worth. But as home values continue to rise, most underwater homeowners will eventually recoup their equity losses.

Last, but typically most important, is the investment value of your home.  The average annual rate of appreciation in the U.S. housing market – since the 1970s – is 5% (that includes booms and busts).  That may not sound like much, compared to the stock market, for example (which has yielded 10% per year on average) – until you consider the power of leverage.

For most of us, when we buy stocks, we only earn a return on the amount of cash we can put into the market. With a home, in contrast, you earn a return on a giant investment even if you only have a little cash to put forward. Let’s consider an example:

Say you make a 10 percent down payment on a $250,000 house. Assume an average annual rate of appreciation of 5 percent.  By the end of the second year your house is worth $275,625, for a gain of $25, 625.  You’ve already seen more than a full 100 percent return on your initial $25,000 cash investment, in only 2 years!  If your home continues to appreciate at 5 percent a year, at the end of five years your home will be worth $319,070 – $69,070 more than its value when you bought it. You’ll have nearly tripled your initial $25,000 investment.

If you had invested that same $25,000 in the stock market and it grew at a compound annual rate of 10 percent, at the end of five years your investment balance would be $40,263 – for a total gain of $15,263 – not even a quarter of the gain you’d see in your home investment.  That’s the power of leverage – and the value of homeownership.

So, I said that it may be time to reevaluate the value of homeownership.  A few years ago I went on a river rafting trip with some friends in Colorado.  We stayed at a KOA where they had a huge (like, three-story) slide.  You had to sit on a burlap sack to keep from sticking to the metal slide.  One of my friends had been having great fun, until she slipped off the sack.  She was wearing short shorts and the result was not pretty.  It was the “screech heard ‘round the KOA,” we joked.  She had, literally, second-degree burns.  I think that a lot of homeowners have felt that same way as they’ve been taken for a ride down, down, down the slide with no burlap sack to protect them.

In other words, homeownership hasn’t turned out so hot for some homeowners in the last three years or so.  But prices have already begun to rebound, and they will continue to rebound.  It will be a long haul back to boom levels, but we’ll get there.

And, once-in-a-lifetime boom and bust notwithstanding, anyone who bought a home before the boom or during/after the bust is still in great shape to reap all of the rewards of homeownership – not least of which is the incredible returns homeowners see because of the power of leverage.

Bob Stahl is a REALTOR® at Keller Williams Arizona Realty in Phoenix, AZ.

Mortage rates fell below the the five percent mark after rising for the past three weeks. The expectation is that rates will rise above six percent in the near future. So the current drop is seen as a window of opportunity for buyers who want to lock in a rate at near record lows. The likelihood of rates continuing their fall is very slim given the recovering economy.

Ki Gray blogs about mortgage rates falling below five percent:

“After rising steadily for the last three weeks, mortgage rates fell back down. The 30-year rate fell from 5.03 to 4.98. The 15-year rate fell from 4.46 to 4.40. The 5- and 1-year arm fell from 4.42 to 4.35 and 4.57 to 4.47 respectively. This looks like more of a hiccup as mortgage rates steadily start there rise.

At this point, the overwhelming consensus is that mortgage rates are going to rise in the next six months. But the lowered rates do provide an opportunity for potential homeowners to lock in rates at sub 5.00 rates.”

Potential buyers who have been waiting to apply for a mortgage should not wait any longer. Not only are rates primed to rise but, as Gray points out, lending guidlines have created a lot of issues with getting a loan. Get in the door before rates rise and prices start to stabilize.

Click through to read Ki Gray’s full post.

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Laws have been enacted to protect consumers from falling into the same pitfalls that led to the sub-prime mortgage crisis. Although lenders have received criticism for their predatory lending practices, there is still a need for homebuyers to educate themselves on what kind of loan they are applying for. With mortgage rates at record lows, refinancing is a smart idea if you have rising payments due to an adjusting mortgage rate.

Lee Dworshak blogs about the possible benefits of refinancing:

“Refinancing may lower your monthly mortgage payments. The keyword here is ‘may. Refinancing, a simple word that can sometimes mean a complicated process, is a process all homeowners should become familiar with. If you are considering refinancing, there are a few things to know beforehand so that you know what is expected of you and what you can expect from the process. 

Refinancing to lower your monthly payments or to move from a variable interest rate loan to a fixed rate loan can be a great idea, but it is critical that you know exactly what you’re signing up for before you commit yourself and your home to a new deal.”

REALTORS® who keep in touch with past clients can be a helpful resource for those who may have adjusting rates. Sending past clients’ information that may help them sort through the confusing process of refinancing can help you stay on their minds and increase the chance of referral.

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The number of homeowners with underwater mortgages continues to grow as home values fall. Some are doing their best to pay down a mortgage that is more than what their home is worth. Others are simply walking away from their homes and cutting their losses. The alternative that could help these homeowners is a mortgage refinance under the Home Affordable Refinance Program (HARP) set up by the Obama administration.

Lee Dworshak blogs about who qualifies for HARP:

“The Home Affordable Refinance plan is helping homeowners who are underwater with their home values restructure their mortgage payments and ease their financial stress. A few highlights of the Home Affordable Refinance program are:

The borrower must be current on his/her payments in order to qualify for the refinancing.

The refinancing must be completed with a Fannie or Freddie approved lender.”

The HARP program, through Fannie and Freddie, have refinanced 2.9 million borrowers this year. Despite this, the program has its critics who complain about the lengthy refinance process and high fees. But, for those homeowners who were able to keep their homes due to the program, the time and money spent was all worth it.

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At-risk homeowners are working with their lenders to get a loan modification or short sale before their home is deemed a foreclosure.

But many have had a significant amount of push-back from these institutions. Some believe that the lenders have little incentive to work with these homeowners, given the likelihood of falling behind on their payments again in the future. Fortunately there are government backed Fannie Mae and Freddie Mac programs to help struggling homeowners.

Ki Gray blogs about how Fannie and Freddie programs will help avert further foreclosures:

“Home Affordable Refinancing Program (HARP) and Home Affordable Modification Program (HAMP) are the two initiatives under the umbrella of the MHA that are being used to distribute the funding for the program.

The programs fall under the U.S. Department of Housing and Urban Development (HUD) secondary mortgage market lenders, Fannie Mae and Freddie Mac. Through the MHA programs, certain homeowners are provided assistance whose loans are either owned or guaranteed by Fannie Mae and Freddie Mac. Over the following three years, the program is on target to assist three to four million homeowners. Currently, over 230,000 trial modifications have been started; although, over 500,000 is the goal to have in process by November 1, 2009. What’s interesting is that more than 85 percent of mortgage loans out there today are covered by participating service providers.”

Besides preserving the American dream for countless homeowners, programs like HARP and HAMP have long-term effects on the overall market. As the government spends money to keep people in their homes, it slows the momentum of the mounting foreclosures, which bring down home values.

Click through to read Ki Gray’s full post.

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At-risk homeowners are working with their lenders to get a loan modification or short sale before their home is deemed a foreclosure.

But many have had a significant amount of push-back from these institutions. Some believe that the lenders have little incentive to work with these homeowners, given the likelihood of falling behind on their payments again in the future. Fortunately there are government backed Fannie Mae and Freddie Mac programs to help struggling homeowners.

Ki Gray blogs about how Fannie and Freddie programs will help avert further foreclosures:

“Home Affordable Refinancing Program (HARP) and Home Affordable Modification Program (HAMP) are the two initiatives under the umbrella of the MHA that are being used to distribute the funding for the program.

The programs fall under the U.S. Department of Housing and Urban Development (HUD) secondary mortgage market lenders, Fannie Mae and Freddie Mac. Through the MHA programs, certain homeowners are provided assistance whose loans are either owned or guaranteed by Fannie Mae and Freddie Mac. Over the following three years, the program is on target to assist three to four million homeowners. Currently, over 230,000 trial modifications have been started; although, over 500,000 is the goal to have in process by November 1, 2009. What’s interesting is that more than 85 percent of mortgage loans out there today are covered by participating service providers.”

Besides preserving the American dream for countless homeowners, programs like HARP and HAMP have long-term effects on the overall market. As the government spends money to keep people in their homes, it slows the momentum of the mounting foreclosures, which bring down home values.

Click through to read Ki Gray’s full post.

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