Once upon a time, collateral was king when it came to borrowing money. And your home was typically the crown jewel of your collateral assets. Home ownership gave you instant credibility to a lender who could quickly pull up your payment history and deduce from past payment schedules that, yes, you were a reliable borrower and, even if something went south – a lost job, a divorce, an illness in the family – with the house as collateral, the bank would never lose money on your loan.
But now the market is saturated with foreclosed homes, short sales and defaulted home loans. The value of property in some of the most saturated areas continues to go down and has yet to hit rock bottom, leaving both homeowners and bank owners in a precarious position.
According to Robert Sumner, CEO of First National Bank of Pasco (FNB Pasco) near Tampa, Florida, “Everything is down right now; not only are we making fewer home loans but we are seeing fewer home improvement loans as well.”
Sumner clarifies: “Those who still have their homes are simply trying to ride out the storm and waiting until the market goes back up; they don’t want to throw ‘good money after bad’ by doing costly home improvements if they’re not going to get their value back. Unfortunately, others are losing their homes altogether.”
Sumner is referring, of course, to the staggering amount of foreclosed properties currently flooding the market. And he should know; Florida features one of the highest numbers of foreclosures in the country right now. Nationally, according to CNNMoney.com, “More than 1.5 million homes are seriously delinquent and close to foreclosure.” What’s more, a new study finds that “…more than 20% of U.S. homeowners – about 20 million residences – owe more than their homes are worth.” [Source: CNNMoney.com]
Not wanting to become part of the problem but preferring to remain part of the solution, now more than ever banks are eager to stay out of the foreclosure business and do what they do best: banking. In other words, your bank doesn’t want your house. Rather, they’d prefer to work with you so that you keep the house.
Banks don’t want your home for two basic reasons.
First, the bank is not in the real estate business. They don’t want to filter precious assets of time, personnel and energy into inspecting the residence, listing your home, making concessions or worrying about upkeep.
Further, who will mow the lawn and prune the shrubs once you’ve foreclosed on the property? Either the bank spends money to hire someone to do it or lets it alone to become not only an eyesore to the community but a liability on the already-competitive housing market. Either way, the bank loses money.
Secondly, when the bank takes over the house the price is drastically reduced. According to Sumner, “Once the message is out that this is a ‘bank-owned’ property, both savvy realtors and buyers know that they suddenly have the upper hand; they know the bank wants to unload this property and they now have a much stronger bargaining chip. We typically experience a 30% loss on the value of the property the minute we assume ownership.”
What can you do to avoid missing mortgage payments or, barring that, avoid foreclosure? Sumner lists three simple steps you can take to work with your lender to avoid your own financial meltdown:
1.) Reach out before it’s too late: If your income has been affected or your debts have simply snowballed to the point where paying your mortgage this (or even next) month is looking less and less likely, don’t bury your head in the sand but reach out to your lender and start communicating with them, sooner rather than later. They can’t help you if they don’t know you’re in trouble.
2.) Come prepared: The bank will need information to help you restructure your payments, refinance the loan or possibly delay a payment or two to help you with a current situation. Be sure to bring the latest information on your income, how it’s been affected, your current bills and debt load. Calling the bank beforehand (or visiting its website) will help you gather a specific list for each vendor.
3.) Prepare for the worst: Not every bank can help in every situation. Short of foreclosure, you will still need to pay your mortgage on time and Sumner warns you shouldn’t expect miracles. However, rather than take over your home the bank would rather work with you, realistically, to help you avoid foreclosure.
Sumner warns there is no simple fix when budgets are tight and your mortgage continues to be your biggest expenditure per month. However, he stresses, “avoiding the issue is never the answer.”
