The lending bubble
A decade ago consumers were borrowing money without thinking. They stretched their finances for no real reason other than because they could. Lenders played along and gave out huge dollars without fully researching how the money would be repaid. It created havoc within the lending industry, and borrowers struggled with payments. According to the National Association of Realtors, in 2007, 12% of all residential sales were for vacation homes and 21% were for investment properties. A lot of people took on more debt than they could handle and are under a great deal of stress to cope.
Managing too much real estate debt
For anyone who is strapped, there are options. Government-sponsored foreclosure programs are aimed at saving primary homes. Filings for bankruptcy protection are rising. These are some ways to manage.
•Refinancing loans. Mortgage rates are at an all time low, and homeowners in trouble should consider refinancing. At minimum, a good refinance can cut down a mortgage payment by a few hundred dollars. Obviously some homeowners, who have seen a decline in their assets’ value, might not be able to refinance. According to Milo Benningfield, financial adviser in San Francisco, “Typically, lending companies won’t offer a refinance loan for more than 80% of a home’s value. That leaves owners who owe, say $ 200,000 on a condo now worth $ 170,000 without the ability to refinance.”
•The short-sale. There is also the short-sale option. When a home’s sale price is less than the mortgage total, owners can ask the lender to accept sale proceeds, even when they are less than the total owed. Typically, it’s easier to short sell a primary residence. Chicago attorney Joseph Nery said, “They are being more flexible when they think the only other option will be the customer forecloses on the property.” He also added, “A lender may also try to recoup their shortfall by looking to borrowers’ other assets like equity in additional properties, savings, and even retirement accounts.”
•Modification. The loan modification has grown in popularity in the last few years with President Obama’s push for aid to homeowners in trouble. A successful modification depends on the person borrowing the money being able to prove sufficient income. Investors have decision making capabilities to reject or accept a modification. Nery added, “More modifications are happening, but they involve a reduction of principal or interest rate charges, or other changes like lengthening the term of the loan to make payments more affordable.”
•Bankruptcy. Some people look into bankruptcy as a way to save their homes. Some areas have incredible numbers of bankruptcies, such as in Las Vegas, for instance. The real estate market in Nevada is in bad shape, and a recent RealtyTrack survey indicated 60% of homes in NV are in default. Nery said, “Bankruptcy should be a last resort, but if someone reaches that point, they are no longer worried about their credit. They are in survival mode.”
Coping with copious debt
Borrowing money used to be a simple process. Lenders qualified customers quickly, without investigating their finances. In today’s world, however, many people are struggling with that huge debt and looking for ways to manage. Though it is a difficult situation, there are ways to manage an overwhelming debt, but each one comes with its own problems to overcome.
