Financial Frontlines®

Here’s the Washington Post take on the Homeowners’ Assistance Program for military members.

http://www.washingtonpost.com/wp-dyn/content/article/2009/02/24/AR2009022403793.html

Key points:

• For members required to sell their home due to reassignment, base closure, combat injury, or because you are a surviving spouse.
• Member can choose from one of these payments:

1. An amount that is the difference between 95% of the prior Fair Market Value and Fair Market Value at the time of sale, or,
2. An amount not more than 90% of your home’s prior Fair Market Value or the amount of the outstanding mortgage.

• No limit on home value has been established.
• Only applies to members who bought homes before 1 July 2006.
• Only applies to a member’s primary residence.

This program is an enhancement of the DOD’s Homeowners’ Assistance Program that has been used in the past to help members affected by a base closure.

As military members, the bottom line is that buying a home a gamble; pure and simple. When you buy, you gamble that the housing market will go up during your tour. ‘Going up’ depends on timing and the market at your location–neither of which you can predict. Plus, you can never be sure how long you will be assigned to your current posting.

Over my career, we bought every time and made $10,000 on one home one time. Just enough to cover the costs of selling it. We lost on every other home. I assumed the risk every time I bought and was ready to face the consequences. However, during the same period, I knew people making money because of their locations. It’s a gamble…period. Please don’t read this as though I’m bitter about this home bail-out plan. Far from it. I’m glad some members will get relief during this time of war and economic crisis. Just don’t think big brother will be there for you next time.

Don’t buy unless you can live with the worst case scenario.

Across the country, many homeowners are in trouble.

A lot of homes purchased at the top of the housing mania in 2003-2006 are now worth significantly less than the original purchase price.  Some markets have seen a 40% drop in home values over the last two years.

Throw in the fact that many of these purchases were financed with non traditional mortgage products such as interest-only (IOs), adjustable-rate mortgages (ARMs) with lower teaser rates that are now starting to adjust and so-call “Option ARMs” where homeowners could choose their payments at the cost of having unpaid balances tacked onto the end of the note.  We are now seeing a foreclosure pandemic.

For military homeowners that have to PCS every 2-4 years, this situation can be financially devastating, forcing families to live apart as the servicemember travels to the new duty station and the family stays behind, desperately tying to sell the house. 

If installation housing isn’t available, the servicemember will have to rent, putting even more financial pressure on the family. 

Walking away from a mortgage or declaring bankruptcy is not an option for most military families, since these moves endanger security clearances (most security clearance revocations are due to financial issues).  So what are military families to do?

Consider the following 5 Tips:

Tip #1 – A Good Defense is the Best Offense

If you don’t currently own a house, be very careful before buying one in today’s market.  While bargains abound, it takes 4-5 years to break even on a home purchase in a “normal” market.  If you are PCSing in a down to flat market, a home purchase at your duty station may not be the best deal.  Given the chronic shortage of base housing around some installations, you may need to rent.  Before signing the lease however, question the landlord to make sure his or her finances are stable, since your rental property could get foreclosed right out from under you.  It isn’t always better to buy a house…so make sure you don’t make an expensive mistake!

Tip #2 – Refinance Now

If you have an adjustable rate mortgage that will adjust within the next year, plan to stay in the home and haven’t refinanced to a fixed mortgage, then strongly consider a refi before the note adjusts.  Rates on 30-year mortgages have, unfortunately, risen within the last month and currently hover around 6.4% with no points.  That is still relatively cheap money and refinancing now may save you trouble and heartache down the line.  In addition, many lenders will now cover the closing costs for refinancing, a big savings for homeowners.

Tip #3 – Renegotiate with the Bank

The Federal Deposit Insurance Corporation (FDIC) is now authorizing certain lenders to restructure loans for mortgage customers that are in trouble.  For instance, the FDIC authorized IndyMac Bank to send out loan modification offers to over 15,000 mortgage holders, with an average monthly savings of $430.  Several other large banks, such as Bank of America, who now owns Countrywide Mortgage, are pursuing similar programs.

If you are slipping underwater, be proactive and contact your lender.  It is easier to modify the mortgage before you reach the crisis stage and the bank is more likely to be a full partner in the process the quicker you get started.  Delaying just prolongs the process and costs you more money over the long run.  Please remember though, that for years banks were in the business of lending money, not restructing loans.  It may take time and perseverance and finding the right person at the bank to speak with.

Tip #4 – Rent Your Unselleable Home, If Possible: In many areas with depressed housing markets, fewer homeowners means more rental demand.  If you can’t sell, consider renting. 

Being a landlord isn’t for everyone, it is certainly worth a try and beats losing the home to foreclosure.  If you have trouble locating suitable tenants, there are some things you can do to sweeten the pot.  One strategy is a lease-purchase arrangement, where you agree to credit a certain percentage of your tenant’s monthly rent towards the eventual purchase of the home in return for a slightly above average rent.

This can help you get and retain a better quality of tenant, but make sure the rental income isn’t too much lower than your carrying costs on the property or you could end up with an “alligator” – a rental property that takes a painful bite out of your income each month.  It is critical to screen your prospective tenant’s credit before finalizing a lease.

Make sure you get some tax and legal assistance when structuring a lease-purchase if you don’t know all the ins and outs.  There are some specific tax savings availalbe through rental real estate that can help “slay” the alligator mentioned above, so make sure you check it out.

Tip #5 – Selling the Home with a Short Sale

If you can’t otherwise sell or rent your property, consider a “short sale” instead of allowing foreclosure or bankruptcy to proceed.  A short sale is a negotiated sale where the lender agrees to accept less than the property is worth and forgives the balance of the mortgage, avoiding expensive and time-consuming foreclosure proceedings and keeping the owners credit intact (Note: Not all short sales result in total debt relief…some will require carrying a note back from the bank, but will relieve the monthly payment burden).

In some areas of the country, 50% of current home sales are short sales!

A short sale is a negotiation and should be approached with a “win-win” attitude.  Don’t start pointing fingers at the lender or bad mouthing the original loan officer…this just gets things off on the wrong foot.

You are a good candidate for a short sale if:

• You are already behind on your payments
• You can conclusively show the monthly payments are not affordable for you
• You are willing to work hard towards a mutually satisfactory solution with lender, even if the first offer isn’t accepted

A successful short sale involves several steps:

• Find a good realtor experienced with short sales in your area.  They can often really assist in accelerating the process and can be an invaluable resource.  Also, most lenders want to see that you are actively trying to sell the property.
• Get the property listed for sale.
• Contact the lender, find the right person to talk to and see if the lender is open to a short sale.  It may take a number of phone calls to find someone with decision making authority, so be persistent.  In some cases, you will need to have your realtor send all paperwork (signed contract, competitive market analysis, loan approval paperwork from prospective buyer and your financial documents) to the bank to establish your need for a short sale before the bank will discuss moving forward.
• Submit documentation to your lender, including
  • A letter of authorization to the lender with key information on you and the property that will allow them to work with your agent on your behalf
  • A hardship letter explaining why you are seeking the short sale
  • Financial information such as tax returns for the last 2 years, your LES and bank statements for the last 2 months, financial worksheet (from lender)
  • Listing agreement and property report
• Receive an offer on the property (your agent will likely have a specific pricing strategy for selling your home quickly).
• Submit the offer to the lender and be prepared for some offer/counteroffer if they don’t accept the first offer.

If all goes well, the lender will accept the short sale, you can close on the property and get on with your life!  Be advised that it may take 90 days (or more) from the submission of your executed sales contract before the bank acts on the short sale.  They are in the business of lending money – not forgiving debt – so don’t expect instant approval.

Short sales can be tricky and require a strong commitment to see it through from end to end, but it can be far better than the alternatives.  They also save the bank thousands in foreclosure fees and, as a bonus, the realtor’s commission, most closing costs and even late payments may be covered by the bank.  Remember, if you are getting into trouble…don’t wait to act…put an attack plan in place and execute!

Special thanks to Florida realtor J.D. DeBoskey, Major, USAFR (www.allamericanrealty.com) for his assisstance in preparing this article.

A recent article on Bloomberg News highlights the plight of many military homeowners…

Foreclosures in Military Towns Surges to Four Times the National Rate by Kathleen M. Howley (Bloomberg News)

Many military members, lured by the easy credit terms offered a few years ago, are now being hit by the double-whammy of rising mortgage payments as the adjustable-rate mortgages (ARMs) that many of the use start to reset and rapidly falling housing prices.  The biggest mistake many of them are making?  Waiting too long before seeking assistance.

If a servicemember starts getting behind on their bills, they should seek help immediately.  Unit commanders at all levels should keep a sharp eye out for potential money troubles, such as a sudden drop in performance, arguments with co-workers, increasing sick calls and other signs of financial stress.  Immediate intervention and referral to services that can help is imperative.

Sources of assistance for military members in trouble with their homes include:

• National Foreclosure Hotline at (888) 995-467
• Military OneSource at  (800) 342-9647
• USA Cares

In addition, activated National Guard or Reservists should immediately contact their lender and invoke their rights under the Servicemembers Civil Relief Act (SCRA), potentially lowering their mortgage rate to 6 percent during deployment.  Visit HUD Q&A for Reservists, Guardsman and Other Military Personnel for more information.

The bottom line?  Many military families are in trouble with their home loans and this financial stress hurts readiness and unit morale, so leaders need to keep a sharp eye out for potential problems and intervene early!