By Yulissa Zulaica and Deb L. Kinney
In this ever changing economy, many never expected to find themselves in such a financial quagmire. Investing in real property has always been the ‘smart’ thing to do. For those who purchased homes in the last few years and paid premium prices, one may now wonder whether it was prudent to jump on that bandwagon.
Recently, many people have been losing their homes and other real property investments to foreclosure. There are many factors that have contributed to this, one of which is the adjustable rate mortgage (“ARM”) phenomena. Lenders got creative a few years back with the ARM, where initially a low, fixed interest rate was charged for a specific period of time during and only the interest was due. Once that specific period ended, the interest rate adjusted (usually upwards) causing mortgage payments to go up and become no longer affordable. Some banks even offered the choice to pay less than the interest due. The problem with this, however, is that the foregone interest is added to the outstanding principal balance which only further increases mortgage indebtedness and what is owed down the road. Thus, with values dropping at the same time many people found themselves owing more than the property was then worth- known as being “upside down” in the investment. So, while a $3,000 mortgage payment may have been affordable 3 years ago, the $4,500 payment now is not— and this amount does not even include property taxes.
Instead of lenders asking how much house can a borrower afford, they were funding whatever amount was asked for and not taking care to prequalify borrowers as had been done in the past. Even the lenders were susceptible to believing that the market would always continue to rise as it was doing just a short while ago.
To make matters worse, due to higher real estate prices at the time of purchase, property taxes are based on a value that is likely to be more than the property’s current fair market value. Given the high costs of real property in California, the taxes being paid may be higher than what needs to be paid. Under California law, the Assesor’s Office is required to annually enroll either the property’s base year value factored for inflation or its market value (whichever is less). In other words, if the market value falls below its assessed value, then the basis for property tax purposes would be reduced to the current fair market value. Although this is only a temporary reduction, it is important to know that this is an option available to all homeowners and it can help save a bit of money in these tough times. Property owners may contact the Assessor’s Office in the county in which the property is located to request an informal review of property values due to the decline in market value.
Many are now asking whether it makes sense to keep homes or real estate investment properties and what can be done to alleviate the financial burden that has befallen you. There are plenty of options to avoid foreclosure and as with all options there are potential tax and credit ramifications that need to be considered. Some alternatives to foreclosure include establishing a repayment plan or loan forbearance due to a lost job, and loan modification, which readjusts interest rates and lowers payments. If continuing to pay the mortgage is simply not an option, or is just not economically viable, then a short sale or deed in lieu of foreclosure are other options that should be considered.
Regardless of whether payments are current or not, there is still plenty of room for negotiation with lenders. And, although negotiating can be a long and drawn out process, it can eventually be worth the while.
Johnston, Kinney & Zulaica LLP is available to work on your behalf to find a solution that is best suited to your needs.
If you have any questions or would like to further discuss your particular situation, please feel free to call our office and schedule a complimentary consultation.