Christina Dunham's Random Real Estate Musings

What is Foreclosure?
Foreclosure is the legal process in which a bank or other secured creditor either sells or repossesses a parcel of real property, home or land, after the owner has failed to comply with the mortgage or deed of trust agreement with the lender. Most frequently, the violation of the mortgage agreement is the default of payment. The completion of the foreclosure process allows the lender to sell the property, and keep the proceeds to pay off the mortgage as well as any legal costs. The length of the foreclosure process varies from state to state.

If the foreclosed property is sold for less than the remaining primary mortgage balance, and there is no insurance to cover the loss, the court overseeing the foreclosure process may enter a deficiency judgment against the borrower. Deficiency judgments can be used to place a lien on the borrower's other personal property, obligating the borrower to repay the difference or suffer the loss of their property. It gives the lender a legal right to collect the remainder of debt out of borrower's other existing assets.

However, there are exceptions to this rule. If the mortgage is classified as "non-recourse debt," then the borrower has no personal liability in the event of foreclosure. This is often the case with residential mortgages. If so, the lender may not go after borrower's personal assets to recoup additional loss.

The lender's ability to pursue a deficiency judgment can be restricted by state laws. In California and some other states, original mortgages (the ones taken out at the time of purchase) are typically non-recourse loans, however, refinanced loans and home equity lines of credit aren't.

If the lender chooses not to pursue deficiency judgment – or can't because the mortgage is non-recourse – and writes off the loss, the borrower may have to pay income taxes on the un-repaid amount if it can be considered "forgiven debt."

Any other loans taken out against the property being foreclosed (second mortgages, HELOCs) are "wiped out" by foreclosure (in the sense that they are no longer attached to the property), but the borrower is still obligated to pay them off if they are not paid out of the foreclosure auction's proceeds.

How Does a Foreclosure Affect Credit?
A foreclosure can be reported as a Foreclosure or Repossession and carries a derogatory payment status. There is a misconception that foreclosures are considered Public Records to the scoring system, however, they are not. Although there is a Public Notice Record on file once a foreclosure is filed, this record is completely different than a credit report public record.

A Foreclosure will remain on a credit report for 7 years from completion date and credit scores can drop from 50-250 points. The difference in point loss depends on how many points you have to lose in the payment history factor of your credit. So if someone has a 750 credit score, and they opt to foreclose, their score could drop up to 250 points. However, if someone has a 500 credit score, they may lose 50 points for the same derogatory.

If a Deficiency Judgment or Tax Lien is filed in connection with a Foreclosure, the credit score can drop an additional 100 points.

When it comes to foreclosure and how it affects the ability to obtain credit in the future, there are multiple points of extremely negative impact. Deficiency judgments for the amount not collected by the lender in the foreclosure sale can end up on the borrower's credit report as a derogatory mark. Additionally, there is a high risk that the borrower will be hit with a substantial tax penalty which can result in a tax lien, which also appears on the credit report. As a general rule, other than a bankruptcy, foreclosure is the least desirable of all of the options available when a borrower is upside down in a home mortgage.

What you can do
If you are going through a foreclosure due to circumstances of losing a job, a medical crisis, or sub-prime mortgage crisis fall-out, make sure to fully document your experience now. Do not wait until later, because the details and emotional energy of what you are going through will be more difficult to document and prove down the road if you decide to apply for a loan in 2 years based on an “Extenuating Circumstance” claim.

Most importantly, outline a plan to recover from a foreclosure by slowly rebuilding your credit. Maintain on-time payments for credit card, utility, and other bills. It is important to understand that over time, all derogatory credit will have less impact on your score.

Next week: Deed-in-Lieu of Foreclosure and Credit.

The Federal Trade Commission (FTC) estimates that as many as 9 million Americans have their identities stolen each year. This means that an identity is stolen every 3 seconds, costing the average victim nearly $4,000 and nearly 175 hours to straighten out their problems and their credit. How can you protect yourself from the dangers of identity theft? Here are some suggestions.

1. Conduct a Credit Check-up – Visit www.annualcreditreport.com to obtain a free credit report every 12 months. Review all three of your credit reports and look for any suspicious activity, unusual or inaccurate names or addresses, or any inquiries that were done without your knowledge. In many states, you may place a 90-day "Fraud Alert" on your credit report, which further restricts access to your credit information. Simply call one of the three main credit bureaus to activate the alert. Here are the toll-free numbers: Equifax 1-800-525-6285; Experian® 1-888-397-3742; or TransUnion® 1-800-680-7289.

2. Don't Give It Up – Avoid falling prey to phishing scams, both over phone and through email. In a phishing scam, identity thieves pretend to be someone from your bank or a credit institution and simply ask you for your personal information. If someone contacts you and requests any personal information, don't give it to them. Verify who is requesting the data and why, and then call the institution yourself. One extra phone call could save you a lot of trouble and money.

3. Stay off the Pharm – While phishing enables thieves to pilfer information from you, pharming is another kind of scam that consists of hijacking your computer and stealing your personal information. A pharming site is designed to look just like the website you're trying to visit. However, enter your information on this fake site and not only can it track your moves within it, it may also direct your computer to give up other personal information at a later time. Be sure you are visiting the correct site, that the address in the navigation bar is correct before entering any information.

4. Return to Sender – Some scammers simply fill out a change of address form and divert your mail to another location. Others simply steal the mail they want right from your mailbox. The key to avoiding this scam is to know your statement delivery dates and pay close attention to any unusual delays in delivery. A lot of identity thieves do things the old-fashioned way: They rummage through your trash to collect your information that way. Be sure to shred any junk mail

or other documents that may contain your personal information before you throw it away.

5. Opt-out of Special Offers – Visit www.optoutprescreen.com to cut down on the pre-approved offers from credit card and insurance companies. It's also good idea to have your clients opt out as well, especially if they're thinking about buying a home. When people apply for a mortgage, they often become "trigger leads" to the credit bureau, who sell your clients' information to any number of companies. It only takes a few minutes to opt out, but it could spare your clients a ton of junk mail and could possibly save them from identity theft.

Your credit profile is one of your most precious assets, so protect your identity from theft and fraud. For more information on credit reports, visit www.sfmortgageadvisor.com and download our complimentary brochure.

There has been a lot of talk lately about the 4.5% 30-year fixed rate mortgage. According to the Wall Street Journal, the U.S. Treasury Department would “use the clout of mortgage giants Fannie Mae and Freddie Mac to encourage banks to lend at rates as low as 4.5 percent.”

The Treasury hopes that this plan can revitalize the sagging real estate market, possibly arresting the decline in home prices. Lower rates enable borrowers to afford bigger loans, thus increasing demand and pushing up home values.

Currently, home loan rates are already in the high- 4% to low-5% range, spurring a flurry of refinance activities. Rates on a 30-year fixed loan are currently around 4.875%. We’re already seeing lender backlog due to low interest rates. In 2003, with rates at these same levels, some lenders were taking up to 90 days to close a loan.

Will this low-rate 30-year fixed loan become a reality though? Right now, no one really knows. Homeowners who could benefit from a lower interest rate need to know that even if 4.5% becomes a reality from Washington's actions, it would only be available to home buyers, not homeowners seeking to better their rate. If you need to refinance, you will be left out unless you act quickly and take advantage of the current interest rate levels.

Interest rates change constantly, and it is important to know that rates are cyclical. If rates are currently at historical lows then we know there is a strong probability rates will go up again, and vice versa. Certain economic indicators such as unemployment data, consumer price index, retail sales data, and consumer confidence all have an effect on mortgage interest rates. For example, the Fed announced recently that they are going to buy up to $600 billion in mortgage-backed securities, driving rates to historical lows. In January, the SEC is meeting and information may be released that could have a significant bearing on rates, potentially for the worse.

But the key factor to watch is the relationship between stocks and bonds. When the economy is slow and the stock market is "bearish," many investors move money out of stocks and into bonds and mortgage-backed securities. This causes mortgage interest rates to go down. When the economy is doing well, the stock market rallies and is considered "bullish." Investors then have a tendency to move their money out of that safe haven of bonds and mortgage-backed securities and back into stocks. As a result, mortgage interest rates go up.

For a quick snapshot of today’s mortgage interest rates, check out the table below. For a more specific rate quote, contact your mortgage advisor today.

As of 12/16/08	Conforming	APR	Payment per $1000	Jumbo	APR	Payment per $1000
30-Yr Fixed	4.875	4.938	$5.29	6.250	6.344	$6.16
15-Yr Fixed	4.875	4.983	$7.84	6.375	6.532	$8.64
7-Yr ARM	5.875	4.941	$5.92
5-Yr ARM	5.500	5.565	$5.68
5-Yr Int Only	5.625	5.690	$4.69	6.000	6.093	$5.00
3-Yr ARM	5.375	5.439	$5.60

Until next week, happy home loan shopping!