FedUpUSA

Archive for the ‘Loss Mitigation’ Category

How should people prepare for the difficult years that are coming?  I get asked about that a lot.  Once people really examine the facts, it is not too hard to convince them that an economic collapse is coming.  But once they accept that reality, most of them want to know what they can do to prepare themselves and their families for the hard times that are ahead.  Well, the truth is that it does not have to be complicated.  Many of the things discussed throughout this article are things that most of us should be doing anyway.  Now is not the time to be splurging on luxuries or expensive vacations.  Now is not the time to be going into large amounts of debt.  Instead, we all need to get back to the basics and we all need to do what we can to become more independent of the system.  Just remember what happened back in 2008.  Millions of Americans lost their jobs and millions of Americans lost their homes.  Now experts all over the globe are warning that another great financial crisis that could be just as bad as 2008 (or even worse) is coming.  Those that don’t take the time to prepare this time are not going to have any excuse.

But there is also a lot of sensationalism out there.  There are some people out there that claim that the economy is going to collapse all at once and that we are going to go from where we are now to some type of a post-apocalyptic “Mad Max” society almost overnight.

Well, that is just not going to happen.  We are not going to wake up next week in a world where we are all fighting each other with sharp pointed sticks.

Just like anything else, an economic collapse takes time.  I like to describe what is happening using an analogy from the beach.  When you build a mighty sand castle, it is not totally destroyed by the first wave that comes along, right?

Well, it is the same thing with the U.S. economy.  It was the greatest economic machine that the world has ever seen, and it is most definitely in decline.  But there are stages to that decline.

The “wave” that came along in 2008 did a huge amount of damage.  Our economy has not recovered from that.

Now another wave is coming.  But that will not be the end.  There will be other waves after that.

Eventually, this thing is coming all the way down.  Someday America will be such a horror show that it will be hard to believe that it is the same place that many of us grew up in.

But in the short-term, we are going to be facing a major league recession and millions of Americans will lose their jobs.  It won’t be the end of the world, but for some people it may feel like it.

So when you are talking about “how to prepare”, the truth is that it depends on what kind of time frame you are talking about.

In the long-term, a lot of the things that even the hardcore survivalists are doing will not be nearly enough.

In the short-term, there are things that all of us can do to weather the coming storm….

Get Out Of Debt

The global financial system is headed for a massive crisis.  Just like in 2008, a lot of people are going to lose their jobs and a lot of people are going to lose their homes.

In such an environment, it makes sense to travel as “lightly” as possible.

That means getting rid of debt.

Some forms of debt are worse than others.  Mortgage debt is not that bad.  We all need somewhere to live, and not all of us can run out and immediately pay off our mortgages.

But there are other forms of debt that are absolutely toxic.  A good example of this is credit card debt.  There are very few things that are as good at bleeding your finances as credit card debt is.  For example, according to the credit card repayment calculator, if you have a $6000 balance on a credit card with a 20 percent interest rate and only pay the minimum payment each time, it will take you 54 years to pay off that credit card.

During those 54 years you will pay $26,168 in interest rate charges on that credit card balance in addition to the $6000 in principal that you are required to pay back.  That is before any fees or penalties are even calculated.

But a lot of Americans still have not learned to stay away from credit card debt.  In fact, one out of every seven Americans has at least 10 credit cards.

Ouch.

The truth is that in future years there is a good chance that you may be facing a situation where you are not making as much income, so you want to try to start reducing your expenses right now.  Getting out of debt will help you to do this.

Save Money

A shockingly high number of American families are operating without any kind of financial cushion whatsoever….

-According to a Harris Interactive survey taken in 2010, 77 percent of all Americans are living paycheck to paycheck.

-According to one recent survey, one out of every three Americans would not be able to make a mortgage or rent payment next month if they suddenly lost their current job.

This is one reason why so many Americans have lost their homes and why so many Americans have fallen below the poverty level in recent years.  They simply had no cushion.

Last year, 2.6 million more Americans dropped into poverty.  That was the largest increase that we have seen since the U.S. government began keeping statistics on this back in 1959.

Don’t let this happen to you.  At a minimum, everyone out there should have a cushion that will cover at least 6 months worth of expenses.  Preferably, you should have a cushion that will last you at least a year.

Yes, I know that is a tall order.  But you would be amazed at how much money the average American family wastes in a typical month.  Almost all of us have areas where we can cut back.

Trust me, in the middle of a major recession you will be really glad that you are sitting on a pile of savings.

Get Independent Of The System

What would you do if you lost your job tomorrow?

Would you have any other income?

How long would it be before you lost your home?

Those are very important questions.

The truth is that the system is failing and so we all need to work hard to become more independent of the system.

So what does that mean?

Well, instead of relying on someone else to employ you indefinitely, you can start up a business in your spare time.  Yes, it will cut into your television time, but if someday you lose your job you will be extremely happy that you still have some income coming in.

Another way of becoming more independent is to start a garden.

Yes, you can run down the street and buy giant piles of cheap food right now, but that will not be the case forever.

Store Food And Focus On The Essentials

I might get into a little trouble for saying this, but the truth is that there is not going to be a major famine in America in 2012.

However, that does not mean that you should not be storing food and other essentials.

In the old days, our grandparents always saved up food.  It was just a natural thing for them to do.  This was especially the case if they lived through the Great Depression.

When hard times come, you will be glad that you have food stored up.  Plus, food is never going to be cheaper than it is today.  Having food stored up is a great hedge against the rising food prices that we will see in the future.

No, we are not going to see hyperinflation by the end of the year like many of the sensationalists are warning.  But someday you will be really glad that you stored up food for yourself and your family.

We live in a world that is becoming more unstable with each passing month.  You never know when the next natural disaster, pandemic, war or national emergency will strike.

It only makes sense to store food and other basic essentials that you will need in the future.

In a previous article entitled “20 Things You Will Need To Survive When The Economy Collapses And The Next Great Depression Begins”, I listed 20 of the things that you would need in the event of a major disaster, a national emergency or a total economic collapse.  These are things that you are going to want to make sure that you have ready right now, because after the crisis begins it may be too late to prepare….

#1) Storable Food

#2) Clean Water

#3) Shelter

#4) Warm Clothing

#5) An Axe

#6) Lighters Or Matches

#7) Hiking Boots Or Comfortable Shoes

#8) A Flashlight And/Or Lantern

#9) A Radio

#10) Communication Equipment

#11) A Swiss Army Knife

#12) Personal Hygiene Items

#13) A First Aid Kit And Other Medical Supplies

#14) Extra Gasoline (But Be Very Careful How You Store It)

#15) A Sewing Kit

#16) Self-Defense Equipment

#17) A Compass

#18) A Hiking Backpack

#19) A Community

#20) A Backup Plan

In the comments to that article, the readers suggested the following additional items….

A K-Bar Fighting Knife

Salt

Extra Batteries

Medicine

A Camp Stove

Propane

Pet Food

Heirloom Seeds

Tools

An LED Headlamp

Candles

Clorox

Calcium Hypochlorite

Ziplock Bags

Maps Of Your Area

Binoculars

Sleeping Bags

Rifle For Hunting

Extra Socks

Gloves

Gold And Silver Coins For Bartering

Once again, a lot of these things are not going to be needed right away.  The economy is going to go through a lot more ups and downs before it totally dies.

In the short-term, keep an eye on the European debt crisis, the Japanese debt crisis and the U.S. debt crisis.  There are a lot of similarities between what happened back in 2008 and what is happening now.

And what happened following the crisis of 2008?

Unemployment shot through the roof.

So be prepared for that.

Make a plan for how you and your family will survive if you end up unemployed.

Also, when it comes to “how to prepare”, there is one aspect that is often overlooked.

During the difficult years ahead, we are all going to have to be mentally and spiritually tough.

It won’t matter how good your physical and financial preparations are if you are cowardly and paralyzed by fear.

The times that are coming are going to test all of our hearts.

Some people are going to make it and some people aren’t.

Some people will become so consumed with fear that they will give up completely.

Don’t let that happen to you.

Prepare your heart, soul, mind and body right now for what is coming.  For those that are cowardly the years ahead will be a total nightmare, but for those that overcome the fear the years ahead have the potential to be a great adventure.

The Economic Collapse

The dynamics for housing moving forward point to a very bleak future and a potential lost decade yet again from 2010 to 2020.  Housing has a treacherous path moving forward and deep down demographic shifts will keep a lid on any significant housing appreciation moving forward.  The economy is in the process of deleveraging from a market highly dependent on real estate.  Wall Street and the government are doing everything they can to bring back the economy of yesterday but have had little success.  This recession has shrunk the middle class so those looking to buy homes have declined simply because many can no longer afford to purchase a home even at today’s lower prices.  Focusing on housing first was a big expensive policy mistake where we should have focused on creating sustainable jobs.  The market is slowly shifting to a new housing paradigm.  Family growth rates, employment trends, baby boomers, and wages will all keep a lid on housing prices moving forward.

First we should break down the entire housing market:

Source:  Census

The U.S. has a large number of homeowners.  A total of 75 million Americans can lay the claim to owning their home.  23 million of this group (31 percent) actually owns their homes outright with no mortgage.  Of course not having a mortgage does not mean that these homeowners have no housing associated cost.  They still need to pay yearly property taxes, insurance, and all the cost in maintaining a home.  Another 37 million American households rent.  These are the basic dynamics of the housing market.

Of those homeowners with a mortgage, 7.2 million (14%) are in foreclosure or 30+ days late on their mortgage.  This practically guarantees a few years of cheaper housing hitting the market in a steady trickle.  This puts a herculean hold on any significant home building going forward.

From the recent Federal Reserve Flow of Funds Report, we find that current outstanding mortgage debt is $10.334 trillion.  We have to break out the renters and the homeowners with no mortgage and find that the average mortgage debt for homeowners is:

$10.334 trillion / 51.575 million mortgaged households =             $200,374

The current median home price comes in at approximately $170,000.  Now some would argue that housing will regain traction and go on to rising to new levels.  Yet this assumption assumes that middle class wages will be growing moving forward.  If we look closely at the data the only real winner so far in this economic crisis is Wall Street but average Americans have seen very little benefit from the current bailout measures.  Now those with big investment bank salaries can afford their piece of prime real estate in Manhattan or the Hamptons but this does not make up the bulk of the housing market.  The bulk of the housing market is highly dependent on how middle class Americans are doing.

If we look at the current unemployment levels by age group, we see that those in the household forming age ranges or those entering into these categories, are taking on the brunt of this recession:

You can see that up to age 34, the unemployment rate is trending much higher than the total national average.  These are prime age groups for forming households and if a family is not feeling safe financially, they will delay on purchasing a home.  The middle class young family is also delaying on having children so the necessity for a bigger home is also being pushed out.  This demographic shift is happening at the same time that baby boomers start entering retirement age and many will want to downsize.

And many of these people have a buffer for equity to sell since they bought prior to the housing bubble.  Take for example data on current owner households:

Moved in before 1989:                  20.5% of all homeowners

Moved in before 1990:                  40.9% of all homeowners

It is highly likely that in this group, you have many baby boomers that will sell to downsize in the years coming forward and the current decline in prices will only cut into their equity but not put them underwater given the decade long bubble.  They purchased before that.  Those that moved in before 1989 will have a much larger cushion.  So there is a large group of people that will sell regardless of market trends because they will have to simply because of life changing events.

And then on the other hand we have the fact that one-third of homeowners in certain states are underwater on their mortgages.  Take for example California:

California has a large renting population and most that own a home carry a mortgage (77 percent).  Of those that carry a mortgage a stunning one-third are underwater.  In other words 1.76 million mortgages in California are attached to homes that are worth less than the actual balance of the mortgage creating a large incentive to walk-away.  Many of these loans come from Alt-A paper and option ARMs.  These loans will impact the market at least until 2012 and hurt the state.  California isn’t immune and other states like Nevada, Florida, and Arizona have similar dynamics.  In fact, here is the amount of mortgage debt in a negative equity position according to a recent Deutsche Bank analysis:

California: $969 billion

Florida: $432 billion

Arizona: $140 billion

The only way that things would improve for banks is if prices moved higher.  But how can prices move higher if middle class Americans are dealing with high unemployment and stagnant wages?  The Federal Reserve and U.S. Treasury have really reached the end of options in terms of what they can do.  Even the 30 year fixed mortgage is at all time lows in the midst of all this turmoil:

The 40 year average for 30 year rates is closer to 9 percent. Today it is under 5 percent.  That is unsustainable and as we move forward with insurmountable levels of national debt, the rate will have to rise.  I know this seems impossible for many but as we have seen with other debt ridden countries, the market can turn on like a tornado and quickly change the dynamics of the situation.  For the housing market, this will mean even more pressure to keep prices muted.  

The only way home prices can rise in a healthy manner is if we start seeing wage inflation.  We saw some of this in the 1970s where wages went up in tandem with home prices.  In the last decade, wages moved sideways while home prices went into a bubble.  As far as the economy going forward, the big job sectors seem to be in low paying service sector jobs.  Certainly someone can purchase a house with these jobs but not at current prices even though they appear to be solid.

The Federal Reserve and the U.S. Treasury have done everything to slam the dollar and create some level of inflation.  Yet other central banks are doing the same.  So what happens is easy money flows to Wall Street for gambling while the real economy stagnates.  It is hard for many to believe that we will have another lost decade in housing but there is little reason to believe that prices will soon start to outpace inflation.  In fact, in the last year or two we have been dealing more with aspects of deflation.  We need to keep an eye on the real value of home prices adjusting for inflation/deflation.

My Budget 360

3 Underground Real Estate Practices Moving the Market – Short Sale Fraud, Squatter Stimulus, and Buying Before Foreclosing.

Posted by mybudget360

In the early days of the housing bubble here in California and other bubble states a handful of people were raising alarm bells that mortgage fraud was occurring at unprecedented levels.  The housing industry initially came out skeptically stating this was only a handful of wayward people. As it turns out, it was the vast majority of the industry sticking people into the most toxic loans for the highest level of commission.  What was good for the borrower wasn’t necessarily what was the best for the mortgage broker’s bottom-line.  After the housing bubble burst, we realized the industry was corrupt to the core and that practices that were standard were largely a joke.  The housing market became one big free grab bag of money.  Some now think that we somehow have stopped this massive fraud but that is a big misconception.  The fix is in.

The irony of this bubble is the industry that created the housing mess (i.e., mortgage brokers, agents, appraisers, banks, and Wall Street) are now on the other end offering loan modifications and assistance on foreclosures.  Without any actual financial reform, those that perpetrated the crime actually have firsthand knowledge on what went wrong and are now working the other end of the con.  Let us first examine how many bad loans exist in the U.S.:

Source:  Census; MBA

The U.S. has 51 million housing units with a mortgage.  Another 23 million housing units have no mortgage.  A recent MBA survey shows that 15 percent of all mortgage holders are either in foreclosure or 30+ days late (7.7 million mortgages).  So in total over 43 million Americans with mortgages are paying on time but all current policy is guided by ignoring what is good for the middle class. Many of those 7.7 million loans are toxic loans and policy is being guided to protect the bottom line of the too big to fail who didn’t practice an iota of due diligence.  This is being subsidized by the prudent and those who are paying even though it is antithetical to what is good for them.

So the crux of the problem is how to deal with the 7.7 million homes in foreclosure or that are 30+ days late.  The HAMP program has pushed 168,000 mortgages into permanent modification but that leaves over 7.5 million mortgages in distress (and more are entering foreclosure each month).  Leave it to the housing industry experts to create additional levels of fraud to siphon off money from the average American.

Con #1 – Short Sale Fraud

Part of the new “help” coming down the pipeline is HAFA.  This program is designed to grease the wheels of short sales this year to get those distress properties moving.  The central force with HAFA is getting second lien holders to let go of their rights on second mortgages to allow the first lien holder to sell a property.  The low $1,000 incentive will not move the market.  Short sales have been a tiny part of the market in the last two years so why are we to expect $1,000 is going to make this a big game changer?  Keep in mind that in places like California, those second mortgages can range from $50,000 to $200,000 or even higher so banks would rather pretend that loan is worth the book value instead of forcing a major write down.

But the major fraud in short sales occurs off the balance sheet:

“(CNBC) But here’s what’s not legal and what’s apparently happening quite often recently. Since many second lien holders are getting very little, they are now allegedly requesting money on the side from either real estate agents or the buyers in the short sale. When I say “on the side,” I mean in cash, off the HUD settlement statements, so the first lien holder doesn’t see it.

“They are pretty clear and pretty upfront about the fact that if the first lender knows they are getting paid, the first lender will kill the short sale,” says Brandt. “So these second lenders are asking for the payments off the closing documents, off the HUD statement, usually in a cashiers check prior to closing. Once they receive that payment, they will allow the short sale to go through, which according to RESPA laws and the lawyers that we have spoken to on the topic is not legal.”

This is absolutely illegal.  Anyone that has been in a real estate deal realizes that the HUD settlement statement accounts for every piece of cash or like money in the transaction.  What the above amounts to is a form of extortion.  The second lien holder is saying, “give us money under the table or we won’t allow the deal to happen.”  In 2009 it appears that 12 percent of all sales were short sales.  How many had fraud involved?

Another fraud with short sales occurs with the real estate agent doing a quick flip.  Say for example a home has a mortgage of $150,000.  The agent negotiates with the bank a $100,000 short sale but has a buyer willing to pay $140,000.  He then brings the property under contract for $100,000 then quickly flips it for $140,000.  This of course is highly illegal and many buyers don’t even realize this happened unless they carefully scrutinize their records.  During this housing bubble how much due diligence occurred?  Short sales are designed and setup for massive amounts of fraud.  Since we haven’t had any sensible regulation in virtually any industry expect this con to go on for some time.

Con #2 – Squatter Stimulus

It isn’t just toxic loans going bad but also prime loans.  Outside of Wall Street the economy is in bad shape:

Source:  HousingWire

Loans are going bad across all categories.  And as many Americans struggle with the reality of 17 percent underemployment making the mortgage payment is becoming harder and harder.  But there is something dubious going on.  Banks are no longer going through with the foreclosure process in any stated timeline.  In fact, you can live rent free for many months:

“(HousingWire) What the above chart should call attention to is the aging of loans in the default pipeline. Again using LPS data, for all loans more than 90 days in arrears, the average days delinquent is now at 272 days—up from 204 days in early 2008. For loans in foreclosure, the aging numbers are even more staggering: loans in this bucket average 410 days delinquent, up from 260 days delinquent in early 2008.

Ponder those numbers for just a second. On average, severely delinquent borrowers have gone more than 9 months without making a mortgage payment—and yet foreclosure has not yet started for them. For those borrowers who are in the foreclosure process, it’s been an average of 13.6 months—more than one full year—since they last made any payment on their mortgage.”

Now think about that.  The average foreclosure timeline is now 13.6 months.  Imagine what this does.  Let us say you bought a home in California for $500,000.  It is now worth $250,000.  Your mortgage payment on your toxic loan is $4,000.  You don’t qualify for HAMP or any other modification.  You decide that you will strategically default.  Now, you’ve freed up at least one year of no housing payment.  This will give your balance sheet a new cash flow of $4,000 for whatever else you want to do.  Even renters have to pay something.  It is interesting that banks seem fine with this because the majority of Americans who are paying on time and bailed out Wall Street are subsidizing this kind of action (remember mark to market being suspended?).  Aren’t you glad your tax dollars are going to things like this?

“(WSJ) Mr. Fernandez says he made four attempts to modify the larger of the two mortgages on his home, which add up to $423,000. Ultimately, he was offered a monthly payment that, together with back taxes, was higher than what he had been paying. Today he’s working to partially reimburse his lenders, IndyMac Bank (now OneWest Bank) and American First Credit Union, by selling the home, which he expects to fetch about $300,000.

A spokeswoman for OneWest Bank said the bank “offered Mr. Fernandez the lowest payment possible under the [Federal Deposit Insurance Corp.] loan modification guidelines.” A spokesman for American First said the company always seeks to help clients stay in their homes.

With an income of about $8,300 a month and a rent of $2,200, Mr. Fernandez says he now has the wherewithal to do things he couldn’t when he was stretching to pay the mortgage. He recently went to concerts by Rob Thomas and Mat Kearney. He also kept his black BMW 6 Series coupe, which has payments of about $700 a month.”

Loan Modifications at Work

Now when was the last time your bank offered you a modification for paying your mortgage on time?  We must be happy that we are allowing some of these poor homeowners to keep their BMWs.  Your tax dollars at work.

Con #3 – Buying Before the Foreclosure

Another big issue in areas where prices have fallen includes buying before the foreclosure.  Many already know they are purposefully going to strategically default.  They also realize their credit will be damaged for a few years.  So what is done is this. Say this person bought a home for $600,000 at the peak.  These properties are now selling for $300,000.  The owner already has made up their mind that they are foreclosing but like their area.  So what they do is they purchase the second place for $300,000 while their credit is still good and then let the first place default.  End result?  They now have a mortgage obligation of $300,000 and that $600,000 property goes back to the bank (which is subsidized by the trillions in bailouts).  These are the kind of cons that simply are not reported and are happening more than you would expect.

Conclusion

What we should learn about this housing mess is that people need to come in with a sizeable down payment of their own money.  When I say sizeable I mean at least 10 percent of actual saved cash.  The big game in town now is FHA insured loans that now make up 4 to 5 loans out of every 10.  And these only require 3.5% down but with the current buyer credit, many are buying with zero down.  And what a shock that these are now going bad:

“NEW YORK (CNNMoney.com) — The recent spike in the number of delinquent Federal Housing Administration-insured loans has some people worried that taxpayers will eventually have to bail the agency out.

Seriously delinquent FHA loans, those 90 days or more late, jumped 62.1% in the past year to 558,944, or 9.4% of FHA loans, as of the end of January, according to agency statistics released on Friday.”

And this will setup even more cons like the cases we described above.  If you bought a place for say $200,000 and you had to put $20,000 of your hard earned money in, you would think twice about leaving.  Plus, you have a nice equity cushion.  But say you go with a 3.5% (down payment $7,000) but the current buyer credit is $8,000 so you are paying zero when all is said and done.  You will be more apt to walk.  But again, this is a Wall Street subsidized con game and the majority of the prudent average Americans are getting taken for a walk on both ends of this crisis.