Q: I enjoy your column in our local paper. I have a circumstance that few people (mortgage companies or government) seem interested in helping.
I purchased a home in 2005 in Pensacola, FL, expecting to move there. I then had a change and moved to an area 600 miles in the other direction, in Brevard County.
I have made the mortgage payments for three years and have never missed a payment or been late. I have an 825 credit score and consider it very important. I am a Realtor for a local custom home builder.
I rented the home in 2007 and am losing about $650 per month on my tenant. I have an ARM and an interest-only loan that is about at 6.75 percent. My problem? No one will lend me money at a decent interest rate.
I have spoken to lenders and even told my mortgage company I am dreading but thinking about turning it over as a short sale. No one will talk to you unless you stop paying.
I am sure there are quite a few people in this boat that would appreciate some advice in this area. Thanks for your time and consideration.
A: There are millions of homeowners who have gotten into trouble over the past few years as their exotic adjustable rate mortgages (ARMs) have readjusted, or they have lost their jobs, or they starting drowning in debt.
Many economists feel that these troubled mortgages are at the root of the credit crisis. These are the trillions of dollars of toxic loans referred to in various press accounts.
To get at the root of the problem, some lenders have taken several steps: They are now modifying mortgages even for homeowners who are not late on their mortgages (call to see if you’re eligible). If you have an FHA loan, you can try to get a streamlined FHA refinance.
If you are late on your loan, you can contact housing counselors at the Department of Housing and Urban Development (HUD.gov), who will recommend a lender to you. Or, you can call the Hope Now hotline (toll-free 888-995-HOPE).
But all of these efforts are for homeowners and their primary residences. I have not seen anything that would benefit real estate investors.
Real Estate Investment Property
Over the past four years, millions of investment homes were scooped up by investors, some of whom must have been relatively unsophisticated and new at this sort of game. They were guided by books and investment "gurus" who promised riches at the end of a very short, no-pain road.
At the moment, lenders have been so burned by the credit crisis and these toxic loans, that they have very little appetite for investment real estate or even commercial real estate (these loans are typically short-term with a balloon payment on the end) loans. These credit markets are truly frozen, with just a few hard money lenders and even fewer local banks making loans.
If they are making loans, it’s for higher interest rates. Right now, one of your loans is interest-only at 6.75 percent. That’s quite good. Many lenders aren’t even doing interest-only loans at the moment. If you can get a loan on an investment property, the rate would be far higher.
The problem is that you, like so many first-time or happenstance investors, are stuck owning property you don’t want, on which you’re losing cash each month, in a completely frozen credit market.
The odd part about this financial crisis is that many homeowners if they are current on their loans but their situation isn’t conforming to the lending requirements for an owner-occupied home in an approved development, these property owners can’t refinance their properties. These property owners can be current on their loans and are looking for ways to save money as interest rates on many loan types have plummeted. But they are out of luck in this financial market.
Housing Market Conditions
The real estate market is in a unique situation in which property values have come down in many areas. In your case, if values have come down and you tried to refinance, you might find that the value of the home is less than the value of the loans you currently have. That doesn’t make you a greater loss risk for the bank — you currently pay your loan on time. But historical assumptions are against you. You don’t live in the property, the value of the home might have gone down, and many lenders are trying to avoid lending to real estate investors.
If you can reduce the amount of the loans on the property, you might find a local bank in the area in which the property is located that might — that is might — want to lend to you. Otherwise, you might want to pay off the higher interest rate loan with a loan from a different source.
I feel for you, but at the moment, I think there is very little that you can do other than keep paying your mortgage and hoping that this year starts to unwind the damage of the past decade.
Whatever you do, keep paying your loan, even if you have to take a second job to do it. When the markets unfreeze — and they will — those who have managed to keep excellent credit will get all of the best opportunities for new loan programs.
Jan. 19, 2009.