There has been a lot of debate in recent years over how much Arizona real estate prices have fallen, the ominous shadow inventory, overbuilding, when the housing market will recover, how many years supply of inventory exists, whether or not there will be a double dip, etc, etc. While these statistics and topics provide good banter and a powerful reminder of just how far we’ve fallen, they really only speak to the macro-level economy. What REALLY matters are the homeowners. The decisions of the millions of people in Arizona will ultimately be the solution of all the aforementioned problems.
So why do I mention this? CoreLogic, a business analytics and proprietary research company, recently released a report detailing exactly how many homeowners have negative equity (Negative equity, often referred to as “underwater” or “upside down,” means that borrowers owe more on their mortgages than their homes are worth). The report, (which can be found here) has a headline of DATA SHOWS 23 PERCENT OF BORROWERS UNDERWATER WITH $750 BILLION DOLLARS OF NEGATIVE EQUITY.
Wow, that is significant. However, those numbers are at a national level. Arizona has the 2nd highest negative equity percentage at 51%. FIFTY ONE PERCENT! That means more than HALF of every Arizona homeowner is paying for an investment with negative return. What would you do if your bonds or stock portfolio had a negative return since late 2006?
So what are these homeowners to do? The bankers on Wall Street have no intention of helping these people out. Why would they? They have an homeowner paying $1.75-$2.00 on an asset that’s worth $1.00. That’s a good deal to Wall Street. So it becomes clear that the homeowners of Arizona need to find a solution other than subscribing to an investment that returns negative. Default On Purpose aims to give information and support services so that homeowners are able to make educated decisions and sell their overleveraged properties. with no debt deficiencies, no taxable income, and minimal credit damage.
When we meet with clients who are looking to get out from underneath a property, we analyze 3 variables that will determine whether or not it is in the homeowner’s best interest to sell the property:
1. Debt deficiency
2. Tax issues
3. Credit damage
Issue #2 has become a hot button issue within the industry lately. Let’s take the example of a homeowner who sells their property for $200,000, but the mortgage balance is at $300,000. The bank decides to forgive the $100,000 debt deficiency. Now, the bank is mandated by federal law to issue the homeowner a 1099 for the forgiven debt. Because of The Mortgage Debt Relief Act of 2007, that $100,000 will not cause a taxable event.
However, this act expires January 1, 2013. With the average short sale taking 6-8 months (some taking even longer), this deadline is approaching rapidly (Isn’t it believable that banks will begin postponing foreclosures until after the deadline so that the delinquent borrowers will have more of an incentive to keep the mortgage current?. There has been a significant amount of urgency in the marketplace now that this deadline is approaching.
We believe that in order for homeowners to protect themselves, they need to being looking at their options, at the latest, early summer. Otherwise, homeowners are opening themselves to more liability than they need to. The only way Arizona will pull themselves out of this hole is by individual homeowners making educated financial decisions, and we believe providing this information enabling information can benefit everyone.