Strategic default

It was just last summer that Charlotte Perkins made the hardest decision of her life as she and her husband Jim were caught in the vise of the housing bust.

Wanting to downsize their lives as they headed toward retirement, they bought a new house in Mesa, Arizona, before they sold the old one, also in Mesa. Their previous home had been appraised at nearly $400,000 at the height of the market, but as the housing crisis ravaged Arizona, they were told they'd be lucky to get $200,000 for it.

They were carrying a loan of $260,000 on their original home alone, meaning they were well 'underwater,' owing much more than it was worth. Combined with the mortgage on the new house, their housing payments had become an "anchor around our necks," she says, threatening to gobble up all their retirement savings and leave them with nothing.

The couple made a difficult call: They would do a 'strategic default,' and simply stop paying the old mortgage. "We really had to wrestle with it," said Perkins, 60. "We had worked all of our lives to build good strong credit, and we're proud people. But it came down to, 'Can we keep doing this?' We had to say 'No.'"

As the housing bust drags on, many homeowners are thinking like Perkins. Almost 11 million homes are now underwater, says financial information provider CoreLogic. Around 3.5 million homeowners are behind in their payments and another 1.5 million homes are already in the foreclosure process, according to online marketplace RealtyTrac.

As banks start to work through their backlog of distressed properties, the New York Federal Reserve estimates that 3.6 million foreclosures will take place during the next couple of years.

So, the question is: Does it make sense to keep paying a massive mortgage, knowing that it might be decades before a home regains its prior value? Or is that akin to - as columnist James Surowiecki recently wrote in the New Yorker - "setting a pile of money on fire every month"?

"I constantly get the saddest e-mails from people saying, 'I've exhausted all my life savings, my retirement is gone, and now I have to default,'" said Jon Maddux, CEO of YouWalkAway.com,

a foreclosure agency that helps clients with strategic default (and charges a fee for it). "But if they had seen the writing on the wall a couple of years earlier, stopped paying the mortgage and stayed in the home throughout the whole process, they would be in a much better financial position."

Moral Quandary

There's a moral component to that decision, of course. People naturally feel embarrassed about breaking a contract and not paying their bills; no one wants to be branded a deadbeat. But remember that companies default on their obligations when it makes financial sense for them to do so, via the bankruptcy process. Even the Mortgage Bankers Association itself, in a flourish of irony, arranged for a short sale of its Washington headquarters.

It's not personal; it's business. So think of strategic default as a business decision, and do a cold-eyed cost-benefit analysis of whether it makes sense for you, advises Carl Archer, an attorney with Maselli Warren in Princeton, New Jersey.

[Also see: Small Money Missteps That Can Cost You Big]

"People think it reflects on their integrity, and say 'I wasn't raised this way,'" said Archer. "But the more businesslike attitude is to say that there's a contract, there are penalties for violating that contract, and sometimes it just makes financial sense to break it."

The penalties largely revolve around your credit record, which admittedly gets blown up in the near-term. For a few years you can likely forget about qualifying for a mortgage or a car loan. When lenders are ready to take a chance on you again, you'll have to pay for the privilege, with stiff interest rates due to your default history.

What Happens to Scores

Charlotte Perkins watched her credit score go from a pristine 800 to 685, dropping every time she missed a payment. Credit-scoring firm FICO estimates that someone with a 680 score would see that number sink between 85-100 points after a strategic default, and someone with 780 could crater 140-160 points.

Not desirable, of course, but not the end of the world either. For Perkins, for instance, she already had a loan on her Ford Escape, and the mortgage on her new house, before she even started the default process. She hasn't seen any changes on her credit cards since, in terms of limits or interest rates.

Now that the previous home was auctioned off in December, she can start slowly rebuilding her credit, a process that should take about seven years.

Strategic default isn't a decision to be taken lightly, of course. If everyone did it, the housing market -- and the banks -- would be in much worse shape than they already are.

The following are some of the issues to keep in mind:

1. Look to it as a last resort, not a first option. Your financial troubles could be alleviated with a simple refinancing, especially since 30-year mortgage rates are near record lows of below 4 percent. If the banks are hesitant to rework your loan, look into the number of government programs designed to keep you in your home, which can be researched at MakingHomeAffordable.gov.

2. Location, location, location. Each state has its own rules and regulations regarding foreclosures, which affect both the length of the process and what you could be liable for in the end. In so-called 'non-recourse' states like Arizona, California and Texas, a lender cannot come after you for any deficiency (for instance, if your mortgage was $300,000 and they're only able to sell the property for $200,000). In other states they can pursue the difference, in theory - which is why some homeowners opt to file for bankruptcy, to free themselves from those potential obligations as well.

3. Use the interim to save like a demon. If you're in a state like New York or Florida, which require a judicial review of every foreclosure, it might be a couple of years before you actually have to pack up. In the meantime, be extremely disciplined about stockpiling cash. That will help you with a down payment for a rental, to pay for a car in cash if you need to, or to clear up other debts you might have. "Save money as if you were still paying the mortgage," says Archer. "If you don't, then you'll run out of both time and money, and then you'll be in a real tough spot."

4. Know the tax implications. Historically, if you have a debt that's forgiven, the canceled amount is considered taxable by the IRS. In the wake of the housing bust, though, the Mortgage Forgiveness Debt Relief Act was drafted to spare you those taxes. That legislation expires at the end of 2012, though - so if it's not extended, you could potentially face a tax bill for the difference.

5. Talk to a professional. A bankruptcy or real-estate attorney can help you through a very tricky process. The National Association of Consumer Bankruptcy Attorneys, for instance, has a searchable database of lawyers at www.nacba.org.

"is not an easy decision, and there's a cost either way," said Gerri Detweiler, director of consumer education for Credit.com. "Would you rather be $200,000 underwater, or would you rather have seven years of damage to your credit report? It depends whether you're finally at the point where enough is enough."

Broward housing inventory down 35 percent

The number of residential listings in Broward County fell by 35 percent in 2011, according to data from the Miami Association of Realtors. There are a total of 12,997 current residential listings in the county, down from 19,899 in 2010. In December, total inventory fell 2.4 percent compared to November. “The residential housing market has reflected health and balance over the last year,” said Ernesto Vega, president-elect of the Broward County Board of Governors of the Miami Association of Realtors. “Broward County home sales and prices continue to rise and are expected to further strengthen in 2012.” Nationally, total housing inventory fell 9.2 percent at the end of December. — Alexander Britell


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Buffet CEO on the Real Estate Recovery

Below its the transcript of an interview with Buffets Real Estate CEO



Here is the Video

http://video.cnbc.com/gallery/?video=3000067593

for more on the housing recovery, we hope it's a recovery, we're joined by ron pelltier, krthanks for joining thus morning. i don't want to put words in your mouth but you are cautiously optimistic for the second half of the year, ron? that's correct. you know, i clearly agree with diana's comments, the fact is housing has been under a lot of stress. i think there are some emerging signs of optimism that unless they are stifled here in the next few months i think give us reason to believe that, after six years of pain, there is a warm glow that's starting to shine over the housing market. and what is that warm glow? what's the tipping point? well, i think the tipping point a couple of things specifically is that you know, we have population growth in the area of 3 million people a year, and household formation that's about 1.5 million. after six years of very, very low levels of activity in terms of housing of housing sales, housing new construction, we have a lot of people that are sitting on the sidelines, and people have moved to rental housing or have moved back to live with mom and dad. neither of those options are optimum, and frankly, we're sitting here today in almost every major market, rents have exceeded the cost of home ownership, and i think that's a major tipping point that is going to cause people to start to re-think, do i want to continue to rent or do i want to move into a rental or do i want to buy a home. and when do you think people are going to appreciate that tipping point is taking place, that the rent versus buying price, you know, people have those calculators that the numbers now add the opposite way. well, i think that's happening right as we speak. i think the last couple of months particularly of 2011, we saw home sales activity start to, you know, move north versus south. we -- early indicators are for the month of january and virtually all of our markets, we're seeing some very, very positive activity. one might argue if you want to look for the negatives we've had no winter in many of the northern climates but the fact is there's a lot of activity. i also think it's very important to identify the fact that inventory from its peak is off about one-third, and as we move more into a balanced marketplace, where you know supply and demand are closer to equilibrium, i think we start to get price stabilization and maybe by the second half of the year we might see some small but at least positive price growth. ron, looking city by city, is there a particular city where you think the greatest opportunity lies in the next six months? well, i think that you know, the larger cities are, i mean we can -- miami's been under the spotlight for good or bad reasons for a long, long time. i this i if i used miami as an example, if you go back two years and listen to the dialogue, they said about ten years of unsold inventory. we sit here today, miami believe it or not is concerned about having enough inventory. i do think the inventory will come as homeowners that are currently homeowners are starting to think that they can sell their home. for years, people have held onto their home, unless they were under distress, because you know, they're giving up in their mind too much of a price forgiveness, and we're not going to be at 2004-'05 prices. we're seeing a stabilization and we're seeing that in markets across the country. i use miami as the most outrageous and most positive. what do you see happening in detroit, one of the hardest hit cities but of course we see auto sales coming back. well, again, there's a very good example. the auto industry that was, you know, maybe by some people's standards was given up for dead, in this country, the big three has come back. housing sales are actually very brisk. we'd all like to pay the average sales price in detroit. you can hardly buy a car for the price of a home or a home for a price of the car. it's a bargain, but sales activity is picking up, and you know, i think that a lot of the, you know the markets that were very stressed are really showing some significant signs. i don't think it's going to be a boom, and i certainly would not suggest that, but i do think there's reason for us to believe that as we go through 2012, this will be a transformational year from correction and continued distress to you know, stabilization and minimal recovery, and i think we'll see a slow, steady growth going forward. is there anything you want to see or hope to see out of washington that you think is going to actually change the game? well, you know, there are a lot of issues still remaining in housing. the foreclosure issue is a big issue. i think people at the street level would like to see the foreclosure issue just get settled and move on. there are going to be homes that are foreclosed. we need to be able to sell those

Builder Confidence Rises to Highest Level Since June 2007

Homebuilder confidence in the market for newly built, single-family homes rose for the fourth consecutive month in January to its highest level since June 2007 on the NAHB/Wells Fargo Housing Market Index.


The index rose four points to 25. Each of the index’s three components, which measure current sales conditions, sales expectations in the next six months and traffic of prospective buyers, posted increases.

The three major U.S. stock indicies extended their gains on Wednesday, following the better-than-expected housing data.

“Builder confidence has now risen four months in a row, with the latest uptick being universally represented across every index component and region,” noted Bob Nielsen, chairman of the National Association of Home Builders (NAHB) and a home builder from Reno, Nev.

This is just the third time the index has been at 20 or above in two years.

Still, any reading below 50 indicates negative sentiment about the housing market. The index hasn't reached 50 since April 2006, the peak of the housing boom.

The index is rising because builders are optimistic that sales will rise this year. In 2011, they fell and are likely to be the lowest level on records going back nearly a half-century.

The index rose in all four regions of the U.S. with the Northeast posting the largest increase — a 9-point rise to 23.

“Builders are seeing greater interest among potential buyers as employment and consumer confidence slowly improve in a growing number of markets, and this has helped to move the confidence gauge up from near-historic lows in the first half of 2011,” noted NAHB Chief Economist David Crowe.

HUD-approved agencies offer free help

WASHINGTON – Jan. 17, 2012 – In recent years, many people have turned to individual agencies, housing counselors and lenders to avoid foreclosure – but many found themselves paying scammers who took money and failed to protect them.

In a new information campaign, the Department of Housing and Urban Development (HUD) is telling homeowners that anyone at risk of foreclosure can receive free counseling from HUD’s nationwide network of approved counseling agencies.

Available services

Although each agency offers specific services, each generally offers the following types of help:

• General counseling in matters related to housing
• An evaluation of a homeowner’s specific situation
• Counseling on ways to avoid foreclosure
• Help with refinancing through HUD’s various programs or with lender negotiations

HUD-approved agencies cannot charge for their foreclosure counseling services. However, they can charge a reasonable fee for other services, such as general housing education, pre- and post-sale counseling, and other services.

Preparing for a first meeting

A homeowner does not have to be in the foreclosure process to seek counseling. In fact, HUD advises anyone who thinks he might have problems in the future to contact a mortgage counselor sooner rather than later. Before a first meeting, HUD suggests having the following information ready:

• Household monthly income and expenses
• Current monthly mortgage payment amount
• Latest mortgage account statement
• Any relevant communication with your lender regarding late mortgage payments

“It is also a good idea to have a sense of what you want to accomplish with the help of the approved counseling agency – keeping your home, selling it, refinancing, etc.,” HUD says in a release.

Working with a non-approved agency

To avoid a scam, HUD advises homeowners to take the following steps if working with an agency no approved by HUD:

• Avoid paying for foreclosure counseling services. HUD-approved agencies provide these services at no cost.
• Resist any tactics that pressure you into signing documents without enough time to go over them carefully.
• Do not sign over the deed of your house to any other person or organization.
• Make your mortgage payments only to your lender or an institution approved by your lender.

To find a HUD-approved agency in Florida, visit HUD’s website.


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Fannie Mae sees 2012 home sales up 3.5%

The housing sector will likely take incremental steps forward in 2012, though total originations will fall on fewer refinances, according to economists at Fannie Mae.

The second half of the year should outpace the first six months in terms of growth, though fiscal policy and political uncertainty in Washington will likely drive consumer and business activity, the mortgage giant said.

Chief Economist Doug Duncan said positive consumer activity and challenges in housing and the global economy will equate to moderate growth for the year.

"We're entering 2012 with decent momentum, especially on the employment side, which is fostering positive household and consumer behavior," Duncan said in a release. "Unfortunately, we expect this momentum to slow as we move through the first half of the year."

The report released Friday forecast total home sales to increase 3.5% to about 4.74 million in 2012 from 2011 with another 5% gain in 2013 to nearly 5 million. New home sales could jump 10.4% for 2012.

The Federal Housing Finance Agency home sales price index, excluding refinances, could dip 1.1% for 2012 from a year before, according to the forecast. Economists predicted the 2011 index would finish 4.6% lower than 2010.

Mortgage originations as dollar volume could see a decline as well in 2012, largely on a steep drop in refinances. The Fannie report said total originations will fall to $1.01 trillion in 2012 from a predicted final 2011 tally of $1.36 trillion. Economists expected refinancing to plummet to $540 billion from $894 billion.

Purchase mortgages, however, will rise to $471 billion in 2012 from a estimated 2011 total of $464, according to the report.

Total single-family outstanding mortgage debt will likely drop 1.3% to $10.14 trillion in 2012.


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For the U.S. economy as a whole, Fannie researchers predicted real GDP would increase 3.3% in the fourth quarter to finish the year at 1.7% growth. Economists forecast 2.3% GDP growth for 2012 and 2013.

Increased Lending and More Loan Modifications and Short Sales, Key to Recovery

“As the nation’s leading advocate for homeownership and housing issues, NAR knows that a strong housing market recovery is key to the nation’s future economic strength,” said NAR President Moe Veissi, broker-owner of Veissi & Associates Inc., in Miami. “Improving access to affordable mortgage financing for qualified home buyers and investors and aggressively pursuing more loan modifications and short sales is necessary to help reenergize the housing market and spur an economic recovery.”

The pendulum on mortgage credit has swung too far following the housing downturn. According to the 2011 NAR Member Profile, 34 percent of Realtors® reported that the most important factor in limiting their clients’ ability to buy a home was difficulty in obtaining a mortgage. While NAR supports responsible and strong underwriting standards, unnecessarily tight credit restrictions are keeping many qualified home buyers from purchasing homes, which could help absorb excess inventories of homes in foreclosure.

“Creditworthy consumers continue to have difficulties securing affordable financing despite their proven ability to afford the monthly payments,” said Veissi. “Expanding financing opportunities to qualified buyers could help reduce distressed property inventories, minimize the negative impact those homes have on local markets and restore vibrant housing markets and neighborhoods.”

To prevent further foreclosure inventory increases, NAR also urges lenders to take more aggressive steps to modify loans and keep struggling families in their homes. Significantly reducing monthly mortgage payments will help more families remain current on their mortgage and allow them to remain in their home, reducing the impact of foreclosures on local home prices.

For homeowners who are unable to meet their mortgage obligations, NAR has urged lenders and servicers to quickly approve reasonable short sale offers so these people can avoid foreclosure. The short sale process can be time-consuming and inefficient, and many would-be buyers end up walking away from the transaction.

“Loan modifications and short sales help stabilize home values and neighborhoods, and limit the losses incurred by lenders, the federal government and taxpayers, which is good for everyone,” said Veissi.

The Fed paper also addresses converting foreclosed properties into affordable rentals. NAR supports reducing the barriers that prevent owner-occupants and small investors from accessing financing, such as opening the Federal Housing Administration 203(k) program to investors. NAR also believes these efforts are best made by local entities that understand the challenges of the local community and will respond to renters’ needs.


Washington, DC, January 05, 2012 (Realtor.org) Stabilizing and restoring the health of the housing market is critical to a broader economic recovery, according to a white paper released yesterday by the Federal Reserve Board. Many of the issues and recommendations outlined in the paper support key principles established by the National Association of Realtors® to help revitalize the housing industry and economy.

The white paper, The U.S. Housing Market: Current Conditions and Policy Considerations, calls for increased lending to creditworthy home buyers and more loan modifications, mortgage refinancings, and short sales to reduce the rising inventory of foreclosed homes and help stabilize and revitalize the housing industry; an approach long recommended by NAR to help spur the housing market recovery

In addition, NAR is concerned about proposed bulk sales of distressed properties and believes that every effort should be made increase liquidity for consumers and small investors since bulk sales will likely result in greater losses for taxpayers and have a more negative impact on housing values.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.

For more information, contact:

Sara Wiskerchen
(202) 383-1013

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When you work for yourself, can you take time off?

FORTUNE -- Not many job categories are growing in today's economy, but here's one that is: the number of workers calling themselves "free agents." According to temp staffing agency Kelly Services, more than four in 10 workers call themselves "free agents," feeling unattached, long term, to any employer. This is up from 26% in 2008. People flit between organizations and -- often -- spend significant time working for themselves.

There are many upsides to calling yourself boss. The downside? Every year, around the holidays, entrepreneurs learn (and relearn, as the case may be) that it's tough to take even a week or two off, let alone a longer absence, like a maternity leave or sabbatical.

While corporations dangle paid vacation as a perk, as James Sutton, a self-employed psychologist in Pleasanton, Texas puts it, "the self-employed person pays for their 'fun' twice: the cost of the time off, and the revenue lost from not working."

It's tempting to just keep grinding away. But that's counter-productive. Sutton claims that "some of my best ideas and marketing approaches came when my mind was refreshed and 'idle,'" and many other free agents report the same thing. Here are a few strategies for taking time off from business owners who've done it:

Plan ahead. Way ahead.

Figure out your 2012 travel plans by the end of 2011. Knowing your vacation times at least a few months in advance lets you build that lack of availability into your client proposals and plan your pipeline accordingly. Says Tim Parkin, president of Parkin Web Development in Orlando, Florida, "last minute trips make it difficult to adequately prepare and give notice to your clients. It's unfair to both parties."
Knowing your schedule ahead of time also lets you plan for some long days before and after, and arrange employee schedules with that in mind. Parkin notes that clients who learn of your vacation plans "might have immediate requests ('Can you do XYZ before you leave?'), which is why more notice is better."

Watch your business cycle.

If you run a retail business, forget about starting Christmas vacation before Christmas. Mark Aselstine, who co-owns a wine club called Uncorked Ventures with his brother-in-law, notes that "50% of our sales typically occur between Thanksgiving and Christmas Day." 2010 was their first in business, "and we didn't have a real plan and ended up, frankly, not doing a good job seeing family, or getting customer orders delivered in a timely manner."

This year, the rest of the family will start Christmas without them, and Aselstine and his brother-in-law will take off on the night of the 23rd. At that point, it's too late to get wine delivered before the 25th, and with January being a slow month for wine, they won't have to hurry back.

Get help.

Meghan Ely, owner of OFD Consulting, a Virginia-based wedding marketing firm, took an eight-day trip to Ireland last September with her husband. "Prior to leaving, I trained one of my staff members essentially how to 'be me,'" she says, answering emails, taking the first few steps with prospects and the like.

Don't have staff? Doctors cover each other's shifts for vacations, and if you have a colleague you admire and trust, you could try referring work over there during your time off -- particularly if you plan to take a longer leave. You could also ask a trusted friend or family member to check your email and voice mail and call your hotel if anything disastrous happens.

Consider shorter, more frequent breaks.

Gaurav Sharma, who now runs the startup RightBuy.com, used to run a web consulting company. "I took a week off last year and even though I planned it well, a few clients were frustrated," he says, and did not become repeat customers. Now he sticks to long weekends.

Others squeeze in a week by thinking outside the usual calendar categories. Tim Pacileo, owner of TheBoardRoomAdvisors, a marketing firm, often takes his vacation from, say, Wednesday to Wednesday. If clients think on a weekly cycle, this allows you to never actually skip a week. "It's easier on my customers and doesn't affect my income stream as much," he says.

Schedule short "work breaks" on your vacation.

Brad Friedman, an attorney who now works in social media marketing, says that "My type-A personality wouldn't possibly let me completely shut down for an entire week." So what he does is "set a schedule before I leave town. That schedule provides me with some time every day, or every other day, to check email and phone messages. I try to limit this 'work time' to no more than an hour a day. Frankly, this tip helps me relax on the vacation much more than if I would try to totally cut myself off from work for a whole week."

But even keeping all this in mind, happy business owners say that you sometimes just have to go for it. Taking time off is a risk, but so is running a business in general. Paige Arnof-Fenn, founder of the consulting and marketing firm Mavens and Moguls, took a month off for her 40th birthday, staying in a rustic farmhouse overseas that had no Internet access or cell phone reception. She told everyone months ahead of time, and then just went. She enjoyed the experience so much that she and her husband will be taking another month off to go to Australia and New Zealand in 2012.

"Not a milestone birthday for either of us but just a way to celebrate our lives," she says. She and her husband have lost several relatives in the past few years, and the lesson they are drawing from it is to "not … wait for an excuse to take time off" -- even if it takes some effort to scale back up when you return

Investors should look to S. Fla. for home rentals

The housing bust has helped turn Broward and Palm Beach counties into two of the nation's best areas for investors seeking single-family home rentals, according to a North Carolina research firm.

A fourth-quarter analysis of 100 U.S. housing markets by Local Market Monitor ranks Broward eighth and Palm Beach County 14th. Las Vegas is first.

Aside from Broward, four other Florida markets made the top 10: Daytona Beach (two), Orlando (four), Fort Myers (five) and Tampa (nine).

"We think Florida is one of most interesting states in terms of rental property opportunities," Ingo Winzer, president and founder of Local Market Monitor in Cary, N.C., said in a statement. "That's because home prices haven't bottomed out, and rents will eventually be supported by renewed population growth."

Metro areas are ranked by the expected returns of single-family homes bought as rentals. The report helps investors determine how much to pay for properties.

Local incomes, job growth and rental rate growth were among the factors the firm considered in determining the best communities for investment.

Markets at the top of the list have endured large home price declines during the housing downturn. Investors who buy in these areas can expect above-average returns, assuming they can keep the properties rented, according to Local Market Monitor.

That shouldn't be an issue for many investors because the rental market, particularly in South Florida, has been strong for at least the past two years. Thousands of bank-owned homes are being resold to investors, who are renting them until the housing market improves.

Meanwhile, demand for rentals is on the rise. Foreclosures and price declines have many residents leery of homeownership or unable to qualify for mortgages.

David Hicks, co-president of HomeVestors, a Dallas-based firm that buys and sells rentals, said this is the best environment for single-family investors in 30 years.

"People who have been displaced from the housing market want to find a home — they don't want to go back to apartments," Hicks said Wednesday.

Deerfield Beach housing consultant Jack McCabe forecasts annual rental rate increases of 5 percent to 15 percent in South Florida for the next three to five years.

McCabe said he's working with two South Florida investor groups that are targeting single-family homes. He expects the investors to buy and rent before eventually selling.

"They have an opportunity to make some very sizable profits as an exit strategy," McCabe said.

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