Foreclosures Affect All  U.S. Home Owners 

If you are like the millions of Americans who are paying their mortgages on time, you probably think the mortgage foreclosure crisis is someone else’s problem. But, if you do, you are wrong. Foreclosures are affecting every American home owner because they are so widespread, and they are driving down the values of homes in every neighborhood across the country.

Consider this common scenario. Imagine that you bought a home in 2003 in a new development where the prices started at $450,000. Average price paid for the homes with upgrades was $550,000.

Your neighbor down the street, Joe Smith, did things the way he was supposed to. He put 20% down and added some upgrades that he paid for in cash. Then his son, Joe Jr., got accepted to Yale. Joe refinanced his house to raise the tuition money. He was still ok because house values were appreciating and he had equity in his home. Next his daughter got married, and he took out a second mortgage to pay for the wedding.

Now it is 2006, and home values have started to drift down. But Joe is still ok. However, 2007 and 2008 bring more home devaluation. Now Joe has decided he might sell his house because the kids are gone and he doesn’t need so much space. It is then that he realizes he now owes pretty much what the house is worth. If he sold it, he wouldn’t have enough left over to pay the sales commission and other closing costs.

Joe thinks about a short sale where the bank forgives as much as 20% of the loan amount. But he has two mortgages – from two different lenders. This makes it almost impossible to negotiate short sale.

Then catastrophe strikes, and Joe losses his job. Now he can no longer afford the big mortgage payments. He misses three payments, and the bank issues a Notice of Default. Next thing you know, his house is listed in the newspaper in the Sheriff Sale announcements. Six months go by, but Joe does nothing. He can’t sell his house, he can’t pay the mortgages, he can’t even afford the taxes.

The bank with the primary mortgage moves in and takes over the house. Joe is forced to move out. The bank hires the ABC Real Estate Company to liquidate the home. They send someone over to take a picture of the house, stick a sign in the yard and a lockbox on the door.

Joe paid $550,000 for the house. The bank decides to list the house for $450,000. The bargain hunters swoop in. But $450,000 is too high. Weeks go by. The bank lowers the price. Finally an offer is made. But it is for only $350,000. The buyer perceives this as a distressed property. He doesn’t want to overpay in a declining market. The house is being sold AS-IS, so no repairs will be made. After going back and forth for a week, the final sales price is decided: $375,000.

The buyer’s lender sends over an appraiser. He decides the house is worth $395,000. The buyer is happy because he perceives he has gotten a great deal. But you, the neighbor, should be horrified. Because now your house that you paid $550,000 is worth $400,000, maybe less. $375,000 is the latest sale in your neighborhood, and it becomes the comparable or benchmark against which all future sales well be judged. If you are lucky, Joe had the smallest model with the least square footage and no upgrades. But if he had the granite kitchen and the bump outs, you are screwed.

So, even though you played by the rules, paid your bills on time and did everything the way you were supposed to, you have taken a $150,000 or more haircut. If you decide to sell your home, you will not get what you think you deserve. Even if you managed to find someone willing to pay what you want, they won’t be able to get a mortgage and the deal will fall through.

Things could actually get worse. As unemployment continues to rise, more and more people will find themselves unable to meet their obligations. www.realtytrac.com reports that foreclosure filings are on pace to hit 3.5 million this year, up from more than 2.3 million last year. Unemployment is the primary reason homeowners are getting into trouble. The rate is now 9.8% and isn’t expected to peak until the middle of 2010.

To find out what your house is actually worth today, visit www.zillow.com and type in your home address.