AARP Report Says More Older Americans Now Still Have Morgage Debt, Larger Mortgages, and So--Surprise--More Foreclosures

Not only is the foreclosure rate climbing for older mortgage holders, it is climbing faster than it is for younger ones.

 

The last blog described two very significant changes in home mortgages among older Americans in the period from 1989 to 2010: a much larger percentage of them have mortgages on their homes, and these mortgages are much larger. Now almost twice as many 65 to 74 year olds continue to have a mortgage to pay, and nearly three times as many 75+ year olds do so. And the median amount of mortgage debt has nearly tripled in this time period for 55 to 64 year olds, while the amount has increased about four and a half times for 65+ year olds. These are the results of a report released earlier this month from the AARP Public Policy Institute.

This report also showed that, although the foreclosure rate for older American mortgage holders is consistently less than for younger ones, the older mortgage holders’ foreclosure rate is climbing faster. Take a look at this data tabulated in the report:

Foreclosure Rates by Age	2007	2008	2009	2010	2011	% Change 2007–2011
<50	0.42%	0.97%	1.84%	2.83%	3.48%	729%
50+	0.30%	0.66%	1.32%	2.27%	2.92%	873%

Notice that in every single year, the foreclosure rate was lower for those 50 years old or older than for those under 50. But also notice that the increase in the foreclosure rate was greater for the older Americans.

It makes sense that older homeowners would have a fewer foreclosures as a group. On average they’ve presumably owed their homes longer, bought them when prices were lower, and have had more time to pay down or pay off their mortgages. They would tend to have more income stability, and have had more time to accumulate savings and other resources with which to make mortgage payments if their income was reduced. And more of them would have sold their homes before the bubble burst when they cashed in their home equity for more modest homes.

As for why the foreclosure rate has increased more for older Americans, this flows directly from the two main conclusions of the last blog: because they are much more likely now to be carrying a mortgage at all, and because those mortgages are larger. Instead of no longer having a mortgage from having paid it off, or instead of owing a small balance in the final years of a mortgage with a modest payment, more are stuck with a sizeable obligation into the future.

So, older Americans are vulnerable month-to-month because of higher monthly mortgage obligations. And they are vulnerable long-term because they have less equity in their homes or none at all.  They are in the period of their lives when it’s more difficult to get hired or re-trained, when they are more likely to have health issues, and when they are on fixed incomes while expenses continue to rise. So it’s not surprising that more of the current AARP generation is ending up in foreclosure.

 

Reasons to Do a Short Sale? Maybe Not

Besides avoiding a foreclosure and its hit on your credit record, you may have other sensible reasons for looking into a short sale of your home. Let’s consider those other reasons.

In my last blog I showed how a short sale may be harder to pull off than expected, and how they can be dangerous if you do not get advice from knowledgeable professionals looking out for your interests. Simply put, you should not assume that any particular solution is the right one without knowing all your options. And that means asking whether the reasons you are pursuing one option might or might not actually be better served through a different option.

So here are some sensible reasons to consider doing a short sale:

1. You can’t afford the house anymore and so believe you have no choice but to get out.

If your income has been cut or the mortgage payments have gone up so that you cannot keep up those payments, and yet you can’t sell your house in the normal fashion because it’s worth less than the mortgage balances, then a short sale may be a good way to escape the house and its debt.

But maybe you have important reasons to stay in your home. Your family may benefit from staying for deep personal reasons—such as not leaving your kids’ school district or maintaining family stability. If you leave this home it may be a long time before you would have the financial means to buy again. So there may be ways to lower the cost of keeping your home. A mortgage modification may now be more available than in the last few years because of the recent large mortgage fraud settlement with the major banks, and other improved programs. A Chapter 13 case in bankruptcy court may enable you to eliminate or drastically reduce a second mortgage balance, and either eliminate, reduce, or delay payments on other liens on the house. And either a Chapter 7 or 13 could reduce or eliminate other debts so that you could better afford to pay the home obligations.

2. You’ve heard that bankruptcy does not allow “cram downs” of mortgages on your home. So you see no way out of your second mortgage other than getting them at least a partial payment through a short sale in return for writing off the rest of that debt.

You’ve been doing your homework if you understand that mortgages secured only by your primary residence cannot be “crammed down,” reduced in bankruptcy to the value of that residence, unlike lots of other kids of secured debts.

But there’s a big exception, one that keeps getting bigger as home values continue to decline in many areas. If your home is worth less than the balance of your first mortgage, so that there is no equity at all in your home for the second mortgage, then through a Chapter 13 case you can “strip” this lien off your home. That means that your second mortgage debt can be paid very little—sometimes even nothing—during your 3-to-5 year Chapter 13 case, and then written off completely. This not only saves you from paying the 2nd mortgage payment from then on, it reduces your debt on your home forever, making hanging onto your home economically more sensible. If this second mortgage strip applies to your situation, then you will pay less each month for a home with less debt on it.

3. You may be induced to do a short sale not just because of your voluntary mortgage debts on your home, but because of various other usually involuntary ones which have attached to your home’s title, like one or more tax, judgment, support, utility, or construction liens.

You may have found out that your title is saddled with other obligations, and in fact you may well be under a great deal of pressure to pay one or more of these obligations. The IRS and support enforcement agencies can be especially aggressive. So you would understandably feel that you have no choice but to sell your home to get that aggressive creditor paid. And since you have no equity in your home, you can only sell it on a short sale. But the problem is that the more lienholders you have, the more challenging a short sale becomes. And even if it does succeed, the troublesome lienholder may agree to sign off for less than the balance, leaving you still being pursued by it.

I can’t cover here how a Chapter 7 or Chapter 13 case would deal with each of these kinds of lienholders. That’s a many-blog discussion, and would depend on each person’s circumstances. But often you would have options that would give you more control over your home and over your financial life than would happen in a short sale. Considering what is at your stake, it certainly makes sense to consult an attorney who is ethically bound to explain all the options in terms of your own goals and best interests.

Short Sales: Seldom Easy and Often Not What You Expected

A short sale of your home is sometimes your best alternative. But short sales often do not successfully close, and even when they do you may get a rude surprise.

In a short sale, a house is sold by “shorting”—underpaying—one or more of the lienholders, because the value of the house, and thus the purchase price, is not enough to pay everyone in full. The liens can include not just voluntary ones such as the first and second mortgage, but also judgments, income taxes, support obligations, unpaid utilities, and property taxes. All lienholders must consent and release their liens, or the sale cannot occur. There may or may not be subsequent liability for the homeowners to those lienholders who were not paid in full.

The primary benefit of a short sale is that it avoids a foreclosure on the homeowner’s credit record—that is, it does so IF the short sale is successful. Even so, in the present economic climate there are some indications that there will be less credit record difference between a short sale and a foreclosure. So if you are using this credit record difference as the primary reason try to do a short sale, it may well not be your best course of action.

Short sales have two main problems.

First, they are generally much harder to pull off than expected, taking much longer, and often fail to close, putting the homeowners further behind, with dashed expectations. They usually don’t work because:

• Unhelpful and slow mortgage lenders: To accomplish a short sale, usually the first mortgage holder has to give up some money to a junior lienholder or two. The benefit to the first mortgage holder is that getting a little less out of the sale is better than incurring the delay and cost of foreclosure. But many mortgage companies are not well organized or staffed to handle such negotiations. You are often forced to work through a servicing company, whose financial incentives may well not encourage short sales. So they may drag their heels, and can even sabotage your efforts.
• Since all lienholders must agree, any one of them can kill the deal: Everybody wants their “fair share” of a pie that is too small to make everybody happy. Just when you think you have a deal among the main players , someone else crawls out of the woodwork demanding a payment and jeopardizing the closing. They all have a legal claim against the property, and can delay or undo the whole deal.
• The middlemen have the most to gain: Realtors and others in the real estate sales industry often benefit more from a short sale than you do. Realtors without enough homes to sell have to close sales to survive—even if they are paid less in a short sale than otherwise to help the deal happen. Some “short sale specialists” are indeed expert in this type of transaction, but if it is all that they do then you need to be concerned that they may be like the proverbial “person with a hammer to whom everything looks like a nail.” There are good reasons that unbiased observers—like bankruptcy judges—tend to take a dim view of short sales, seeing them as mostly a way for the middlemen to make money on you.

Second, short sales are dangerous:

• Potential liability from unpaid balances on the junior mortgages and liens: Although you may be told that you will not be liable, you need to be sure that the settlement documents and the applicable law in fact cut off any liability. Also be aware that sometimes in the midst of the negotiations, especially if a junior lienholder is playing tough, and the closing has been delayed for a long time, you may be feel forced to accept some liability in order for the closing to occur.
• Potential tax consequences: This issue deserves a whole blog by itself. The key principle is that debt forgiveness can be treated as income subject to taxation unless you fit within one of the exceptions. Make sure you talk with an appropriate tax specialist about this before investing any time or expectations in the short sale option.