Home Prices take a dive in 2010 - short sales, deeds in lieu and deficiency judgments

It is hard to believe that between 1950 and 2008; home prices rarely climbed less than an average of 8% return.  In some years there might be no appreciation and in other years, double digit gains. The figures are hard to pin down, but if we can believe it, between 2009 and 2010 home prices in Chicago dropped 20%.  Think about it.  It's crazy.  We've been told for years that these investments can't fail and the prices never go down.  Do you remember the phrase - "better get in now before prices go up".  The failed housing market or bubble burst has ruined realtors, loan officers and most importantly home owners who could barely afford and really weren't qualified to buy a home.



Right now most experts believe foreclosure filings will peak in 2012 and decline thereafter.  Most experts are calling for another 15% drop in prices in this year with a flat period for many years thereafter.  What is troubling is the similarity between the great depression and our present situation.  Many people are chronically unemployed with no unemployment benefits and our government is surprisingly silent.

For our firm, we are seeing far less Chapter 7 bankruptcies where people are coming in with fees.  We think it is because people are heavily in debt, without income and just wanting to clean things up before they head back to work.  For most people it means waiting to file a Chapter 7 until just after you have been at a job for about 4 months.  This is about the lag time between starting a new job and garnishments catching up to you.

For people looking to avoid a bankruptcy but wanting to get out of their property, a short sale can be great.  The problem traditionally has been that lenders intentionally stalled to cause failures and force foreclosures.  Now, lenders are softening up as they find they can be more profitable in a short sale.  One thing you may have noticed,  nothing involved is done to benefit the borrower or preserve creditworthiness or home ownership - this is strictly an attempt to improve profitability.

A deed in lieu of foreclosure is where a borrower asks the lender to take back the property by allowing the owner to sign over the over property via deed and avoid having the bank file foreclosure.  In the old days, the property would often be sold by the bank at a price high enough to pay off the mortgage and the borrower simply walked away from a house he or she didn't want.  Today,  lenders won't even consider a deed in lieu unless you have failed to sell your home (for any price) for six months or sometimes a little less.   Often times, someone will buy the house as a short sale instead of having the bank take the house back through a deed in lieu.

What's disturbing is that most borrowers face a deficiency judgment.... so what's this.  Well basically it's like a credit card debt that often is $80,000 or more and most lenders SELL IT at 2 cents on the dollar to a collection agency that sues the borrower and garnishes their wages forever.  Does this sound bad?  Yes.  Unfortunately, this is exactly what is sending many good families into bankruptcy and I can't think of a way that my clients can avoid it.