'Is My House in a Bubble?' Avoiding Foreclosure in Today's 'Bubbly' Market

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Bills.com offers tips on avoiding foreclosure risk.

The topics at many Thanksgiving tables this year included home prices: How prices are moving, whether interest rates will increase, and whether someone's market is in a "housing bubble." Many markets have been classified as having a housing bubble problem -- yet Andrew Housser, co-CEO of Bills.com, suggests that homeowners can take steps to avoid suffering the ultimate loss of foreclosure, even in a bubble market.

"A housing bubble is a market condition in which home prices rise rapidly to the point of being unsustainable relative to income and to other costs," Housser explained. "At that point, when housing demand declines, home prices decline. Buyers who purchased at the top of the market risk being in a position of negative equity, owing more than the home's current market value."

Adding to the stress on homeowners, many people purchase homes with small down payments -- providing little equity in a property -- and using flexible loan products such as adjustable rate mortgages (ARMs). As interest rates rise, so do ARM rates -- and payments. Owners who have difficulty making higher payments are at risk of losing their homes to lenders through foreclosure.

Prevent foreclosure

"It's true that an ounce of prevention is worth a pound of cure," Housser said. He offered several suggestions to avoid getting into a foreclosure-risk situation:

1.    Avoid buying top-of-market. In most areas, the market has already peaked, Housser noted. "But if a buyer is unsure if properties are a good value, it's best to hold off on buying. This is one area where it can be smarter to rent until you are certain property values have settled."

2.    Put enough down. Housser suggests making a down payment of 10 to 20 percent of the home price. "With a good down payment, you own enough of the home that you have some flexibility in terms of home value. Even if you were forced to sell and lost some of your investment, you at least would not owe on a property you no longer own."

3.    Avoid ARMs, interest-only loans and other mortgages that might increase. "If you can't afford a home with a traditional mortgage, you probably can't afford the home," Housser advised. With some rare exceptions, "it's best to continue saving until you can afford a home with a fixed-rate mortgage."

4.    Don't take a cash-out refinance. Consumers should avoid refinancing their home to take cash to pay off debts or go on vacation unless they have a very high percentage of equity. "Otherwise, you risk owing the bank if for some reason you must sell the home for less than you owe on it," Housser said.

Buyers at risk can take action

Housser also suggested actions buyers can take when prevention is too late. For those who have already missed payments and are at dire risk of foreclosure:

1.    Request a forbearance agreement. For a temporary hardship -- for instance, an earner has an unusual, seasonal loss of income -- lenders might grant a forbearance agreement to lower or eliminate payments for a limited time.

2.    Modify the loan. In unusual circumstances, some lenders will modify a mortgage loan, such as lowering the payment and extending the loan's term, or incorporating any delinquencies into future pay¬ments.

3.    Obtain a "deed in lieu" of foreclosure. A "deed in lieu" essentially allows the borrower to return the title or deed of the property - giving the home back - to the mortgage holder to avoid foreclosure. The borrower forfeits any equity in the property, but does not have a foreclosure on his or her credit record.

4.    Sell the home. Selling the home may not be ideal, but it is a way to avoid foreclosure proceedings on the house and repay the lender. In a housing bubble situation, the home may be worth less than the mortgage amount. These cases might require special permission from the lender to sell the home at a loss, for its current value.

5.    Refinance the loan. Sometimes, borrowers can refinance a home for a lower interest rate and/or lower monthly payment. "If you already have had late payments on your mortgage, the interest rate offered to you may be too high to lower your monthly payment," Housser cautioned. Mortgage calculators are available online, including at http://www.bills.com/calculators/.

"The worst-case scenario in a housing bubble is that you will have to sell your home for a loss," Housser said. "In most cases, a housing bubble leads to some losses, but more often forces homeowners to stay in a home for longer than they had intended. This can work out for the best, if you continue paying on a mortgage. Eventually, you will have greater equity in your home, and that's the best investment of all."

Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and save money by choosing the best-value products and services. Since 2002, Bills.com's partner company, Freedom Financial Network, has provided consumer debt resolution services, serving more than 10,000 customers nationwide and managing more than $250 million in consumer debt. The company's co-founders and CEOs, Andrew Housser and Brad Stroh, were recently named Northern California finalists in Ernst & Young's 2006 Entrepreneur of the Year Awards.

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Aimee Bennett
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