Whom to Foreclose?

Banks foreclose on homes with lots of equity and try to "workout" the loans with the homes with no equity. 

Doesn't that seem counterintuitive?  Actually, it doesn't if you look at it from a banker's perspective.  Which piece of collateral (READ: home) is more likely to cover the debt>  The answer is simple; the piece of property you can sell at a low price and move quickly.

Why do we recommend to clients that they always have their properties leveraged to the maximum amount allowable?  Simple, we try to protect our clients from the four most common reasons that trigger foreclosure:

1- Divorce
2- Disability
3- Death
4- Loss of Job

Keeping a home leveraged through available credit in a home equity loan insures liquidity.  If prices drop, we've already "locked in" a profit.  If prices rise, we can "reset" the line after our annual review.

Liquidity means that mortgage payments can be made if one of the "Big Four" hits you.  if you use up all of your equity, the bank will be more apt to negotiate "workout terms" with you rather than rushing you to foreclosure.

*Article written by guest author Brian Brady and is solely his opinion and information.

Comments

[laurie manny]

Excellent advice, as usual Brian. Now if we can just lead a horse to water...

[Gena Riede]

Brian, good article. It would be helpful if at all possible...to site an example here with some figures of homes with equity and homes leveraged...for those who may not be familiar with the terms. Just a suggestion.

[Toby & Sadie]

Amen Brian! It is amazing how many people try to put a one-size-fits-all bandage on the foreclosure situation.

Too many people are burying their head in the sand rather than looking at the situation and saying "what can I do to solve this?"

On to a better topic, played in a vintage Base Ball game this weekend - using 1860s rules - if you've never, you have to. It is a wonderful time!

(I'm here via the AR Blog Tour this morning, but I really should stop my more often!)