Can we really hold on to our properties?

[nepoez]

How will we be affected if our real estate unrealized loss is down 50%(just a # I pulled out of my rare pocket) next year.

For example, if I buy $1M worth of properties today, even though in 5 years they may be worth $2M which I will wait for, but before that time, say next year the market dives and it is then worth $500k and our mortgage is up for renewal. Will we be able to hold? Will the banks renew the mortgages or are we screwed?

 

[Thomas Beyer]

QUOTE (nepoez @ Dec 17 2008, 11:59 AM) How will we be affected if our real estate unrealized loss is down 50%(just a # I pulled out of my rare pocket) next year.

For example, if I buy $1M worth of properties today, even though in 5 years they may be worth $2M which I will wait for, but before that time, say next year the market dives and it is then worth $500k and our mortgage is up for renewal. Will we be able to hold? Will the banks renew the mortgages or are we screwed?
it depends on the income .. but any lender has 2 ceilings:
a) loan-to-value
b) DCR (debt coverage ratio)

so if the property is indeed 500K, then they lend at most 85% with CMHC if the cash-flow would allow it .. but if your mortgage was $750,000 (75% of $1M) yes you`d have a problem .. or better: the bank as their mortgage exceeds the asset value ..

which market will drop 50% in 5 years ? Cambodia ? Serbia ? SE Russia ?

 

[Nir]

Hi,
Just our of curiosity, what happens technically/what is the process when the bank does not renew the mortgage for the reason nepoez mentioned above and no other bank "wants" you? The bank suddenly owns the property?? I mean can they really do that legally? assume you never missed a payment and have a FICO score of 750

I guess that`s 2 questions: 1. can the bank decide in such a circumstance, legally, not to renew you? (not sure if there is a rule to protect the citizen against it) and 2. what is the process / what happens technically? (well, if anyone knows the answer as I`m guessing it didn`t really happen in Canada)
Thanks.

 

[TIMWEMBLEY]

QUOTE (investmart @ Dec 17 2008, 09:59 PM) Hi, Just our of curiosity, what happens technically/what is the process when the bank does not renew the mortgage for the reason nepoez mentioned above and no other bank "wants" you? The bank suddenly owns the property?? I mean can they really do that legally? assume you never missed a payment and have a FICO score of 750

I guess that`s 2 questions: 1. can the bank decide in such a circumstance, legally, not to renew you? (not sure if there is a rule to protect the citizen against it) and 2. what is the process / what happens technically? (well, if anyone knows the answer as I`m guessing it didn`t really happen in Canada)Thanks. If by some chance your 1 million is worth 500k and the bank does not renew what is their process?
I beleive it would be a demand letter to pay. If you dont pay which you probably can`t as nobody else will finance you,

Where will they get the money from?

They will have to forclose to collect their money from the sale of the home. So the bank first has to convince a judge that they should be allowed to forclose on a property where all payments are current. If they are succesful they will be the proud owner of a property worth $500k and they are owed $800k + lawyers fees + the months of interest while this whole mess was going on and you had no one who would take your payments.

Now the bank has to sell a home in a distressed market pay a realtor and another lawyer to close. This should be the absolute last thing they want ( or I would want if I was them) They should be begging you to keep payments made on a upside down home in distressed market. Now from your point of veiw (not saying I would do this but this is going on in the states ) I owe $800k on a house worth $500k am I gonna be real sad if the bank takes it off my hands its called jingle mail (keys back to the bank all the rage in the states)

What will you do?
Yes you get a foreclosure on your credit score which really sucks but you net worth went up 300k and now with properties on sale everywhere time to start doing some creative buying with your education from the school of hard knocks! ( That education is very effective)
Let me know if Im completely off base here with my interpretation of mortgage forclosing process and yes my glasses are very rose colored!
Tim

 

[Thomas Beyer]

QUOTE (investmart @ Dec 17 2008, 09:59 PM) Hi,
Just our of curiosity, what happens technically/what is the process when the bank does not renew the mortgage for the reason nepoez mentioned above and no other bank "wants" you? The bank suddenly owns the property?? I mean can they really do that legally? assume you never missed a payment and have a FICO score of 750

I guess that`s 2 questions: 1. can the bank decide in such a circumstance, legally, not to renew you? (not sure if there is a rule to protect the citizen against it) and 2. what is the process / what happens technically? (well, if anyone knows the answer as I`m guessing it didn`t really happen in Canada)
Thanks.
The bank lends money for a term, say 5 years. Once 5 years is up, they can demand their money back. (note, big period)

Usually they offer you a renewal sheet with terms that are above market in a flat or rising environment. So, you`d re-apply with same bank or different bank for better terms, possibly for a different amount. But, if the value may have dropped, they may chose to not even offer you a renewal.

So, if you don`t pay the money back, you are in mortgage default. This is a lengthy process, but after a few months the bank has the right to take over your property.

Keep in mind that in 5 years on a 25 year amortization you have paid down the mortgage by about 10%. Thus it is highly unlikely you will be upside down, but of course if you went in at 95% leverage with CMHC you may have an issue with a 20% property value drop. With CMHC though this ticket is good for 25-35 years ! Shop it around to other lenders. They may lend the money owed based on the CMHC underwriting (i.e. insurance policy from 5 years ago)

 

[nepoez]

QUOTE (TIMWEMBLEY @ Dec 17 2008, 09:11 PM) you get a foreclosure on your credit score which really sucks but you net worth went up 300k

I don`t think ur really up $300k net worth. If you bought $1M, $800k borrowed, $200k down. they take your property and now you own nothing but you lose $200k + and principal payment.

 

[nepoez]

QUOTE (TIMWEMBLEY @ Dec 17 2008, 09:11 PM) you get a foreclosure on your credit score which really sucks but you net worth went up 300k

I don`t think ur really up $300k net worth. If you bought $1M, $800k borrowed, $200k down. they take your property and now you own nothing but you lose $200k + and principal payment.

 

[invst4profit]

Assuming individuals can get mortgages you will see a lot of positive cash flow properties slip into the negative if individuals got into the market with high leverage and low interest rates.
Boarder line cash flow landlords, especially those with multiple properties, could create a selling/buying frenzy in the market by 2011.

 

[TIMWEMBLEY]

QUOTE (nepoez @ Dec 18 2008, 09:34 AM) I don`t think ur really up $300k net worth. If you bought $1M, $800k borrowed, $200k down. they take your property and now you own nothing but you lose $200k + and principal payment.


Not from original investment NO.
But from the time you own the asset to immeadiately after the bank takes it. You own an asset worth $500k you owe $800k= -$300k Equity. Now you own nothing.. 0 is $300k better than -$300k. Yes price should rebound and you could recoup your investment but your staring $300k in the hole. You lose it now go buy houses that are actually worth what your buying them for or better yet below market as their is lots out there. Yes you will have to be creative as your credit now sucks but the easiest time to get creative is in a depressed buyers market with motivated vendors all over.
Tim