Anyone looking to navigate the real estate landscape in the United States would be hard pressed to do so without understanding our recent history; in particular, the events that occurred since 2008. The financial crisis was the source of a number of legal revisions to the way property management and real estate is handled in the U.S., so to better understand the market, it’s important to be aware of what went wrong and what our country has been working to rebuild since.
Just before the crisis, the United States was booming. Properties were selling left and right; people were coming from everywhere to try and buy up their slice of the American Dream. But when things seem too good to be true - they usually are. Ultimately, we wound up overdoing ourselves and prices just rose too much. Being as easy as it was to obtain a mortgage at that time, we were overfilled and oversold; soon millions had trouble paying back the money they borrowed to pursue their dream of home ownership. Many had no equity in their homes and were in a position where they could not afford to pay back the banks. The banks then began to foreclose homes at a rapid pace, spurring the downfall of the real estate market. It was all about Economics 101 – When supply exceeds demand, prices go down! And boy, did they ever!!!
Just about every person in this era came into real estate related issues, not just the poor or those who couldn’t afford their mortgages. Banks at this time were simply not interested in doing much about loan modifications for those who clearly couldn’t pay. The lenders were quick to get you into a situation where you would need to default, but then homeowners could be in a kind of “limbo” with their bank for as long as a year while you try to work something out. Many banks told their clients transparently that if they do not default on their payment, the banks would not even look at their file for a modification. Ultimately, it became a choice of staying current or destroying your credit.
The government’s first attempt to try to reverse their wrongs came through the Homes Affordable Modification Program. Lots of money and press backed up this legislation, but it ultimately did not solve many issues. Clients would go ahead and jump through all the hoops of the program, providing all the tedious paperwork that was necessary and making their profile payments, but then the banks would simply rebut by saying they needed more time. This resulted in a never-ending updating process of documentation, where different representatives would ask for different documents every time you called. This was because if nothing happened internally within their department in 30 days, you were required to update all your files that you had previously submitted and restart the process.
Further, anyone hoping for a loan modification needed to write a letter explaining exactly what their hardship was. Many realtors worked long and hard writing up heartfelt and extensive letters for their clients, but the reality was that they were falling on deaf ears at the bank in too many cases. The only alternative was a short sale, which involved listing your property with a realtor. But even this process became tedious, as the homeowner needed to first get an offer for purchase, then approach the servicer or lender to get approval, once again handing over all those financials.
The other government solution that resulted in 2007 was the Mortgage Debt Relief Act. This allowed people to exclude the forgiveness of debt from their taxes if it was due to the taxpayer’s financial condition or a decline in the home’s value. It only applied to primary residences, money mortgages, or improvements to the home. This bill expired at the end of 2014, so today, debt forgiven due to shortfalls or loan modifications are subject to tax liabilities along with your income.
Overall, the issues that plagued the real estate market in 2007 and 2008 may seem far away, but the reality is that investors can learn from the climate back then in order to ensure they are making smart, current fiscal decisions with their investments.
