We know where the money went...

As Wall Street and the financial markets continue to suffer there is one segment that is actually doing quite well, and getting better as the housing market continues to contract. To which market segment am I referring? Forensic Accounting.

Forensic accounting is the practice of utilizing accounting, auditing, and investigative skills to assist in legal matters. It encompasses 2 main areas – litigation support, investigation, and dispute resolution. Litigation support represents the factual presentation of economic issues related to existing or pending litigation. In this capacity, the forensic accounting professional quantifies damages sustained by parties involved in legal disputes and can assist in resolving disputes, even before they reach the courtroom. If a dispute reaches the courtroom, the forensic accountant may testify as an expert witness.

Investigation is the act of determining whether criminal matters such as employee theft, securities fraud (including falsification of financial statements), identity theft, and insurance fraud have occurred. As part of the forensic accountant’s work, he or she may recommend actions that can be taken to minimize future risk of loss. Investigation may also occur in civil matters. For example, the forensic accountant may search for hidden assets in divorce cases.

During the Great Housing Boom, many americans were leveraging the equity in their homes for home improvement, buying cars, taking vacations, and in some cases making down payments on investment properties. Here's where it gets interesting, some banks have already begun to use forensic accounting firms to investigate where the money was used for some of the home foreclosures that are hitting the market.

So, for those who used the money to buy tangible items such as cars and homes, listen closely. If you decide to walk away from your home allowing it to go into foreclosure, the bank may be able to make a case that the equity within those tangible items belong to them!

Consider the following scenario:

A homeowner bought their home for $200,000 before the Great Housing Boom. During the boom, they acquire a Home Equity Line Of Credit (HELOC) for an additional $200,000!!! Now, the homeowner uses the money to buy a new BMW for $40,000, and applies the rest toward the down payment of a second home, and moves into it. What this all means is, if the homeowner walks away from there first home, the bank may make a case that the equity in the new home belongs to them!

Currently there is no legal precedence for doing so; however, with banks taking huge losses as a result of the staggering number of foreclosures, it's inevitable that the laws will be massaged to allow them to recover some of that money.

The Economy is Broken

The embedded video actually has nothing to do with the housing market or the economy. However, the title of this posting will make complete sense after you've watched the video. Enjoy.

Calling the "Bottom"

Lately, I haven't posted nearly as many articles as I used to, mainly because most of the insights that I've written about in the past have not changed. In this article, I've decided to comment on what analysts commonly refer to as "the bottom" of the housing market.

I've been reading and watching (on television) these analyst struggling to call a bottom for the current economic turmoil we're experiencing. Some of the more optimistic analysts claim we'll see a bottom at the end of 2009, others claim 2010 or 2011. So which of them are right? I say, it doesn't really matter... And here's why:

Once we've hit the bottom, we'll stay there; for a while... There won't be any upward movement in home prices, and there will still be enough distress situations that it will be difficult to estimate the exact value of homes in certain areas. Homeowners will still be walking away from their properties because they'll be so upside down that they see no other way out. Rents will continue to decline, forcing make-shift landlords into foreclosure, and you'll only know we were at the bottom in hindsight once the recovery starts. The ugly truth is there is still a long way to go, and government intervention will only prolong the inevitable, not prevent it.

So what if anything can you do?

Be smart. You'll hear the National Association of Realtors (NAR) claim time and again that the market is turning around, that sales are way up. The truth is, every summer sales will increase (even as home prices continue to dwindle), and every winter there will be huge price declines! So you may be growing weary of the rental you're in, but you may not want to buy yet!!! The time is not right.

If you own a home and you've been thinking about selling, then you've got a more difficult road ahead. For those who are not severely upside down in terms of loan to value ratio, there's no harm in attempting to sell!!! Prices will continue to fall, so if you can cut your losses, you should probably do so.

For those who are seriously upside down, if you can afford your mortgage, hang tight! One of the programs to help "save the homeowners" may be of help to you, but most of them require you to be in good standing with your mortgage! Keep making the payment, light may be at the end of the tunnel for you.

For those who are seriously upside down, and having difficulty affording your mortgage, work with your lender! Believe me, the lender doesn't want to go through the foreclosure process on your home anymore than you do. If  you've lost your job, or taken a pay cut call your lender and tell them about your situation. In some cases they can temporarily suspend your mortgage payments (although you may still be responsible for the interest, which will continue to accrue).

Finally, I'll leave you with one thought: No one can absolutely call the bottom as it is happening!!! Watch the signs, and you'll know when the time is right to act.

A profound observation...

While pondering how the current economic crisis has affected family, friends and co-workers, I've had an epiphany. The people that have faired the worst, have done so because of a genuine lack of humility. I recall certain individuals bragging about the expensive homes, cars, and jewelry that they were planning to buy, or vacations they were planning to take; presumably with their home equity. For many, it just never occurred to them that home prices would stop going up; or heaven forbid, go down. (Even some of the analysts refused to see it!)

In the aftermath, many of these "individuals" have had their homes foreclosed and/or filed for bankruptcy, or are currently struggling to keep from doing so. The question that remains is:

Have we, as a society, learned anything from this?

I would so like to answer that question with yes; however, I'd be lying... The truth is, this has all happened before, and it will happened again.