Virtually everybody that follows the Real Estate Industry–especially in California–has been talking about the next wave of foreclosures that is supposed to hit and drive prices down. Even many of the buyers and sellers that I talk to have heard rumors or pieces of information about “moratoriums lifted” and “loan resets” and all kinds of things that make them want to wait if they are a buyer and sell before they hit if they are a seller. The point is that everyone knows that large amounts of foreclosures equals further price declines and everyone knows that values in Santa Clarita are already 35-60% lower than the height of the market in May 2005. And of course everyone wants to try to time something, something that I have come to the conclusion may be impossible to time. I have spent the last 9 months talking to top agents, asset managers for banks, executives in the Title Industry and people that should just plain know the answers to my questions about this “wave” and guess what- NO ONE KNOWS. We have been hearing “after the first of the year”, “after Obama is in” , “after the moratoriums end”, and in May 2009 foreclosures are at the LOWEST point of the last 3 years. So what gives? I can tell you that I have spent hundreds of hours trying to understand what is really happening and I will present it here in as clear a way as I can, because it is complicated. Lets start with does this “wave” even exist…and the answer is yes.
1. If you talk to Executives at the largest loan servicing companies (Wells, Citi, Bank of America, Chase etc), they will confirm that they have hundreds of thousands of properties in default. Many of these properties are so far upside down that there is no way the owner wants it back unless the Bank (I will use ‘Bank’ and ‘Loan Servicing Company’ to represent the ultimate decision maker-they are not necessarily the same) is able or willing to “cram down” the loan amount; meaning take the $450,000 loan and magically change it to $300,000 which is what today’s value is. So far this has not happened and unlikely will ever happen because of how this would have to occur. It’s incredibly complicated. These hundreds of thousands of properties, in many cases, haven’t even had a Notice of Default (which is public record after 90 days of missed payments) or a Notice of Trustee Sale (another 110 days after that), let alone gone back to the bank to be liquidated as a foreclosure. WHY?
2. The answer is political policy and the mysterious “moratoriums” which have been in place since last year. Understand that “foreclosure” is a bad word and politically anything that can be done to stop the process is in political favor right now-whether it makes logical sense or not. Last year the Senate passed a bill REQUIRING banks to have direct communication with borrowers in default and work on loan modifications. The banks (including Fannie Mae and Freddie Mac) immediately instituted “moratoriums” on foreclosure. We expected these to end at the beginning of the year and the natural process not to be artificially stymied. That didn’t happen. In California this past February the Governor proposed, and passed, SB 7a which extended those moratoriums until August.
Now this isn’t about whether foreclosure is good or bad-it’s terrible for anyone that was truly taken advantage of (a small percentage in my experience) or really wants to stay in their homes. As an agent, the sooner these end, the easier my battles with appraisers will be when they compare the “normal” homes I sell to the beat up foreclosure that no one wants and I’m told is “comparable”. They aren’t. Still, foreclosure is a part of Real Estate. Bottling up hundreds of thousands of homes artificially that should be coming on the market so that the bank can remove a non-performing asset, a new homeowner can improve the property, and price stability can occur sooner not later is what everyone should want. And it isn’t happening.
Today in Santa Clarita there are about 800 homes for sale. If you take out the “short sales” there are about 370. This is the lowest point in over 5 years. Of those 370, only 61 are foreclosures or “REO’s”. Last year at this time there were over 2200 homes for sale. What has occured is a 180 degree change from a “buyer’s market” to a seller’s market and NO ONE SEEMS TO KNOW IT. The reason why is that the appraisers are still appraising for a decling market even though any agent will tell you there is precious little to show and any buyer under $500,000 will tell you that they have lost out on multiple properties, been trying to buy for months, etc. So prices haven’t gone up except in the under $325,000 price point, and for a lot of reasons will not go up any time soon. In fact, because this process of getting rid of defaulted properties is being extended so much I do not think that we will see prices rise for several years except possibly in the lowest price points. Even when we do sell for a higher than customary price, the appraisal will not come in, so the sooner confidence comes back, the better.
So what will happen to all these properties?? Of course they will be sold and most “experts” are suggesting that is the end of the year for California, UNLESS the governor extends the moratoriums. Many of the larger lenders have recently ended their moratoriums and agents are seeing an increase in “broker price opinions” which is the precursor to the lender taking the property back so that it can be marketed as a foreclosure. Still the numbers of active listings are LOW.
A final point of interest in this guessing game is that the lenders are now being given financial incentive to pursue short sales with defaulted borrowers. Last week the Obama Administration announced new guidelines for short sales designed to motivate the lender/servicer ($1000) and borrower ($1500) to pursue short sales as an alternative to foreclosure. Understand that if the President or Governor or whomever can claim to have “saved X amount of homes from foreclosure”, it makes them look good. And is very likely the right thing to do. This was announced last week so it remains to be seen if the “short sale” will replace the foreclosure as the home of choice for buyers starving for homes, but I wouldn’t be surprised. Unfortunately many of the challenges of negotiating a successful short sale remain (lots of time, understaffed lenders, lack of cooperation between lien holders, etc). I have personally had several defaulted homeowners not get the loan modification that they wanted and were advised by the lender to pursue a short sale. If this trend continues (and I think it will), these properties may actually represent more of a “wave” than the foreclosures. So this bears watching. In the mean time, I am actively listing short sale homes in an attempt to be part of the solution….stay tuned.
Posted by nealweichel 