Despite the efforts of the government the foreclosure crisis hit a new peak in the first quarter, as banks took back the largest number of properties to date. The number of homes entering REO status (short for “real estate owned” by a bank) climbed 35% to 257,944 — the highest quarterly total ever — from 190,543 in the first quarter of last year and 9% from the previous quarter, according to real-estate data firm RealtyTrac. The increase comes as lenders seized more property that couldn’t qualify under the Obama administration’s Home Affordable Modification Program (HAMP).
The real question here is a rough one. Should the government intervene or let foreclosures take their own course. Obviously many people were falsely led into mortgages they could not afford and therefore the banksters and brokers are culpable for the dilemma that so many families now find themselves. Losing their homes to foreclosure brings with it total destruction of their credit rating which they will likely never be able to restore. However, the other side of the coin is that these easy loans also falsely inflated the value of homes and if the government intervenes, those prices will stay inflated locking out a whole new generation of home buyers and therefore the market will never return to a stable normal situation.
It can also be argued that the government intervention programs had not been that effective and indeed the HAMP program has only helped about 20% of those who are in serious jeopardy of foreclosure. Also “There have been delays throughout the system, and it has taken longer for properties to go from delinquency to default,” says Rick Sharga, senior vice president at RealtyTrac. Once rejected for HAMP, however, these properties are now moving to foreclosure at an accelerated pace, Sharga says.
More properties moving through pipeline
Foreclosure filings — from notices of default to bank repossessions — were reported on 932,234 homes in the first quarter of this year, a 16% increase from the same period last year and a 7% jump from the previous quarter, according to RealtyTrac. And the pace accelerated near the end of the quarter, with foreclosure filings reported on 367,056 properties in March, an increase of 19% from the previous month and the highest monthly total since RealtyTrac began issuing its report in January 2005.
Foreclosure auctions were scheduled on 369,491 properties during the quarter, the highest quarterly total since RealtyTrac began compiling its report.
“There have not been a lot of households that have been successful under HAMP,” says Gary Painter, director of research at the University of Southern California’s Lusk Center for Real Estate. “It’s likely that many of the people who could be helped have been helped.”
The good news is there doesn’t appear to be a huge wave of properties entering default. In the first quarter, 304,799 properties received default notices, an increase of just 1% from the previous quarter and a decrease of 1% from the same time last year. Default notices have dropped 11% from their peak in last year’s third quarter.
Nevada continued to have the highest foreclosure rate in the quarter — four times the national average — with one in every 33 households receiving a foreclosure filing, followed by Arizona, Florida, California and states where employment has plummeted, such as Utah, Michigan, Georgia, Idaho and Illinois. Foreclosure filings were reported on 34,557 properties in Nevada during the first quarter, a 15% increase from the previous quarter but a 16% drop from the first quarter of 2009.
Foreclosure filings in Arizona were reported on 55,686 properties — one in every 49 households — a 22% increase from the previous quarter and a 13% increase from the same time last year. Florida posted the third-highest foreclosure rate, with filings recorded on 153,540 properties — one in every 57 households — a 7% increase from the fourth quarter and a 29% increase from the same time last year.
Sitting on delinquencies
Just how many foreclosures move through the foreclosure process and when banks sell them will be key factors in how much more real-estate prices could fall before they recover. Most of these bank-owned properties are not making it onto multiple listing services, analysts and brokers say, despite banks having more of them to contend with. “We have about 860,000 REOs in our database, and only about 30% of them are available for sale on the MLS,” Sharga says. “That means you have another 550,000 to 600,000 that have yet to hit the market.”
By keeping this “shadow inventory” off the market, banks are keeping prices unnaturally high in this soft economy, says Leo Nordine, a Los Angeles-area broker specializing in REO properties. “Lenders want to keep postponing them for as long as they can,” Nordine says. “Prices have stabilized” in many areas because banks have kept these properties off the market, he says, adding that banks will likely continue to do so until the economy picks up again.
A long, painful recovery
Meanwhile, foreclosure prevention efforts don’t appear to be helping a significant number of borrowers. While 1.4 million homeowners were offered trial modifications under HAMP through the end of March, just 230,000 homeowners had their modifications made permanent. That’s a drop in the bucket compared with the 5.5 million delinquent loans Sharga says are on the books.
Acknowledging this poor progress, the government revamped HAMP last month to provide additional mortgage assistance for unemployed job seekers, increase payments to second-lien holders and give some underwater homeowners the chance to refinance into loans backed by the Federal Housing Administration. This could slow the number of homes entering foreclosure, but it probably won’t make a huge dent in the number of properties being taken back by the banks.
“Many people are so far upside down in their home’s value they are not even eligible,” says Helene Raynaud, vice president of housing for the National Foundation for Credit Counseling. And since HAMP is voluntary, lenders and investors are still deciding which properties they want to take back. “The government is really trying, but there are some issues of accountability and enforcement with servicers.”
And, Raynaud says, there are some questions about how many of these modifications will end in re-default, given borrowers’ still-high levels of debt. Very few servicers are requiring these borrowers to get debt counseling, she says.
Given these factors, economists expect a steady stream of foreclosures to hit the market for the next several years. But they don’t think it will derail a recovery. “I think we are very close to a recovering housing market,” says Celia Chen, senior director in charge of housing at Moody’s Economy.com. “We expect a slight decline and then flat prices until 2011.” However, Painter says you might want to brace yourself for a bit of a bumpy ride. “I think we are going to see upticks and downticks as the process happens,” he says. “But generally we are going to be stuck in place for a while.”
In 2008, it looked as if Paradise Valley, the wealthiest, most exclusive community in Arizona, had neatly side-stepped the foreclosure crisis. Only 38 foreclosures were recorded in this 16-square-mile town that year. Indeed, the median home price for resale detached homes reached an all-time high of $2 million in mid-2008, according to MDA DataQuick, even as values plummeted elsewhere. “People were buying up million-dollar homes, tearing them down and rebuilding them,” says Jay Butler, director of the Arizona Real Estate Center at Arizona State University’s W.P. Carey School of Business.
Last year, the bottom dropped out. Like many other luxury-home markets, Paradise Valley joined the foreclosure crisis late: As the economy worsened, companies lost clients and executives lost bonuses or jobs. Affluent residents ran through their savings and credit. And banks, once reluctant to foreclose on major depositors, started taking estates back. People began talking of “simplifying their lifestyle.”
By the end of 2009, the number of foreclosures had tripled to 114, with an additional 315 notices of trustee sale filed, according to the Information Market, a data provider. In most cities, this paltry number wouldn’t even cause a ripple in the real-estate market. But in this tiny town of about 7,700 homes — owned by celebrities, politicians and businessmen such as Muhammad Ali, Alice Cooper, Dan Quayle, Mike Tyson and Peter Sperling — these foreclosures landed with a thud. Broker sale signs, once considered too gauche for this tony enclave, with its 12 high-end resorts, began sprouting like weeds, as overstretched borrowers began seeking short sales or letting their underwater custom homes go.
Forget Beverly Hills. Some of the priciest foreclosures in RealtyTrac’s database were in tiny Paradise Valley, and all were recorded last year — such as this palatial property with private theater, walk-in wine cellar, indoor sport court and separate guest house with two-car garage, which was taken back by the bank when its owner defaulted on a $6.5 million note. It’s now listed at $3.5 million.
“We’ve seen examples of where something that was listed for $10 million sold for $2 million,” says luxury real-estate agent Walt Danley, who has sold homes in the area for nearly three decades. “The run-up did get a little out of control. It needed a correction, but this is an overcorrection.”
A continued correction
Bargains like these should be around for a while, agents and economists say. Even as local economists are predicting that the Phoenix market will bottom out this spring and that prices will start ticking back up, no one knows exactly when the price reductions will stop in Paradise Valley.
The number of sales of distressed properties has grown, as many business owners who took out a credit line against their homes to try to save their businesses got deeper underwater and could no longer afford to keep making those payments. “Short sales will continue to dominate the market for the foreseeable future,” Danley says.
Well is short sale the answer? Consider this:
Steve and Debbie Martin are losing their home. That’s for sure. The only question is whether it will be in a short sale or a foreclosure. They’ve found a buyer, who is offering less than what they owe. The Martins just have to get the bank to accept the offer.
In the past, that’s been a tall order. Since the housing meltdown began, short-sale offers have often taken months to get a response from overwhelmed lenders. Even then, there have been no clear guidelines about what kinds of offers are acceptable or about how to handle second mortgages that could easily derail the process. Industry experts estimate that less than half of short-sale offers have been accepted, and many real-estate agents have avoided showing these properties altogether. But if the Martins can hold on until April, a new federal program might help.
Starting April 5, lenders in the Home Affordable Modification Program must offer borrowers the option of a short sale, including the minimum amount needed for an acceptable offer, if their mortgage doesn’t qualify for a modification.
Once a homeowner applies to list his home as a short sale, lenders must respond to offers within 10 days. The program also offers $1,500 to homeowners to help them move, $1,000 to loan servicers to cover the cost of paperwork and up to $3,000 in incentives to secondary lenders who might otherwise reject an offer.
The Martins bought their home in 2003, when they needed a larger house for themselves, their three grown children and one grandchild. Steve and Debbie made the down payment, and all five adults signed on the loan. Everyone chipped in on the mortgage payments. The Martins figured that when their kids moved away, they would sell the house and all would share the profits. Then property values in the Pacific Northwest plummeted. As the nest emptied, Steve and Debbie started having trouble paying the mortgage.
Now the Martins can no longer sell the house even for the amount they owe on it. But they don’t want to just walk away. They feel a moral obligation to try to pay back their loan, and they don’t want to trash their and their children’s credit scores. The Martins tried everything before asking the bank to accept a short sale. Steve started taking one of his pensions early in an effort to make ends meet, but it wasn’t enough.
“We tried to refinance,” he said. “We tried that with three institutions, and they all said no because there were too many people on the mortgage. We tried loan modification and had the same issue.” Millions of people like the Martins are finding it hard to hang on to their homes as the Great Recession squeezes both household income and housing values. And many others who owe a lot more than their houses are worth may just want out.
Walking away, however, is a terrible choice — one you could regret for years. Here’s why:
You could get hit with a deficiency judgment. It’s common to assume that if you walk away from your home, the bank can’t come after you for more money, because the loan was attached to the house. But that’s not always true. In some states, lenders can obtain a deficiency judgment for the difference between what you owed and what they got from selling your house.
Florida is one of those states. “No homeowner should walk away,” says Rashmi Airan-Pace, a Florida attorney who specializes in mortgage modifications and foreclosure defense. “Deficiency judgments are very damaging.” Airan-Pace points out that lenders, for example, can seek to garnish wages or place liens on other properties.
Other states, including California and Arizona, are nonrecourse states, which means that laws there prohibit such judgments. You still have to be careful, though; some lenders get borrowers to sign papers obligating them to pay deficiencies anyway.
Foreclosure can ruin your credit scores for up to 10 years. When it comes to the effect on your credit scores, having a few late bills is to foreclosure what having a leaky faucet is to burning down the house. “When a foreclosure is filed against a property owner, that person’s credit will go down 100 points,” Airan-Pace says. “At the foreclosure sale, it goes down another 100.”
She estimates that a short sale would do about one-quarter as much damage to your scores. And though you can start pulling up your credit scores substantially from a short sale or a spate of late payments within a couple of years, a foreclosure can affect your credit history for a decade.
First, do all you can to keep the house
Before you think about letting your home go, make sure you’ve exhausted every other possibility. If you can save your home by working extra hours, staying on a strict budget or taking money out of savings, you should consider it. (In general, don’t touch your retirement accounts, however.) If you just want out because the value is down, remember that a house is still a place to live, regardless of what the market says it’s worth.
You would also be wise to consult a credit counseling organization, such as the National Foundation for Credit Counseling, or hire an attorney. According to the nonpartisan Urban Institute, borrowers facing foreclosure are 60% more likely to hold on to their homes if they receive counseling.
When you hit trouble, the first step is to see whether you qualify for federal programs that help you refinance your home at a lower rate or reduce your mortgage balance. Be patient. And be prepared for lots of paperwork. The Martins say they have faxed more than 80 pages at a time to their lender.
Sam Hussain of ClearPoint Credit Counseling Solutions in Modesto, Calif., says that people often get frustrated when they have to fax the same paperwork more than once. “That’s reality,” he says. “Ask for the mailing address, and use certified mail.” Hussain also recommends you use a notebook to make a conversation log through the process. Write down the name of every person you talk to, the date you spoke and what was said.
It should go without saying that getting your legal advice from scam outfits that advertise in spam e-mails or on utility poles is a bad strategy. As Lee Jones, a spokesman for the Department of Housing and Urban Development in the Northwest, says: “They fold up in the night like a lawn chair and take your money with them.”
It’s also good practice to steer clear of well-intentioned people who are out of their field. Taking advice from friends, relatives and even your real-estate agent can be a costly mistake. A credit counselor or attorney can be helpful if saving your home proves impossible and you seek to complete a short sale or deed in lieu of foreclosure. Keep in mind that banks will want to know that you tried every other avenue first.
One of the tragedies of D2 is how badly it has devastated so many families. Even D1 did not do so much damage to a emerging middle class. D2 however is basically wiping out the middle class in America. There are no simple answers or solutions to this current dilemma. What is clear that this is criminal and there are many banksters that should go to jail. Period. In recent testimony that emerged from the WAMU trial was that some WAMU bankers had fraudulently changed up to 85% of the loan applications they were processing! 85%! These are the guys that should go to jail. I am deeply saddened by the families that have been devastated by these actions, but we should also learn from this experience that ultimately you are on the hook. If you know instinctively that you can’t afford it, you can’t! A good rule of thumb is that your home should cost no more than 3 times your income. I know that in most areas that wouldn’t buy a fixer upper, but that is the point. We need to have the discipline to wait. It is a consumer’s market and ultimately we determine home prices by the demand we create.