I remember my first visit to a foreclosure. I was doing a buyer tour in 2007 and, quite frankly, had no idea what to expect. What I found was shocking: plugged toilets, skanky carpets, horrific smells, holes in walls, trash everywhere ? it was a foreboding indication of things to come. And come they did.
Reminiscent of the waves of Carrier Pigeons that once darkened prairie skies, foreclosures began dominating the real estate stratosphere, rising to a peak in 2009. The heartache and devastation wrought on families who had their homes stripped away from them is hard to imagine. Fortunately, it appears the cycle is headed towards its demise. Foreclosure numbers have been dropping and might soon slip into oblivion, going the way of the unfortunate pigeons. Or the Dodo Bird, for that matter.
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Although it?s tragic when a species disappears, as the current wave of foreclosures heads towards oblivion, no one I know is shedding any tears.
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There are many elements contributing to their departure: by and large we?re through the cycle of ?garbage? subprime loans, the economy is slowly eking its way to recovery, HAMP is making a tiny dent as some are managing to score a loan modification, and yet others are successfully completing short-sales on their homes. Regardless of the cause, life as we?ve known it these past five years is changing. In the same way that the weathervane on the roof of the Bank?s house in Mary Poppins signaled change as it shifted direction, current economic indicators are indicating that a new wind is blowing.
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And then there is the issue of the ?flood.?
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Many believe there is a large shadow inventory out there that will eventually hit the market in a flood of foreclosures. It?s an urban legend that has controlled the thoughts of many over the past five years. As I?ve repeatedly stated, ?Don?t hold your breath.?
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It actually depends on your definition of ?shadow inventory.? Sean O?Toole, chief executive at ForeclosureRadar.com defines shadow inventory as, ?bank-owned homes that could be listed for sale, but aren?t on the market.? O?Toole clarifies, ?If we use this definition, shadow inventory in California either doesn?t exist or isn?t worth a mention.?
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If, however, like Sam Khater, senior economist at CoreLogic, you define it as, ?the pending supply of distressed property that will hit the market,? then that could really be a totally different situation. He infers that these are homes that, while not foreclosed yet, might be so in the near future. Maybe. Or maybe not. Improvements by the banks in recent months in dealing with distressed homeowners indicate that lenders are shifting preferences towards loan modifications and short sales rather than costly foreclosures.
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Approving short sales and loan modifications actually makes more financial sense because they cost much less than a typical foreclosure.
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The writing seems to be on the wall. At a recent market trends conference sponsored by a large, national bank, the speaker asked realtors in the room receiving REO listings (foreclosed bank-owned homes) to raise their hands. Numerous hands were raised across the room. Looking around, the bank official stated, ?It?s time for all of you get a different business plan.?
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Where I come from, that would be called, ?A clue.?
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It looks like things are finally changing for the better. Here are 3 important facts to understand:
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1. ? As of January 1st, 2013, banks will no longer be allowed to ?dual-track.?
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We just met with a couple who?d been trying for a couple of years to get a loan modification. Regardless of what they did, the bank steadfastly refused. Their final refusal notification came via a phone call from the bank, accompanied by the words, ?And by the way, we?re scheduled to foreclose on your home in 12 days.?
This is called ?Dual Tracking? and has been where banks process a short sale or a loan modification simultaneously with foreclosure proceedings.
Recent legislation passed into law in Sacramento provides California homeowners with a Bill of Rights that prohibits this predatory practice.??
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SFGate (see link to article below) states that the legislation does the following:
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? ??? Delays: Bans banks from proceeding with a foreclosure when a homeowner is seeking a loan modification, a practice known as dual tracking.
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? ??? Contacts: Requires banks to provide struggling borrowers with a single point of contact at the bank.
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? ??? Answers: Requires banks to clearly explain to borrowers why they are rejected for a loan modification.
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? ??? Recourse: Gives borrowers the right to sue lenders for "significant, material violations" of the law.
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? ??? Fines: Subjects lenders to fines of $7,500 per loan for filing and recording unverified documents.
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? ??? Limits: Applies to first-lien mortgages for owner-occupants.
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(Click here to read the 07/02/2012 SFGate article by Marisa Lagos and Wyatt Buchanan explaining dual tracking.)
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2. ? Banks are working harder than ever ?to make short sales rather than foreclosing.
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Lenders have discovered that it really makes more sense to authorize a short sale instead of proceeding with foreclosure. While we are still not seeing short sale approvals happen as quickly as we?d like, at least we appear to be headed in the right direction. Consequently, short sales are becoming more successful and banks are choosing to go this route whenever possible. ?
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3. ? Rising home prices have returned many ?underwater? homes to positive equity positions.
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Over the past few years, many homeowners, faced with reductions and/or losses in income coupled with plummeting home values, concluded that the best way of coping was to bail out of their mortgage obligations and allow the bank to foreclose. Recent market gains, however, have propelled many who were previously underwater (owed more than their home was worth) back into positive territory again. This, coupled with record low interest rates, has made it possible for many to refi out from under bad loans. Consequently, requests for refinances are up. Way up. So many, in fact, that banks are currently straining at the seams to handle the flood of refinances and normal purchase transactions are being delayed.
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As a result, there are a growing number of homeowners who can once again afford to stay in their homes, removing the need to let their home go back to the bank.
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It looks like we are slowly working our way out of the woods and I, for one, am glad. And, in the same way that, in the Lord of the Rings, the Hobbits discovered that the deeper they ventured into the forests, the more dangerous they became, we?re discovering that the closer we get to edge of the trees, the more the light can shine through the branches and the less foreboding things appear to be.
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