Inept Banks Plunge Foreclosure Process Into Chaos

In yet another consequence of the “bubble years” when zero-down mortgages went to almost anyone, now the foreclosure crisis is itself in crisis.

Bank of America, largest holder of US home mortgages, has declared a moratorium on foreclosures. Other large lenders, GMAC, Chase, have stopped foreclosures in 23 states, but  all large lenders are expected to follow suit shortly and declare a total moratorium across the country.  Initially, California was not involved, though immediately Jerry Brown the attorney general who is also running for governor of the state, pledged to scrutinize the banks’ foreclosure processes.

The reason for the moratorium is the revelation of the “robo-signing” of foreclosure affidavits without even looking at the contents. This has opened the banks to claims of massive fraud.

What does this mean for my  home? Will the auction go through?

If you with a  BofA or Countrywide loan  were expecting an auction any day now, that auction has been postponed indefinitely.  As mentioned here previously, from start to foreclosure, the process has been taking over one year due to the slow pace set by the banks. Now, add to that an indefinite moratorium period. The consensus seems to be the time will be 60 to 90 days. I would bet that most, if not all, foreclosures will begin again only in the new year.

How long will I be able to stay in my property without paying the mortgage?

At this point, no one knows what is going to happen next. Most likely, BofA for now and perhaps other banks will use the period of the moratorium, no matter how long it lasts, to clear out their huge,clogged pipelines of homes which have already been foreclosed upon and remain in some part of the sale or pre-sale process.  With the pipeline cleared, once the moratorium is lifted, foreclosures should resume at a brisk clip.

I haven’t paid my mortgage on my home for 6  months and I have a Notice of Default. Does this mean I won’t get a foreclosure on my record?

No, this means that,  if you have just done nothing so far, the BofA  moratorium is allowing you time to do a short sale and avoid the worst result for your credit. If you have an NOD, that means the process has started and the clock is ticking. Once the moratorium is lifted, whenever that is, you are just that much closer to foreclosure. You  may be one of the first foreclosures after the moratorium.

For help deciding or doing a  short sale, call me at 626-641-0346 or email Diane.

I haven’t paid, but I don’t have a Notice of Default. What about me?

It’s unclear at this point whether or not the banks will continue to issue NODs during the moratorium. No matter because at some point the moratorium will be over and the foreclosures will continue.  During this lull in the foreclosure activity, you have time to get going on a short sale.

How did all this happen?

Foreclosure Heat Map

As indicated in another post, really the incredible speed and complexity of the modern mortgage system are at the root of the issue. As explained in a Washington Post article, the situation is further complicated by the various reactions and legal opinions coming from many states. Some states which have not been especially hard hit appear to have adopted either more scrupulous attention to detail or some have even passed laws making it easier for banks to foreclose. Other states, especially the Big Four Foreclosure States, Florida,  California, Arizona and Nevada, faced with entire neighborhoods shuttered and communities gutted of population, have tried to stem the tide.

What is going to be the outcome?

BofA has already said it will resume foreclosures once its internal investigation is complete and has further stated that, so far, its internal investigation has revealed no irregularities.Banks are notoriously self-serving, though, so no one is relying too much on a self-test. Rumors are that Congress wants to hold hearings on the topic to see exactly what the banks are doing to validate the foreclosure process.

It’s evident that massive lawsuits may follow any hint of wrongdoing which could throw the entire real estate and financial sector into chaos.  Bad as the foreclosures are, the spectre of another TARP to bail out the banks again is just too horrible to contemplate. Let’s hope against hope  the banks have been following the proper procedures.

For help deciding or doing a short sale, call me at 626-641-0346 or email Diane.

California Home Values–Where Are They?

Home Values Are Up

Here’s what’s happening in housing, according to the most recent reports from NAR [National Association of Realtors] and CAR [California Association of Realtors]. Nationally, the number of home sales declines, but in California home sales rose 14% in May 2010 over the previous month and were up a bit over 1% compared to last year. Of course, last year was a terrible year. This shows, though, that things are getting a bit better, though not by much.

California’s median home price also rose 23% compared to last year, May 2009. Last year the median price was $263,440 and this year the new median for May 2010  is $324,430,  almost 6% higher than the previous month of April 2010. This may seem to be a big jump in one month, so, naturally, we might ask the reason. And, the reason appears to be the federal government’s $8000 tax credit which is set to expire at the end of June 2010. It’s very likely sales volume and possibly the median home price will sink back once the buying frenzy has run its course.  New home buying has already snapped back to the doldrums after a busy couple of months.

Will California Home Prices Rise Soon?

Does this mean we’re coming out of it and should see rising prices from now on? It’s possible that prices will continue to inch up in  California, but more likely they will either decline or stay flat for quite some time. Here are several reasons. One is that a record number of foreclosures is slated to hit the market this summer and into the fall. This is the famous “shadow inventory” that banks have purportedly been holding off the market to prevent a steep slide in values.  That strategy works only so long then it gets old fast because neighborhoods and municipalities have  to deal with the consequences of many vacant properties. It’s better to sell them than leave them open to vandals, meth-heads and squatters.

Another reason we most likely will not see a brisk rise in home values in California anytime soon concerns our ongoing budget crisis which does  not instill confidence in the state. But, the  most important impediment is our stubbornly high unemployment rate. A government in crisis  cannot hire new people in the public sector to help the situation. Unemployed people cannot buy homes and, in fact,  may be on track to lose the homes they’ve been hanging onto. Long-term unemployed who may have been making it on unemployment benefits are now about to lose that lifeline as Congress has failed to renew extra benefits.

What Does This Mean To Home Sellers/Buyers?

The bottom line is–if you are underwater and hoping that the equity in your home will increase substantially in the next year or so, you will probably still be substantially underwater one year from today. If you have equity, but are waiting to sell until the prices “come back”, you will most likely be waiting for a number of years.

If you are a buyer, things are looking good. The new affordable median prices mean that a healthy 66% of first-time time buyers can afford the median-priced home. This is a good sign.

I, personally, have faith in the long-term health of the Golden State. Yet, it seems clear to me that all Californians have a lot of work to do before we return to the “good times” when we had good schools, fine universities, excellent local and state governments and rising home values–all with low taxes and little effort on our part.

Can’t Get a Loan? Try a Lease-Option

It’s no secret that plunging home prices still make home-buying out of reach for many. The reason? Lenders have become tough and tougher. It’s the old shutting the barn door after the horse has run out gambit. Lenders were so profligate with their money before that now in reaction they’ve become regular Scrooges. Today, many of the best deals, the REOs and properly-priced properties, go to those with 20%, 30% or more down payments and A+ credit. Gone are the no-money-down loans, the no-PMI second mortgages and the no documented income loans…Gone, gone, gone.

So, what to do if your credit isn’t quite good enough right now? Or, you want to buy now, but haven’t yet gotten that down payment together? One possible scenario is to bring back the lease-option contract, fallen out of favor lo these many years of booming home prices.house for rent

What, exactly, is a lease-option? A lease-option is a legal contract between buyer and seller in which the buyer agrees to rent for a specified period of time at a specific rent and has the option to purchase the home at a specified time in the future at a pre-determined price. The details can vary wildly…

Often, the buyer/renter pays an “option fee” up-front, sometimes pays more than market rent for the property, both predicated on the seller agreeing to apply part or all of the option fee and the extra rent to an eventual down-payment on the property. So, if I want to purchase a $300,000 home, I might pay $5000 in option fee to the seller and $2500 a month in rent, instead of $2000, applying the extra rent and half, say, of the option fee to the down-payment. At the end of a year, I’d have $8500 or a good chunk of my down-payment. If, at the end of that year, I wanted to exercise the contract, I’d buy the house. If not, then I’d forfeit the option money and the extra rent.

Bear in mind that the details of the agreement are totally up to the buyer/renter and seller/landlord. The contract could say the buyer gets to apply the whole $5000 or the rent is $2300 with $500 applied or the period is 18 months or the purchase price is $320,000 or whatever the two parties can negotiate between themselves.

The good part about this is that sellers get up-front money for their rental properties with a good chance at selling in the future at a fair price to a qualified buyer. They also get a renter who is more likely to take good care of his property. Renters get to become buyers over time instead of all at once. They get to know the property intimately before buying it outright. As always, renters get to walk if the deal no longer appeals to them. And, sellers get to keep their option money or part of it, depending on the agreement, if they do.

But, there are a few downsides. Buyers must beware as sellers still control the property and may take out more loans or have liens placed as a consequence of court judgments, or, may have already done so. Potential renter/buyers should protect themselves by checking with a title company or a real estate lawyer. Buyer/renters should also make their interest in the property public by recording their legal contract with the County Recorder. That way, everyone is aware of the contract.

This type of agreement is potentially a great deal, especially for the buyer/renter. The seller is locked in for the duration, but the buyer/renter can continue to look at other properties and can always decide to buy another property when the time comes.

More About Repos: Avoid Rookie Mistakes

Sign Of The Times - Foreclosure
Image by respres via Flickr

What’s the main attraction in a repo [REO=real estate owned, foreclosure]? Why price, of course. PRICE, PRICE, PRICE. Typically, repos can be priced as much as 30% below the market value of similar homes.

What’s the number ONE rookie mistake in buying a repo? Lowball offers. A lowball offer immediately identifies a buyer who has no idea about foreclosures. Buyers are already “stealing” a property in buying a foreclosure at the list price. Why do so many think they can offer 30% to 50% LESS than what the bank is asking? These very buyers are then “shocked,” “stunned” and out of the game when the word comes back that the property turns out to have 5, 10, 20 or even more offers.  If that property was the dream home, then it will be “the one that got away” because buyers had not done their homework or,possibly, were working with a rookie agent.

Here’s how banks come up with their prices for properties foreclosed upon and then offered for sale. Before foreclosure, the bank typically orders a drive-by BPO[broker’s price opinion] in which an experienced real estate agent takes pictures of the property, which is usually still occupied, from the street and then prepares a comprehensive analysis of the property’s current worth. The agent takes three active listings and three recent sold properties of approximately the same age, square footage, style and location to come up with a potential market price. During and after the foreclosure process, the bank orders up to seven BPOs at the varying stages, reflecting a declining market and, eventually, a vacant property. After the property is vacated and cleaned up, the bank also orders interior BPOs.

What this all means is this: the bank has a very good idea of the value of the property. The list price of a foreclosed home in then put at some point BELOW the normal market value. After all, as mentioned in a previous post, the buyer is not getting any disclosures. The bank will not do any repairs. Often, the bank will not do a termite clearance. The bank provides no home warranty. The buyer cannot talk to the bank to negotiate any little part of the transaction. So, the buyer gets a great deal on price.

If you want to be a successful repo buyer, make reasonable offers. 30% below an already 20%-below-market price is not reasonable.

Here’s another rookie mistake. Some buyers habitually make offers with the idea that after a home inspection, they will renegotiate the price or demand that repairs be made. If this is your strategy to get a repo even cheaper, quess what? It won’t work.  Banks offer their properties AS-IS. ALL banks offer properties AS-IS. If the property has no toilets or the walls are punched in, that’s how you will get it. You cannot do a home inspection and “discover” no toilets and then negotiate with the bank.The bank has already factored no toilets into the list price.

Here’s why this strategy will not work. First, the bank has already sent out contractors, agents, locksmiths, handy people, cleaners  to inspect the property and report back. Repos may be damaged, but they are always clean of debris. All traces of the previous occupants’ detritus have been removed. The repo will be clean, swept and neat, though faucets, lighting fixtures, A/C  compressors and the like may be missing or damaged. The locks will work and the property will be secure.  Second, except under very extraordinary circumstances nothing your home inspector can discover will move the bank to repair anything. Unless something has happened since the property was put on the market–a hurricane, tornado, flood, etc–that has substantially altered the condition of the home, the bank will simply move on to the next buyer or put the home back on the market.

The last rookie mistake was already mentioned in a previous post. Don’t figure you can make your offer and show proof  you can do it later. Make sure you have your ducks in a row BEFORE making that offer to the bank. You MUST have a pre-approval from a reputable lender to accompany your offer. In most cases, you cannot get it later.  Even if you are paying cash and banks, like everyone else, love cash, you still must show PROOF OF FUNDS. That can be a bank statement, a letter from your stock broker or whatever. Most repo sales agents operate on volume and have a fairly bureaucratized sales procedure demanding all parts of the offer, including proof the buyer is viable, be done at the time of the offer. Even most standard sales require this today. Sometimes, banks also require pre-qualification with a particular loan rep at a particular bank. A sucessful repo buyer must provide that pre-qual before making the offer.

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How To Buy A Repo

Elden P. Bryan Residence
Image by Floyd B. Bariscale via Flickr

Everybody wants to buy a repo? What’s a repo? It’s a lender-owned home, a repossession. What’s so special about a repo, you may ask?  Main difference is the price, the price, the price. Lenders have no emotional attachment to a property. They just want it off their books as quickly as possible. To that end, repos are frequently, but not always [pay attention: NOT ALWAYS] priced below market.

So, that’s good, right? What’s not to like? Buyers get a below-market home. Lender/seller gets the property off its books. What’s the problem here?

There are a few issues when buying a repo.. Here are a few for buyers to consider.

Condition

By law, lenders are not required to offer the usual transfer disclosures required in California and most other states in which the seller discloses all the material facts about the home, including any known defects.  Why do lenders not have to disclose? Because the bank has never lived in the home and, in fact, most likely knows nothing about it or its history.

Buyers of repos get none of the detailed information sellers love to impart to buyers about what was done to the house, by whom and when.  Frequently, repos are not in great condition, truth be told, though most of them will have been cleaned of debris and tidied by the listing agent’s cleaning crew.

Remember: the former owners lost the house because they couldn’t make the payments. More than likely, they couldn’t pay for furnace cleaning or roof leak repairs or any of the multitude of tiny and large repairs that homes we live in get from us every day. This deferred maintenance  can cause hidden damage.

Remedy: Get a thorough home inspection from a competent home inspector. If further inspections are suggested in the report–plumbing, HVAC, roof or whatever–get them. This property may be offered as a  may be a bargain price, but it’s still a lot of money. It may wind up as no bargain if the pool equipment is broken or the roof leaks.  Do yourself a favor and spend the money to get the suggested inspections.

The Negotiations

Another area of difference concerns the actual negotiations in purchasing the home. Normally, you make an offer, submit it to the seller, get an acceptance or a counter offer and then go into escrow. The procedure for a repo is relatively the same except the seller is a faceless bureaucracy and usually you and your agent have no communication whatsoever.

It’s often even difficult to get in touch with the “listing” agent because frequently these “agents” are faceless themselves, communication through websites, email and voice mail.  These companies often list   hundreds of repos,   each one as lovingly treated as a disposable fork on a picnic.

Each bank and each “agent” has a different technique in negotiating with buyers. And the strategy also depends on the property. If the property is among hundreds of other repos, as in, say, Moreno Valley or Fontana, it’s all about the numbers and getting a buyer quickly if at all.  If it’s a desirable property in a good area of Arcadia, for instance, it’s a different story, though, again, it’s really about the amount of money involved.

So, for some repos, you make your offer, the agent submits it to the bank quickly, it’s accpeted, and escrow begins. For others, many offers are received, so then the agent ,in consultation with the bank,  takes one of the offers and works with it, going straight to escrow. Sometimes in this scenario, the agent comes back with a multiple counteroffer from the bank asking all buyers for their “highest and best offer”. Then, from  those that come back, the bank selects the best and opens escrow.

What to beware of here? The auction effect…we all became familiar with this during the boom market and it’s far from dead. Buyers will always vie to get a good property at a good price. Prevent yourself from paying too much by keeping your emotions out of it, if possible, and setting a price beyond which you won’t go, no matter what. That will immunize you against the auction effect.

Financing

Is financing any different for a repo? Will I have to use the bank which owns the house? The short answer here is NO and No. Some banks will require that you pre-qualify with a specific lender in order to have your offer considered, but no one can require you to use that lender. As with new homes, though, sometimes the lender will offer more favorable terms just to have control of  the situation. Should you do it? By all means…more favorable terms are always good.

Repos are a bit different as far as the transaction goes. Many banks require their own forms which, of course, are there to minimize the bank’s liability.  California, in particular, has many buyer-protection laws. Banks cannot require you as part of the transactions to give up your rights.

But, the bank may require a shorter inspection term [the normal is 17 days] or provide stringent conditions if the buyer’s loan isn’t funded in the agreed-upon number of days, especially if the buyer is not using the bank’s lender.  That’s not so bad. It may keep your lender and your agent on their toes.

Another issue is termite inspection. Many buyers assume that a termite clearance is required by law. Not so–it’s often required by the terms of the buyer’s loan, but many loans don’t require it.  Many repo listings specifically say that the bank-owner will not provide a clear termite. In this case, it’s up to the buyer to get a termite inspection and pay for any damage.

Got your heart set on a repo? Get over it. Set your heart on a good deal whether it ocmes from a bank or a short sale or even a savvy seller. In fact, buying from a seller who prices his home to sell quickly is the best way to go. At least, that seller isn’t going to walk off with the kitchen faucet or leave a big hole punched in the bedroom door…

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Good SoCal Housing News Or Is It?

After months of plunging home prices, Southern Californians heard today that, yes, it’s true….homes have not tanked for the last three months!  It might be a trend! That’s almost all the good news. The other good news is that last month saw a veritable frenzy of home buying as prices throughout the Southland surged 52% over last year. Of course, last year was abysmal, but, oh well, you gotta get your good news where you can.

Here’s the wet blanket to douse those little flames of hope that might be springing up around us. Well, for one thing, there was a foreclosure moratorium and then lenders were holding back the flood, waiting for the new Obama housing policy to be revealed. Obama’s plan came out last month and the first refis started last week.  It will help. But, for so many there will be no help.  Expect foreclosures to surge again soon, putting more downward pressure on prices as lenders try to unload their inventories. It seems that in this first quarter [Q1] of 2009, foreclosure notices, NODs, have jumped 24%. More than 805,000 homeowners got such notices in the past three months. That means during the next three months we’ll see a tsunami of trustee sales and then a few months later a mountain of lender-owned property will hit the market.

Unless government has a few more tricks up its sleeve, prices here will continue to decline in the face of foreclosure. That will, in turn, put more homeowners “underwater” or owing more than their homes are worth. Man of these homeowners will decide it’s simply not sensible to pay the $3000 a month on the $400,000 or $500,000 mortgage when the property is now worth only $250,000. They will short sale their homes and  later buy another for $250,000, effectively cutting their  housing costs in half with today’s low rates.

As an illustration of how crazy we were:  A few days ago I did a BPO, a broker’s price opinion, of a 738 square-foot single family property with a double garage in La Puente. This tiny little house is now a repo, but it sold back in 2006 for $419,000! That’s just wrong. It has a nice lot with a wrought-iron and block fence in front and good curb appeal. But, it’s only a 2 bedroom/1 bath. The former homeowner slapped up a lean-to in the back with an exterior toilet in a little cubicle and a tiny studio wtih another bathroom as a crude rental, it seems. It’s all illegal, of course, and must be torn down. The sad remains of people desperate to save the home and perhaps their life savings. How could it ever have seemed like a good idea to buy that house?

Just as a souvenir, I guess, the L.A. Times today published a chart showing all SoCal Counties and home values during the last 8 years. Now, median SoCal home value is $250,000, less than half what it was in 2007 at the peak of the market.

It’s reached the point now that in many cases it’s cheaper to buy than to rent or at least it’s equivalent. Builders are telling us that new home values are now below replacement costs. Since these two factors are true, that also tells us that just like the last Great California Recession in the mid-90s, prices will come roaring back….sometime. Last time, it took a full 5 years. This time will possibly take as long.

socal-home-sales-and-prices

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What Happens If You Rent & Your Home Is Foreclosed?

Fannie Mae Announces New Policy for Renters in REO Properties
for-rent

Recently,  Fannie Mae released an announcement describing a new policy that will allow qualified renters to remain in Fannie Mae-owned foreclosure properties. Formally known as the National Real Estate Owned Rental Policy, it is meant to address the difficulties faced by tenants who – often through no fault of their own – face serious disruptions in their lives because the owner of the property in which they live has been foreclosed upon.

Renters in properties owned by Fannie Mae will be able to stay in their homes after the foreclosure. Note: this applies only to renters in the property at the time of the foreclosure. It does not apply to the borrowers who lost the home or any of their immediate relatives.

Any  type of property  can qualify: single-family homes, condos, co-ops, manufactured housing, or one-to-four unit buildings.

Key features of the new policy are

  • After the foreclosure is complete, renters will be offered the opportunity to either accept an incentive payment to vacate the property (“Cash for Keys”) or they may sign a new month-to-month rental agreement with Fannie Mae.
  • Fannie Mae will not require payment histories or credit checks.
  • Renters will be charged market rents. This means renters may have to pay higher rents.
  • No security deposit will be required. Nothing is said about the former landlord’s possibly unreturned security deposit.
  • The property will be for sale, and may undergo repair or rehab work, during the term of the tenancy. Tenants must cooperate with the sale.
  • If the property sells, the lease will transfer to the new owner who may decide to occupy himself.
  • The property will be managed by a real estate broker and/or a property management company.

Under this plan, tenants, many of whom are not aware their home is even in foreclosure,  are not forced out into the street. But, all leases will be month-to-month, meaning tenants may have to move within 30 days of a sale.

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