The Las Vegas housing market continued its white hot rise as the sales volume of new construction rose in April to the second highest levels since the summer of 2008, which was in the midst of the housing bubble boom. Meanwhile, the median home price for new construction hit a record high. Both January and April had the fastest sales rate (lowest days on market) since July of 2008. The median home price for houses sold in April was up to $271,600...this is the highest mark since the government began keeping these records in 1993.
This is a whole lot of positive data, and many people are taking these indicators to be signs that the housing market is recovering aggressively in Las Vegas. This certainly appears to be the case. But, at the risk of being the only downer in the room, I'd like to remind everyone that the recent highs in Las Vegas real estate isn't based on particularly wonderful economic growth, either locally or nationally. Unemployment is still way too high. The Fed is hinting that quantitative easing might be ending soon, but it hasn't ended yet. Cities like North Las Vegas are still teetering on the brink of bankruptcy. And, of course, let's not forget the elephant in the room...AB 284. The Nevada Assembly drastically altered the Las Vegas housing market when they passed a bill that virtually ended foreclosures in the Las Vegas valley. The assembly members might be looking like heroes right about now. But it has been my experience that anything that alters the natural flow of the economy eventually has its consequences and they are rarely pleasant. I am seriously concerned as to whether or not the growth in the Las Vegas housing market can be sustained. I would caution potential investors to focus on cash flow, cash flow, cash flow. If you make sure that you purchase a property with positive cash flow right out of the gate, you will be insulated against the further twists and turns of a potentially fickle Las Vegas housing market.
Showing posts with label AB 284. Show all posts
Showing posts with label AB 284. Show all posts
Thursday, May 23, 2013
Tuesday, September 4, 2012
Judicial Foreclosures Fuel Speculation on the Future of Home Prices in Las Vegas
Just
when you thought it was safe to go back in the water... Median home
prices in Las Vegas have been rising steadily since shortly after AB 284
was passed last October. In fact, many Realtors have noted that the
last few months have felt more like the boom years prior to the housing
bubble collapse then the middle of an economic recession. Extremely low
inventory, brought on by the sudden, dramatic decline in foreclosures
in the wake of AB 284 have created a Sellers’ market where multiple
buyers are often competing for the same property and homes are selling
at or above list price.
In the midst of this enthusiasm reminiscent of the “good old days” many financial analysts and real estate guru’s (including myself) have been consistently warning that the final effects of AB 284 are likely to be negative, not positive, and that things which appear too good to be true generally are. We are just now beginning to hear the first rumblings of what the exact nature of this inevitable reprise might be.
A few days ago, a blog post from a local Las Vegas Realtor was brought to my attention. His entry discussed a Judicial Foreclosure that had just recently been carried out against a client of his. No clue what a Judicial Foreclosure might be? Not surprising...they haven’t traditionally been used in Nevada, because there has been no need. Foreclosure proceedings have typically been handled in Nevada, as they are in most of the rest of the country, through the normal notice of default, notice of foreclosure, Trutees’ sale/auction process that we have all come to understand. However, with the passage of AB 284 the banks were faced with a dilemma. With AB 284, the State of Nevada made it impossible for banks to initiate and proceed with foreclosures through the usual channels without utilizing countless employee hours to verify paperwork at every step. All the additional regulations in AB 284 that were designed to “protect” the homeowners, increased the amount of time and effort required by the banks to initiate a foreclosure proceeding without incurring large fines. This put the banks in a difficult position. They could, conceivably, continue to foreclose, but the procedure they must now use would be so time consuming that it bordered on “not worth it” financially.
The solution to the banks’ problems may be Judicial Foreclosure. In a Judicial Foreclosure proceeding, banks actually sue the homeowner in a court of law for breach of contract. They then call upon clauses that exist within most mortgage contracts guaranteeing the plaintiff (the bank) all legal fees required to collect the defaulted upon debt from the defendant (the homeowner.) Do Judicial Foreclosures take more employee hours and more out of pocket costs for the banks than even post-AB 284 standard foreclosure proceedings? Of course. But, the banks can seek additional damages through Judicial Foreclosures (like legal fees) that they cannot seek via the traditional foreclosure process.
In the example cited in the blog, the homeowner was sued for their back payments plus interest, plus forefeiture of the property, plus the deficiency (difference between what is owed on the home and the amount borrowed), plus legal fees and other costs associated with the foreclosure. The defendant was served in June of 2012 and less than two months later she had lost her home and had to declare bankruptcy. Ironically, she had planned to list her home for short sale just as soon as she received an NOD from the bank. She never received one. Instead, she was summoned to court.
There is a lot of speculation beginning in the Las Vegas real estate world as to what a wave of Judicial Foreclosures might mean for the housing recovery. Some say that it would usher in a fresh wave of foreclosures that would halt the rise of home prices and drive Las Vegas real estate into another recession. Others, myself included, believe that even if Judicial Foreclosures become rigeur de jour in the Las Vegas real estate market, the procedures are likely to be more time consuming for the banks and, as result, are less likely to result in a large number of foreclosures being dumped on the market at one time. They would more likely create a steady flow of foreclosures which would certainly not drive home prices up, but would likely be absorbed by the high demand for affordable Las Vegas real estate and would not, therefore, result in prices decreasing dramatically either.
Only time will tell whether or not Judicial Foreclosures will catch on in Las Vegas or what the effects will be. But one thing remains certain: buy and hold investors who purchase properties with strong positive cash flow will be cushioned from the short term market movements that can cripple investors looking to turn quick, flip profits. Las Vegas remains a great place for investors to purchase rental real estate, as long as they buy smart.
In the midst of this enthusiasm reminiscent of the “good old days” many financial analysts and real estate guru’s (including myself) have been consistently warning that the final effects of AB 284 are likely to be negative, not positive, and that things which appear too good to be true generally are. We are just now beginning to hear the first rumblings of what the exact nature of this inevitable reprise might be.
A few days ago, a blog post from a local Las Vegas Realtor was brought to my attention. His entry discussed a Judicial Foreclosure that had just recently been carried out against a client of his. No clue what a Judicial Foreclosure might be? Not surprising...they haven’t traditionally been used in Nevada, because there has been no need. Foreclosure proceedings have typically been handled in Nevada, as they are in most of the rest of the country, through the normal notice of default, notice of foreclosure, Trutees’ sale/auction process that we have all come to understand. However, with the passage of AB 284 the banks were faced with a dilemma. With AB 284, the State of Nevada made it impossible for banks to initiate and proceed with foreclosures through the usual channels without utilizing countless employee hours to verify paperwork at every step. All the additional regulations in AB 284 that were designed to “protect” the homeowners, increased the amount of time and effort required by the banks to initiate a foreclosure proceeding without incurring large fines. This put the banks in a difficult position. They could, conceivably, continue to foreclose, but the procedure they must now use would be so time consuming that it bordered on “not worth it” financially.
The solution to the banks’ problems may be Judicial Foreclosure. In a Judicial Foreclosure proceeding, banks actually sue the homeowner in a court of law for breach of contract. They then call upon clauses that exist within most mortgage contracts guaranteeing the plaintiff (the bank) all legal fees required to collect the defaulted upon debt from the defendant (the homeowner.) Do Judicial Foreclosures take more employee hours and more out of pocket costs for the banks than even post-AB 284 standard foreclosure proceedings? Of course. But, the banks can seek additional damages through Judicial Foreclosures (like legal fees) that they cannot seek via the traditional foreclosure process.
In the example cited in the blog, the homeowner was sued for their back payments plus interest, plus forefeiture of the property, plus the deficiency (difference between what is owed on the home and the amount borrowed), plus legal fees and other costs associated with the foreclosure. The defendant was served in June of 2012 and less than two months later she had lost her home and had to declare bankruptcy. Ironically, she had planned to list her home for short sale just as soon as she received an NOD from the bank. She never received one. Instead, she was summoned to court.
There is a lot of speculation beginning in the Las Vegas real estate world as to what a wave of Judicial Foreclosures might mean for the housing recovery. Some say that it would usher in a fresh wave of foreclosures that would halt the rise of home prices and drive Las Vegas real estate into another recession. Others, myself included, believe that even if Judicial Foreclosures become rigeur de jour in the Las Vegas real estate market, the procedures are likely to be more time consuming for the banks and, as result, are less likely to result in a large number of foreclosures being dumped on the market at one time. They would more likely create a steady flow of foreclosures which would certainly not drive home prices up, but would likely be absorbed by the high demand for affordable Las Vegas real estate and would not, therefore, result in prices decreasing dramatically either.
Only time will tell whether or not Judicial Foreclosures will catch on in Las Vegas or what the effects will be. But one thing remains certain: buy and hold investors who purchase properties with strong positive cash flow will be cushioned from the short term market movements that can cripple investors looking to turn quick, flip profits. Las Vegas remains a great place for investors to purchase rental real estate, as long as they buy smart.
Thursday, May 10, 2012
Las Vegas Real Estate In For Another Roller Coaster Ride
Las Vegas real estate is currently experiencing its largest upheaval since the bubble burst four years ago. The passage of Nevada Assembly Bill 284 has resulted in extreme and far reaching consequences that have rapidly and dramatically changed the face of the Las Vegas real estate market. Most notably has been the unbelievable drop in foreclosures over the last seven months and the resulting steep decline in standing inventory of REOs. In August of 2011 there were 4,063 notice of defaults (NOD) filed in Clark County. The notice of default is the first step in the foreclosure process. In the following month, September 2011, there were 3,108 NODs. Immediately after the passage of AB 284, in October of 2011, there were only 44 notice of defaults filed in all of Clark County! 44! In the six months since that time the largest number of NODs recorded was 209 in January of 2012.
At first glance, one might be tempted to look at these numbers as a positive for the Las Vegas housing market. If banks can’t foreclose then there will be no new foreclosures coming up for sale on the market (true.) If there are no new foreclosures then the existing supply of distressed properties for sale on the Las Vegas MLS will be consumed (also true...there are currently only 400 REOs for sale, less than a two week supply.) So once the REOs and foreclosure properties are consumed buyers will be forced to purchase “conventional” sales and pay the higher prices that those owners are asking for their properties (false...here is where the paradigm breaks down.) In a perfect world, it would be nice to assume that falling foreclosure rates would signal a rise in home prices as potential buyers are forced to purchase homes through conventional channels and pay the higher prices needed to break even by sellers who bought several years ago when Las Vegas prices were on their way up. Unfortunately, that’s not what is happening...and here’s why:
1. Over 50% of sales in Las Vegas in the last three years have been cash deals. Why? Because the Las Vegas real estate market has been kept afloat by investors. These investors have come in to take advantage of the great cash flow rates that can be generated by purchasing distressed properties, in many cases renovating them, and then offering them for rent to displaced homeowners. But this equation only works if the homes the investors are purchasing can be bought at a cost low enough to allow the properties to cash flow once they are rented. If there are no longer distressed properties to buy, the investors will not pay more for conventional homes, they will simply stop buying real estate in Las Vegas and move on to the next opportunity. This will effectively eliminate over 50% of Las Vegas real estate sales, drastically slowing demand and dramatically hurting the Las Vegas housing market’s chances for recovery.
2. Loans are still extremely difficult to come by. It has never been harder to qualify for a home loan. Many would-be buyers continue to be sidelined by lending restrictions and the ongoing credit crunch. Some buyers have been able to successfully purchase foreclosures or REOs using hard money or alternative financing and then refinance into a more attractive loan after several months. This type of purchase was only possible because of the instant equity available to home buyers when they purchase a foreclosure or REO. Eliminating foreclosure properties from inventory eliminates this option.
3. Even when potential home buyers are willing to pay the asking price on a conventional sale and have the necessary pre-qualifications to obtain financing for a home purchase, properties are simply failing to appraise for the sale price. We have run into this time and time again when selling our own properties. Because the only comps available to appraisers, in many cases, come from years worth of foreclosure sales, the properties are just not being appraised high enough to allow sales to go through with financing. This means that even when owner occupant buyers are willing to pay the price that the seller is asking, the banks are not willing to finance the purchase without a qualifying appraisal...thereby killing the deal.
Of course these are just the immediate effects of AB 284 on the market itself. None of this takes into account the effect that AB 284 is having on the lending institutions themselves. If the banks are unable to foreclose on non-performing assets, they are unable to put themselves in a position to be able to loan more money...a situation that further delays the recovery of the lending industry and the end of the credit crunch.
Now What?
The logical next question for investors is, “Does this mean that the Las Vegas real estate market is dead for investors and it’s time to move on?” The short answer is “No.” There are still great deals with tremendous cash flow to be had in Las Vegas. But you have to know where to look. The strategies that were working six months ago are not working now. The trustees’ sale is hopeless. What few properties that are available are being bid up to prices that no longer make sense for an investor. REOs are almost non-existent and are also selling for ridiculous prices. So, once again, we have had to reach deep into our bag of tricks, completely reimagine our acquisition process, and find a way to secure high quality, high cash flowing properties for our investor clients...just like we’ve been doing consistently for the last three years. In the second part of this article, I will tell you how.
Until then, if you are interested in learning more about how to invest in the new face of Las Vegas real estate please contact me directly:
Glenn Plantone
VIP Realty
(702) 656-3264 xt: 203
glenn@teamplantone.com
www.teamplantone.com
Thursday, April 12, 2012
The Last House In Las Vegas
They say that a picture is worth a thousand words...but when this image crossed my desk it rendered me speechless:
This graph shows the Notice of Defaults that have been filed in Clark County from March of 2011 through February of this year (2012.) You will see that as soon as AB 284 passed the Nevada legislature banks became almost completely handcuffed against trying to pursue the foreclosure process. This lack of fresh inventory has pushed Las Vegas standing inventory to ridiculous lows. This is not helping the economic recovery!
I wrote an open letter to our local politicians regarding AB 284. In it, I outlined what the results would be if AB 284 was allowed to pass. My predictions are all coming true. A copy of the letter follows:
AB 284 - Fighting Corruption or More Red Tape?
The Problem
Free market capitalism rests on the idea that the best way to ensure a fair economy is to allow the forces of supply vs. demand to set prices within an open market. Real estate markets have traditionally been one of the purest examples of demand driving prices. A home owner (be it an individual or a builder) places their home on the market for the price that they believe the potential buyer will be willing to pay. Once a final price is agreed upon, in most cases, a third party enters the equation. This third party is the bank (or other lending institution.) The bank makes a contract with the home buyer that they will pay the seller the full amount of the purchase on behalf of the buyer, and, in exchange for that, the buyer will repay the bank over a period of time (usually 30 years.)
As we know from watching the world’s markets, perhaps most notably the commodities market, the price that real goods sell for does not always reflect their “real” value. Prices can become “artificially inflated” for a wide variety of reasons including speculation that many times proves to be incorrect. When this happens prices often rise or decline quickly to “correct” for these misperceptions.
Unfortunately, in 2008 we witnessed a very large correction in the nation’s real estate market. Over the previous several years, especially in states like Nevada, California, Florida and Arizona, home prices had risen dramatically. These price spikes were based on many factors including population growth, sudden shortages of supply, perceived continued economic growth in these regions, etc. During this time period, millions of consumers signed their names on the dotted line and agreed to pay what they felt was a fair price for their home. The banks agreed to finance these buyers and the sellers of the properties walked away with the money.
Fast forward 3-8 years. The economy has declined, population growth and economic growth have halted in these metro centers, and home prices have plummeted up to 75% in some areas. Individuals find themselves in the regrettable position of not being able to meet the mortgage payments on their homes and not being able to sell them for anywhere near the price that they purchased them for. Investors who purchased properties in order to generate income find that they cannot rent the properties for enough to cover their payments to the bank. Some homeowners decide to strategically walk away from properties are valued at 25% of what they once were and will likely take 10, 20, or even 30 years to return to their previous value.
Do I feel sorry for these individuals? Absolutely. Have I personally, as a real estate investor and realtor, been adversely affected by the decline in home prices? Absolutely. Do I believe that people who don’t make their mortgage payments deserve to be foreclosed upon? ABSOLUTELY! That’s right...you heard it hear...I believe that anyone who does not make their mortgage payments deserves to be foreclosed upon. This is the process that drives our economy. This is the core of capitalism. It is plain and simple and everyone knows and expects it.
The Solution?
On May 20th, 2011, the Nevada Assembly passed (33-9) Bill 284 with overwhelming support from Assembly Leader Marcus Conklin. This bill was widely touted as a measure to aid economic recovery and bolster housing prices in our troubled state.
One of the writers of the bill commented, “AB 284 will help the Nevada economy recover...AB 284 increases criminal penalties where “robo-signing” conduct occurs, and it creates a NEW private right of action for borrowers, which includes attorneys’ fees and a mandatory fine when a foreclosure has not proceeded properly. Ultimately, this will aid in stabilizing real property values and restoring transparency and integrity in the foreclosure process, both of which are key to recovery. The Bill requires that the foreclosing party supplement the Notice of Default with a notarized Affidavit of Authority. The Affidavit of Authority, i) states the identity of the trustee, ii) describes the amount in default, iii) lists the full name and address of the current beneficiary (and every prior beneficiary under the deed of trust), and iv) includes the penalties and costs related to the default and foreclosure.”
The Scapegoat
Ultimately, allowing the real estate market to correct itself through the foreclosure process may be painful, but it will work. Just as the stock market and the commodities markets regulate themselves and move forward, real estate will do the same thing...if left alone. The problem is that we can’t seem to let it alone and allow the process to run it’s course. Why? Because we must punish the scapegoat.
In ancient times a scapegoat was sometimes a literal goat and sometimes a criminal or a beggar who would be thrust out from a community or put to death after a natural disaster or other calamity in order to appease the gods or god of that nation. Our modern day scapegoat for the housing crisis has become the banks and other lending institutions.
Let me stop you for a moment as you remind me that the banks have re-packaged loans in ways that might not have been transparent and they have, in some very few cases, “robosigned” documents relating to foreclosure proceedings. Yes, I know. It doesn’t matter. Nothing that the banks have done has affected the price of real estate in any meaningful way WHATSOEVER. The banks are very large and have massive resources on hand so they have become a perfect scapegoat. But, as inconvenient as this truth may be, the banks have done nothing wrong here...at least nothing of consequence. Buyers came to the banks and mortgage lenders several years ago and asked for a loan to purchase property. The banks approved the loan, gave the money (mortgage) and the home was purchased. Whether or not the loan was sold, or packaged, or “robosigned” really does not matter. The buyer, somewhere along the line, stopped making payments. He received a notice of default. This was followed by a notice of foreclosure. At this point the bank has a right to foreclose. End of story. Or at least it should be.
The Scenario
As it stands currently, in default saturated areas like my hometown of Las Vegas, foreclosures are dragging on for unbelievable periods of time. I personally know individuals who have not made a payment on their homes for almost 5 years and have still not been FORECLOSED UPON! The banks are overwhelmed. They have lost money (as they deserved to as a result of their bad investments, just as homeowners deserved to lose money on their bad investments) and have cut staff in response. They are now trying to process a huge increase in foreclosures with limited personnel. The government’s recent response to this is to add a huge measure of red tape to the foreclosure process in the form of Assembly Bill 284. This bill forces banks to provide, among other things, affidavits proving that they have the right to foreclose on each individual homeowner. One of the attorneys who helped draft the bill summarizes the purpose of this law accurately when she states (as quoted above), “this will aid in stabilizing real property values.” How, exactly, will it accomplish this? There is only one way: by making it so difficult for banks to foreclose that the number of foreclosures decreases.
Why Not?
So what’s not to love? Fewer foreclosures means more people get to stay in their homes right? Yes, their homes that are still unsellable because the basis price is ridiculous compared to today’s values. The only way to “reset” a property’s value is for it to go through a foreclosure or short sale process. Delaying this is simply delaying the inevitable while also crippling the very lending institutions that you want to start making loans to new purchasers in order to defrost the current credit freeze.
As opposed to this delay, here is how things naturally take their course when foreclosures are allowed to move forward: Typical owner occupants in Las Vegas may have bought a home in 2006 for $300,000 with payments of $2650 per month. They had an FHA home loan and put down 3.5% (about $10,500) when they purchased the home. They made their payments for 3 years and stopped sometime in 2008. They stayed in their home making no mortgage payments and got foreclosed upon sometime in 2011 (3 years after they have made no payments on their home). Once foreclosed they move across the street into a totally rehabbed turnkey model match home bought by an investor for $80,000 at a trustee sale or as an REO (real estate owned bank foreclosure) and pay $1200 in rent per month to that investor (saving over $1450 per month from their previous home payment.) This savings is actually even greater as they are no longer paying property taxes, insurance, HOA dues, or maintenance on the home as these expenses are being covered by the investor, who by the way is getting a nice 10% return on his money if this is a cash investment and a 20% return if he was able to finance the investment home.
This is not the ideal situation, but this is how the economy works. This is how the housing market heals itself and moves on. If our politicians continue to take the “feel good” approach to economics they will hurt the very homeowners that they pretend to be helping. Politicians at both the local and national level have been playing the procrastination game for the last three years and it has only caused our city and our nation to slump further and further into the grips of recession and home value decline. As difficult as it may be, the only way to get out of this crisis is to walk through. Let the banks foreclose. Let the bleeding stop. Then the healing can begin.
This graph shows the Notice of Defaults that have been filed in Clark County from March of 2011 through February of this year (2012.) You will see that as soon as AB 284 passed the Nevada legislature banks became almost completely handcuffed against trying to pursue the foreclosure process. This lack of fresh inventory has pushed Las Vegas standing inventory to ridiculous lows. This is not helping the economic recovery!
I wrote an open letter to our local politicians regarding AB 284. In it, I outlined what the results would be if AB 284 was allowed to pass. My predictions are all coming true. A copy of the letter follows:
AB 284 - Fighting Corruption or More Red Tape?
The Problem
Free market capitalism rests on the idea that the best way to ensure a fair economy is to allow the forces of supply vs. demand to set prices within an open market. Real estate markets have traditionally been one of the purest examples of demand driving prices. A home owner (be it an individual or a builder) places their home on the market for the price that they believe the potential buyer will be willing to pay. Once a final price is agreed upon, in most cases, a third party enters the equation. This third party is the bank (or other lending institution.) The bank makes a contract with the home buyer that they will pay the seller the full amount of the purchase on behalf of the buyer, and, in exchange for that, the buyer will repay the bank over a period of time (usually 30 years.)
As we know from watching the world’s markets, perhaps most notably the commodities market, the price that real goods sell for does not always reflect their “real” value. Prices can become “artificially inflated” for a wide variety of reasons including speculation that many times proves to be incorrect. When this happens prices often rise or decline quickly to “correct” for these misperceptions.
Unfortunately, in 2008 we witnessed a very large correction in the nation’s real estate market. Over the previous several years, especially in states like Nevada, California, Florida and Arizona, home prices had risen dramatically. These price spikes were based on many factors including population growth, sudden shortages of supply, perceived continued economic growth in these regions, etc. During this time period, millions of consumers signed their names on the dotted line and agreed to pay what they felt was a fair price for their home. The banks agreed to finance these buyers and the sellers of the properties walked away with the money.
Fast forward 3-8 years. The economy has declined, population growth and economic growth have halted in these metro centers, and home prices have plummeted up to 75% in some areas. Individuals find themselves in the regrettable position of not being able to meet the mortgage payments on their homes and not being able to sell them for anywhere near the price that they purchased them for. Investors who purchased properties in order to generate income find that they cannot rent the properties for enough to cover their payments to the bank. Some homeowners decide to strategically walk away from properties are valued at 25% of what they once were and will likely take 10, 20, or even 30 years to return to their previous value.
Do I feel sorry for these individuals? Absolutely. Have I personally, as a real estate investor and realtor, been adversely affected by the decline in home prices? Absolutely. Do I believe that people who don’t make their mortgage payments deserve to be foreclosed upon? ABSOLUTELY! That’s right...you heard it hear...I believe that anyone who does not make their mortgage payments deserves to be foreclosed upon. This is the process that drives our economy. This is the core of capitalism. It is plain and simple and everyone knows and expects it.
The Solution?
On May 20th, 2011, the Nevada Assembly passed (33-9) Bill 284 with overwhelming support from Assembly Leader Marcus Conklin. This bill was widely touted as a measure to aid economic recovery and bolster housing prices in our troubled state.
One of the writers of the bill commented, “AB 284 will help the Nevada economy recover...AB 284 increases criminal penalties where “robo-signing” conduct occurs, and it creates a NEW private right of action for borrowers, which includes attorneys’ fees and a mandatory fine when a foreclosure has not proceeded properly. Ultimately, this will aid in stabilizing real property values and restoring transparency and integrity in the foreclosure process, both of which are key to recovery. The Bill requires that the foreclosing party supplement the Notice of Default with a notarized Affidavit of Authority. The Affidavit of Authority, i) states the identity of the trustee, ii) describes the amount in default, iii) lists the full name and address of the current beneficiary (and every prior beneficiary under the deed of trust), and iv) includes the penalties and costs related to the default and foreclosure.”
The Scapegoat
Ultimately, allowing the real estate market to correct itself through the foreclosure process may be painful, but it will work. Just as the stock market and the commodities markets regulate themselves and move forward, real estate will do the same thing...if left alone. The problem is that we can’t seem to let it alone and allow the process to run it’s course. Why? Because we must punish the scapegoat.
In ancient times a scapegoat was sometimes a literal goat and sometimes a criminal or a beggar who would be thrust out from a community or put to death after a natural disaster or other calamity in order to appease the gods or god of that nation. Our modern day scapegoat for the housing crisis has become the banks and other lending institutions.
Let me stop you for a moment as you remind me that the banks have re-packaged loans in ways that might not have been transparent and they have, in some very few cases, “robosigned” documents relating to foreclosure proceedings. Yes, I know. It doesn’t matter. Nothing that the banks have done has affected the price of real estate in any meaningful way WHATSOEVER. The banks are very large and have massive resources on hand so they have become a perfect scapegoat. But, as inconvenient as this truth may be, the banks have done nothing wrong here...at least nothing of consequence. Buyers came to the banks and mortgage lenders several years ago and asked for a loan to purchase property. The banks approved the loan, gave the money (mortgage) and the home was purchased. Whether or not the loan was sold, or packaged, or “robosigned” really does not matter. The buyer, somewhere along the line, stopped making payments. He received a notice of default. This was followed by a notice of foreclosure. At this point the bank has a right to foreclose. End of story. Or at least it should be.
The Scenario
As it stands currently, in default saturated areas like my hometown of Las Vegas, foreclosures are dragging on for unbelievable periods of time. I personally know individuals who have not made a payment on their homes for almost 5 years and have still not been FORECLOSED UPON! The banks are overwhelmed. They have lost money (as they deserved to as a result of their bad investments, just as homeowners deserved to lose money on their bad investments) and have cut staff in response. They are now trying to process a huge increase in foreclosures with limited personnel. The government’s recent response to this is to add a huge measure of red tape to the foreclosure process in the form of Assembly Bill 284. This bill forces banks to provide, among other things, affidavits proving that they have the right to foreclose on each individual homeowner. One of the attorneys who helped draft the bill summarizes the purpose of this law accurately when she states (as quoted above), “this will aid in stabilizing real property values.” How, exactly, will it accomplish this? There is only one way: by making it so difficult for banks to foreclose that the number of foreclosures decreases.
Why Not?
So what’s not to love? Fewer foreclosures means more people get to stay in their homes right? Yes, their homes that are still unsellable because the basis price is ridiculous compared to today’s values. The only way to “reset” a property’s value is for it to go through a foreclosure or short sale process. Delaying this is simply delaying the inevitable while also crippling the very lending institutions that you want to start making loans to new purchasers in order to defrost the current credit freeze.
As opposed to this delay, here is how things naturally take their course when foreclosures are allowed to move forward: Typical owner occupants in Las Vegas may have bought a home in 2006 for $300,000 with payments of $2650 per month. They had an FHA home loan and put down 3.5% (about $10,500) when they purchased the home. They made their payments for 3 years and stopped sometime in 2008. They stayed in their home making no mortgage payments and got foreclosed upon sometime in 2011 (3 years after they have made no payments on their home). Once foreclosed they move across the street into a totally rehabbed turnkey model match home bought by an investor for $80,000 at a trustee sale or as an REO (real estate owned bank foreclosure) and pay $1200 in rent per month to that investor (saving over $1450 per month from their previous home payment.) This savings is actually even greater as they are no longer paying property taxes, insurance, HOA dues, or maintenance on the home as these expenses are being covered by the investor, who by the way is getting a nice 10% return on his money if this is a cash investment and a 20% return if he was able to finance the investment home.
This is not the ideal situation, but this is how the economy works. This is how the housing market heals itself and moves on. If our politicians continue to take the “feel good” approach to economics they will hurt the very homeowners that they pretend to be helping. Politicians at both the local and national level have been playing the procrastination game for the last three years and it has only caused our city and our nation to slump further and further into the grips of recession and home value decline. As difficult as it may be, the only way to get out of this crisis is to walk through. Let the banks foreclose. Let the bleeding stop. Then the healing can begin.
Subscribe to:
Posts (Atom)
