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 ProblemFree 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 ScapegoatUltimately, 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 ScenarioAs 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.
