Published July 8, 2008
We are receiving an increasing number of calls from buyers that are interested in buying a new home and letting their existing home to be foreclosed on. It i happening every day. Lenders are starting to wizen up.
Some Buy a New Home to Bail on the Old
Published June 23, 2008
I have had many discussions with collegues on the actual cost of a foreclosure. The following article
breaks it down. Now I wonder about the servicers unwillingness to
Story Information
Title: Foreclosures Cost Lenders, Homeowners, the Community, and You Big Bucks
Date: Mon, 2 Jun 2008 12:29:39 EST
Location: http://www.MortgageNewsDaily.com/622008_Foreclosure_Costs.asp
Foreclosures Cost Lenders, Homeowners, the Community, and You Big Bucks!
Earlier this month a reader, Pamela Norvell, wrote a suggestion for lessening the foreclosure crisis. She suggested a freeze and/or a rollback of interest rates to their original levels. In making her suggesting Ms. Norvell wondered what it was causing lenders to foreclose on properties rather than do a workout or a restructure. Made us curious too.
The cost of a foreclosure, it turns out, is pretty staggering and we wonder why lenders and the investors they represent aren’t jumping at a solution, any solution, that would allow them to avoid going to foreclosure whenever possible.
According the Joint Economic Committee of Congress, the average foreclosure costs $77,935 while preventing a foreclosure runs $3,300.
The cost of preventing a foreclosure is not easily categorized. We assume that it includes the staff costs of talking to the borrower, collecting financial documents (a task we have noted seems unreasonably difficult for the borrower) reviewing the documents, ordering and reviewing the appraisal, the cost of that appraisal (more likely to be a less expensive brokers price opinion or BPO) and the preparation of a justification to decision makers for any workout plan.
We have seen figures from non-profits that the cost of averting a foreclosure through the use of credit counseling from a non-profit agency approved by the Department of Housing and Urban Development can range from a bit under $1,000 to $14,000 and we don’t quite know what to do with that large and disparate range. We do know that counseling programs vary greatly and we assume that those on the high side include programs that provide emergency funds to homeowners to bring loans current while those on the low side are primarily advising and educating their clients.
But the $77,934 cost to foreclosure figure seems fairly easy to document and, compared to others that are widely bandied about – from $58,000 to 30 percent of the pre-foreclosure value of the house – seems reasonable.
First of all, the cost does not accrue totally to the lender. The homeowner has a typical loss of $7,200 which includes loss of equity in the property, moving expenses, and perhaps some legal fees.
Those neighbors living in close proximity to the foreclosed house suffer $1,508 in losses from the decrease in the value of their own home as the neighborhood begins to deteriorate.
The local government loses $19,227 through diminished taxes and fees and a shrinking tax base as home prices decrease. This is a hard number to justify. First of all, only a portion of the declining tax base is due to foreclosures. A big chunk of it is based on falling prices community wide. And we’ll bet that even as we talk about it local governments are busy adjusting assessments and mill-levies to keep total revenues close to pre-housing crisis levels. This means that the neighbor’s share of the costs should be higher as they absorb increased tax levels.
Also, while the cities and towns are permanently losing some income from fees such as trash pick-up and water and sewer charges, if and when the house is sold they will collect back property taxes or, if they remain unpaid, they will become the owners of the property through tax title. (That opens a whole new area of concern, but one for discussion on a different day.)
That leaves us with total costs of $50,000 for the lender under the numbers produced by the Joint Economic Committee of Congress. The Committee does not break out these figures but a new study from Standard & Poor’s (S&P) does. While there is not a total match between the two sets of data, they are close enough.
The Committee includes the following in its list of pre-and post-foreclosure expenses:
Loss on property/loan
Property maintenance
Appraisal
Legal fees
Lost revenue
Insurance
Marketing
Clean-up
And S&P breaks them down as follows:
The largest component of the $50,000 is cash loss on the property. S&P pegs this number at $40,000 for a typical loan of $210,000. Investors who buy short sales tell us that the big lenders are unwilling to sell property or take payoffs for more than a 15 to 20 percent discount so these numbers are closely in sync. S&P however includes only the actual decline in property values in that 19 percent loss figure.
S&P assigns a staggering 26 percent of the loan amount for the costs of foreclosure. This category wraps up the remainder of the list above and include paying property taxes (3 percent, although many ignore this obligation, hoping to pass accrued taxes on to the eventual buyer), maintaining hazard insurance, legal fees (1 percent), an appraisal (although most lenders are choosing the far less expensive alternative of a brokers price opinion or windshield appraisal,) lost revenue (an estimated 13.6 percent of the loan amount) 6 percent marketing fees (broker’s commission) and 3 percent spent on home maintenance.
There is a figure that is usually not taken into account – cash reserves. Bank regulations require that lenders put aside a percentage of their capital to cover potential losses. That amount, whether $100,000 or $500,000 is that much less that the bank has to loan to others and means more lost revenue.
It is obvious that no one is a winner in the foreclosure game. But we wonder if lenders and their real estate agents are not exacerbating the situation for all involved through their property management and marketing policies. A look at that later in the week.
Published June 8, 2008
5704 Saint Andrews Dr Stockton, CA 95219-1929 $2,995,000
4673 Pine Valley Cir Stockton, CA 95219-1878 $2,389,000
3626 Gleneagles Dr Stockton, CA 95219-1824 $1,695,000
5117 Spanish Bay Cir Stockton, CA 95219-1933 $1,150,000
4138 Pebble Beach Dr Stockton, CA 95219-1912 $1,095,950
4743 Saint Andrews Dr Stockton, CA 95219-1915 $1,075,000
6065 Riverbank Cir Stockton, CA 95219-2523 $999,975
3318 Morningside Dr Stockton, CA 95219-1728 $999,950
5245 Poppy Hills Cir Stockton, CA 95219-1920 $975,000
5037 Spanish Bay Cir Stockton, CA 95219-1932 $939,950
4550 Pebble Beach Dr Stockton, CA 95219-1909 $925,000
5183 Poppy Hills Cir Stockton, CA 95219-1920 $925,000
4346 Saint Andrews Dr Stockton, CA 95219-1847 $899,000
4353 Bridgewater Pl Stockton, CA 95219-2001 $888,000
5156 Poppy Hills Cir Stockton, CA 95219-1920 $820,000
3315 Morningside Dr Stockton, CA 95219-1729 $819,500
4119 Spyglass Dr Stockton, CA 95219-1922 $795,000
4149 Pebble Beach Dr Stockton, CA 95219-1912 $749,500
6118 Riverbank Cir Stockton, CA 95219-2524 $675,000
3942 Riverboat Dr Stockton, CA 95219-2541 $672,500
3426 Lakemist Cir Stockton, CA 95219-1735 $649,950
4205 Pinehurst Cir Stockton, CA 95219-1839 $610,000
3970 Glen Abby Cir Stockton, CA 95219-1807 $599,900
4312 Heron Lakes Dr Stockton, CA 95219-1767 $589,950
4242 Heron Lakes Dr Stockton, CA 95219-1766 $575,000
3672 Arrowhead Ct Stockton, CA 95219-1769 $515,000
4211 Pinehurst Cir Stockton, CA 95219-1882 $509,000
4258 Pinehurst Cir Stockton, CA 95219-1885 $485,000
3630 Arrowhead Ct Stockton, CA 95219 $475,000
4034 Pine Lake Cir Stockton, CA 95219-2018 $454,950
4029 Coastal Cove Ln Stockton, CA 95219-2530 $449,000
6264 Pine Meadow Cir Stockton, CA 95219-2542 $399,000
6252 Pine Meadow Cir Stockton, CA 95219-2542 $380,000
6367 Brook Hollow Cir Stockton, CA 95219-2441 $353,000
3773 Bridlewood Cir Stockton, CA 95219-2518 $350,000
3729 Bridlewood Cir Stockton, CA 95219-2518 $329,950
6399 Pine Meadow Cir Stockton, CA 95219-2543 $323,999
3393 Willowbrook Cir Stockton, CA 95219-1758 $319,500
3332 Willowbrook Cir Stockton, CA 95219-1706 $299,000
3717 Bridlewood Cir Stockton, CA 95219-2518 $295,000
4889 Timepiece Cir Stockton, CA 95219-2041 $264,900
5331 Rockwood Cir Stockton, CA 95219-2515 $259,000
4828 Timepiece Cir Stockton, CA 95219-2040 $245,000
5687 Vintage Cir Stockton, CA 95219-2513 $239,900
3656 Hidden Brook Dr Stockton, CA 95219-2331 $238,900
3082 Carousel Cir Stockton, CA 95219-2318 $235,000
3065 Carousel Cir Stockton, CA 95219-2315 $235,000
3183 Autumn Chase Cir Stockton, CA 95219-2434 $235,000
3010 Carousel Cir Stockton, CA 95219-2302 $228,800
3971 Bridlewood Cir Stockton, CA 95219-2503 $199,900
Published June 1, 2008
The following Reuters article accurately depicts what is happening. Value priced homes are selling quickly and multiple offers are the norm. The time to buy is now!
Foreclosure capital Stockton has odd market
Stockton, Calif., sees multiple (super-lowball) offers and great rental rates
Reuters
updated 9:39 a.m. PT, Sun., June. 1, 2008
STOCKTON, California - In some areas of California, so many foreclosed homes are available to buy on the cheap that real estate agents are discouraging prospective sellers from even putting their houses on the market.
Perhaps the most extreme example of this is Stockton, about 85 miles east of San Francisco, where roughly three of every four homes for sale are in or on the path to foreclosure.
The city’s resale market is “pretty much gone,” said Cameron Pannabecker, owner of Cal-Pro Mortgage Inc.
“I don’t know an agent today who would take your listing unless you’re a hard-luck case. There is just too much competition,” Pannabecker said. Properties that at the peak of the market two years ago were selling at $500,000, or appraised at $500,000, are now selling for $200,000, he said.
And because foreclosures dot all areas of Stockton, buyers have their pick of properties, said John Knight, a professor of finance and real estate at Stockton’s University of the Pacific Eberhardt School of Business. “Honestly, there isn’t a huge amount of difference between a foreclosed home and a regular home than the prices,” Knight said.
Worse for people trying to sell their homes, lenders in possession of houses and condominiums may keep their fire-sale in full swing for months to come to attract investors to a market near the top of U.S. surveys of areas hit by foreclosures.
“It’s a tough market to be a normal seller,” said Stockton real estate agent Michael Blower of Blower Realtors. “I’ll really ask them, ‘Do you need to sell?’ Because your competition are banks who want to clean it off their books.”
Calling up listings on a database, Blower noted just over 3,500 of nearly 5,000 local homes listed for sale are in some stage of foreclosure. “There are more listings coming,” he added.
More listings would add pressure on local home prices. But they may only hold prices down rather than drag them lower because investors are slowly coming to Stockton in search of bargains, and in some cases they are in bidding wars, albeit at comparatively low prices.
“We heard yesterday there were 36 offers on one house,” said Terry Hull Sr., a veteran Stockton property manager and owner of property management company W.T. Hull Co Inc.
Hull said he, too, may soon put offers on local properties because they have become so cheap: “We’re going to buy about 50 houses because we know it’s an opportunity you rarely see.”
Stockton’s home prices surged earlier this decade amid a building boom seizing on skyrocketing prices in the San Francisco Bay area displacing middle-class buyers.
Many headed to Stockton, historically a sleepy agricultural distribution center, and neighboring towns more than hour’s driving commute east. Routine home financing, as in many other markets, was in the form of risky adjustable-rate mortgages.
When low interest rates reset, many of those mortgages became too expensive to maintain, triggering a wave of defaults and foreclosures.
Distressed borrowers who manage to sell their houses are in many cases able to rent equivalent properties for about half the cost of their monthly mortgage payments. “I don’t know of anybody who has been foreclosed who is moving into an apartment,” said Paul Jacobson, an associate at W.T. Hull Co.
Investors have taken notice that rental demand in Stockton is on the upswing while home prices have fallen, providing an opportunity to turn foreclosures into profits, said Cesar Dias, a Stockton real estate agent who arranges bus tours of foreclosed properties.
Dias said one foreclosed home he showed last month sold for $80,000, or $11,000 above its asking price, after 12 days on the market. The two-bedroom, one-bathroom house may rent for up to $1,000 a month and generate a monthly profit of up to $400.
Investors likewise pounced on a three-bedroom, three-bathroom home in a gated subdivision that Dias just showed. It has at least three offers at its $220,000 asking price, he said. “People are cherry-picking and finding the right ones,” Dias said. “They see prices are at a bottom.”
“Do I see the tide turning? Yes,” Dias added.
Copyright 2008 Reuters. Click for restrictions.
URL: http://www.msnbc.msn.com/id/24883012/
Published May 29, 2008
BofA recently approved a short sale for my clients. The first mortgage is a purchase money loan. An offer from a well qualified buyer netting the bank $221,123 was submitted in January, 2008. BofA’s BPO valued the home at $220,000 two months later. No surprise since the home is in Stockton, CA , the “foreclosure capital of the US”. The value has since dropped substantially.
On my recommendation the sellers have met with an attorney who advised them to not accept the terms of the BofA short sale agreement. That agreement gives the bank and/or its investor the right to collect on any deficiency, a right they BofA would not have if the first mortgage is foreclosed on. As a consequence my clients have decided not to move forward with the short sale.
Information passed down to us from Bob Carus, Sr. VP of Mortgage Servicing informed us that BofA is unwilling to modify the short sale approval verbiage. It is the required verbiage on ALL BofA short sales….no exceptions.
I am having a hard time understanding BofA’s position. The bank/investor will incur additional expense of foreclosure, sell the home for less money, end up with a greater loss, and will have to while carry this non-performing note on its books for a longer time. Is there some banking law or regulation I’m not aware of that dictates this bad business decision? Do you think the BofA investors and Board of Directors aware of this decision?
And speaking of business decisions - why hasn’t BofA encouraged this qualified buyer to obtain a loan from BofA?
I will not pursue short sales with BofA mortgagors. It is not in their best interest. Rather I will counsel these to seek legal advice, and that they consider the alternative of awaiting the BofA foreclosure process and possibly file bankruptcy.
I do think that the public should be made aware of BofA’s position and have contacted the local media. Also requested that BofA provide a contact for the reporter to speak with but none was provide.
Published May 25, 2008
The higher quality Alt-A mortgages appear to be heading down the same path as the subprime. Will this bubble be the next to burst? Mr. Mortgage has a great video providing an overview of the Alt-A market.
http://www.youtube.com/watch?v=pmeBSWI9sF8
Published May 21, 2008
There are opportunities to purchase homes at value prices through the short sale process. Unfortunately the mortgage servicers are making the process in some cases a REAL challenge. The benefit to the owners of the mortgage is that they can sell the property before going through the expensive foreclosure process. The benefit to the seller should be that they are able to walk away from the home without the threat of a deficiency judgment when the loan is not purchase money security. The reality is that some lenders are now including verbiage in the short sale approval giving the lender the right to collect the deficiency even if the loan is purchase money security. Not a good deal for the seller. I have been successful in negotiating the waivers but it does take substantial effort. Sellers beware of the documents the lenders are requesting you sign for a short sale, buyers beware that solid short sale deals do exist!
Published May 16, 2008
The average sale price of a home in Stockton fell below 200k last month. Down 43% from a year ago. Sale activity is picking up. We may have eperienced the bottom. Now is the time to buy!
http://www.recordnet.com/apps/pbcs.dll/article?AID=/20080516/A_BIZ/805160309
Published April 18, 2008
As more individuals loose their homes to foreclosure the demand for rental properties is increasing. We have already seen significant increases in demand and rents are heading up. I expect this trend to continue. Good news for investors. We’re finally in place where an investor can buy a home, rent it, and have a positive cash flow! Mortgage News Daily has an article on this topic:
Published April 13, 2008
We’re finally starting to see the bottom. Homes priced aggressively by the banks are now receiving multiple offers. In some cases up to 20 offers have been received The time to buy is now. More foreclosures are expected and exiting inventory prices are being reduced to “bottom” prices. The following is a link to a recent article in the Wall Street Journal on the topic: