Category: Foreclosure

Expired Homebuyer Tax Credits Only Part of the Drop in July Home Sales

Yesterday, the real estate sales numbers for July were released. CNBC was predicting “armageddon”, citing the expiration of the home buyer tax credits as the primary cause of the drop in sales.

While the home buyer credit is probably responsible for the April and May spikes, it’s not entirely responsible for the July swoon.

As a recent homebuyer who received absolutely no benefit from the tax credits, I’m painfully aware that the tax credit wasn’t the “cure all” needed to fix the housing market. And while dropping prices and low interest rates have historically been a boon for home sales, the biggest issue now is that existing home-owners, a.k.a. home sellers, have less room to cut prices and are stuck staying in their existing house.

These home sellers are those who bought homes in the last 4-6 years with 0% to 10% down, and, with falling prices, they can’t pay off their existing mortgage (and a realtor) in any sale, but they’re not Bankruptcy/default risks. Long story short, they’re stuck: they can’t sell and, as a result, can’t buy.

The tax credits only helped these home sellers in an indirect way: the tax credit added cash into the transaction that allowed the seller to give the buyer less of a price break. But, the tax credits helped the real estate markets by greasing only one wheel of the car. Now, we have to look at the others.

Recent Foreclosure Study from California Refutes Foreclosure Stereotypes

The Center for Responsible Lending has issued an interesting new report regarding the California foreclosure crisis.

As described by the Credit Slips blog, the findings contradict “the stereotype of the California foreclosure crisis as resulting from house flippers and social climbers overreaching to buy 4,000 square foot mansions.”

Credit Slips notes that “the typical foreclosure story is not a family reaching too far in order to buy an unaffordable house, but more likely, of using home equity to pay credit card debt and maintain a middle-class standard of living in the face of stagnating incomes” and concludes that “…the last to arrive at the bottom rungs of the middle class ladder are the first to be pushed back off.”

Tennessean Reports a Steady Increase in Nashville Bankruptcy Filings

The Tennessean ran a story this morning, Bankruptcy Filings Rebound, that discusses the fact that Bankruptcy filings in Nashville and the Middle District of Tennessee went up in July 2010, after declining the prior few months.

Although the article doesn’t say so, I wonder if the re-commencement of foreclosure sales under the new Tennessee foreclosure law is playing some part. (Remember, under this law, creditors must mail out a “Notice of Right to Foreclose” to borrowers, and the timing of the new law resulted in a drastic drop in foreclosures in May and June, 2010.)

In discussing the rising rates, the article cites continuing unemployment rates, expiring unemployment benefits for many laid-off workers, and a general rise in small business failures. The article says that the current number of bankruptcy cases is the highest since the changes in the Bankruptcy laws in 2005, but other experts note that we’re seeing less filings than we actually should be.

New Tennessee Foreclosure Deficiency Judgment Statute Becomes Effective Soon

In addition to imposing new notice requirements on foreclosing creditors, the 2010 Tennessee Legislature has also passed House Bill 3057, which provides post-foreclosure protections to debtors regarding deficiency balances. This new law becomes effective September 1, 2010.

A “deficiency balance” is the amount of debt remaining after the foreclosure sale proceeds are applied to the creditor’s debt. Because most foreclosures don’t net sufficient proceeds to fully pay the debt, lenders often sue their borrowers to recover this difference.

This new statute allows a debtor to question whether the foreclosure sale price was truly representative of the “fair market value” of the property. Under this law, the debtor can attempt to prove “by a preponderance of the evidence that the property sold for an amount materially less than the fair market value…” If successful, the debtor may be able to increase the amount of credit he or she is entitled to.

Additionally, the statute potentially shortens the time to file a lawsuit to recover a deficiency balance, requiring that such actions be brought by the earlier of: two years after the foreclosure; or within the original statute of limitations for suit on the debt.

For most lenders, this new law should not have any practical impact. While you might imagine there would be various horror stories of lenders bidding $10,000 to buy a half-million property, in reality, most lenders were already calculating their foreclosure bids by starting at what the fair market value of the property is, and then subtracting sale expenses and carrying costs. The most prudent lenders have a standard procedure in place for all foreclosures, and many go the expense to order pre-foreclosure appraisals.

The key to avoiding issues under this law is to have some reasonable basis for determining “fair market value” when preparing foreclosure bids, whether it’s the tax records, recent sales, or new appraisals.

Foreclosure Auction Sales: Buyer Beware

In my post from last week about ways to avoid disaster when buying real property at a foreclosure sale, one of the “nightmare” scenarios I noted is when “the house is still subject to prior liens or taxes.”

Well, that exact nightmare came true for these California foreclosure auction bidders, who bought their dream house for half of what it was worth…only to learn that they bought it subject to an existing $500,000 mortgage.

They paid nearly $100,000 for a house they thought was worth $200,000 (great deal so far)…but, under the foreclosure laws, they purchased the house still subject to a pre-existing $500,000 lien (not a great deal anymore).

This is the perfect example of my earlier advice: don’t bid at a foreclosure sale unless you do your homework in advance or consult with someone who will do your homework for you.

As a general rule, foreclosure sales wipe out liens behind the foreclosing instrument, but they are subject to any senior liens (liens recorded before the lien being foreclosed). The foreclosing lender didn’t do anything wrong here, and this isn’t that out-of-the-ordinary. Sometimes, the buyer mistakenly bids so much money above a junior mortgage that the lender is forced to pay that money to the defaulted borrowers–not upstream to those senior liens.

Over the next few years, we’re going to hear a lot about people who made a lot of money in foreclosure sales…just like we’re going to see stories like this one.

Hat-Tip: Calculated Risk Blog.

Foreclosure Sales: Only the Well-Informed Buyers Avoid Disaster

Foreclosure is bad. It’s bad for the homeowner (who loses their property). It’s bad for the lender (who gets a house it doesn’t want back). It’s bad for the neighbors (who may have to deal with a vacant house and decreasing property values).

But, for those with available cash or credit, this economy can offer the deal of a lifetime on the house of their dreams.

For every story like the one above, though, there are dozens more involving people who only buy trouble at foreclosure sales. Maybe the house still has people living there. Maybe the house is still subject to prior liens or taxes. Maybe the sale is on “as is, where is” terms for a reason.

Successful foreclosure purchases require advance homework, involving an inspection of the property records, the tax records, and maybe even an inspection of the property (or at the very least a drive-by). A buyer who does none of the above is running a very good risk that she’ll be buying a nightmare, not a dream home.

Home Sales Drop in June, While Existing Home Inventory Rises

The National Association of Realtors released a report today that home sales dropped in June 2010, mainly as a result of the expiration of the home buyer tax credits. The silver lining, they say, is that June 2010 was still better than June 2009.

What’s really scary is that existing home inventory continued to rise in June. Apparently, in the rush to get homes built and sold prior to the end of the tax credit, builders were left with far more houses than buyers.

The tax credit isn’t coming back, so July probably will not be much better. My prediction? The next report you’ll be seeing is that foreclosures are up in August and September.

Negative Equity May be New Culprint in Foreclosure Crisis

Negative equity drastically increases foreclosure risk. This Christian Science Monitor article notes that the current focus of existing home mortgage modification programs–reductions in monthly payments and interest rates–is misplaced, because the real culprit may be the fact that so many people simply owe far more than their houses are worth.

While lenders may be willing to shave down monthly payments and interest, should they also be willing to shave off tens of thousands of dollars of principal on loans? Does the cost of foreclosure outweigh a discount on the debt?

The above article reminds me of the Tennessean’s 2009 article that the “Making Home Affordable” Modification Program wasn’t helping the foreclosure crisis as expected.

So far, the federal programs look to cure certain symptoms, but can’t seem to reach all of the problem, sort of like plugging a hole and then having another leak spring up.

Nashville Foreclosure Rates Drop in May…But Expect a Roller Coaster Ride for Next 3 Months

The Nashville Business Journal reports today that the foreclosure rates have dropped in the middle Tennessee area for May 2010.  Regardless of what happened in May, I expect the foreclosure numbers to spike in June, and then virtually disappear in July and August, 2010.

Here’s why: On April 27, 2010, Governor Bredesen signed House Bill 3588, adding Tennessee Code Annotated 35-5-117, which imposes new notice requirements prior to foreclosure on an owner-occupied residence. This law takes effect on July 1, 2010 and applies to any such foreclosure that is published on or after September 1, 2010.

Long story short, this new law effectively requires that a new pre-foreclosure notice, called a “Notice of Right to Foreclose,” be sent to delinquent borrowers at least 60 days prior to the first foreclosure publication date. This law is designed to allow the borrowers to explore refinancing or mortgage modification options. This notice requirement applies, regardless of whether any notice is required under the loan documents.

Knowing that the law had changed, many lenders may have rushed to foreclose prior to the new requirements, which would explain any increase in the June numbers. But, for any remaining residential foreclosures, those would be completely stayed in July and August, while the lender waits for the 60 day notice to run.

If your newspaper seems a little lighter over the next two months, this is why.