A New Way to Handle Foreclosures

May 25th, 2008

Background

The foreclosure process in Minnesota is a long one… often consuming an entire year from when the borrower first misses a payment until the time that the bank assumes control of the home. The Minnesota Home Ownership Center has put together a great flyer on the process and an average timeline.

Right now the Minnesota Legislature is considering a bill to “defer” the foreclosure process for up to an additional year if the borrower of an owner-occupied home makes partial payments (65% of principal and interest amount due). If this bill is signed by Governor Pawlenty, Minnesota could potentially have a 24 month disposition window for some foreclosures.

Problem

A lot can happen to a home in the 12 months from the date the borrower stops making payments. In many cases, the homes fall into disrepair as the borrower knows that any investment of time or money on the property will ultimately be lost when the bank assumes possession. Property taxes and municipal bills are also often neglected… I have seen delinquent water & sewer bills for a foreclosed property above $1000 and delinquent property taxes above $5000. These are all bills that will have to be assumed/paid for by the mortgage company. Also, often times there is a significant amount of trash/debris left by the borrower… it is not uncommon to see a large dumpster in front of these properties full to the brim. Add to all of that the year of non-payment of the loan and the legal expenses to the lender to complete the foreclosure process and it is likely that a lender already has a $10,000 – $20,000+ loss at the time they repossess it.

In Minnesota, we have 5 months of average low temperatures below freezing. If a home in foreclosure is vacated during these months, often the utilities are shut off before the bank secures the property and the home’s plumbing ends up freezing and pipes burst. In good circumstances the water was shut off at the meter or the street (sometimes done by the city from non-payment of the water bill) so that only the pipes need to be repaired, which could cost as little as a few hundred dollars or climb to several thousand, depending on the location and extent of pipe damage. In bad circumstances the water can literally fill the house and cause near complete destruction of the interior of the homes, which then become great incubators for mold when they thaw in the spring. In a house profiled by the Star Tribune, one house once worth nearly $700,000 was resold at auction for only $280,000… a loss of over $400,000… about 60% of the value of the home.

Once the bank has possession of the property, the previous owner has vacated, and any debris has been removed from the property, the bank can go about listing the home for sale. Based on a sample of homes sold in Plymouth and Maple Grove in the last 10 months, when the bank resells the property they will lose 23.4% from the value at the previous sale. All told, banks lose $10′s of thousands of dollars on the average property… and on some, $100′s of thousands!

Current Actions

While the banks are already overloaded with the huge numbers of foreclosures they have been taking on and are even more buried in their short-sale departments, where responses to offers can take months, the more proactive a bank can be with their defaulted borrowers, the more likely it is that they can recover a larger share of their investment.

Regulatory and industry efforts to create work-out agreements between lenders and borrowers has met limited success and while without these programs foreclosures would be higher, the number of foreclosures today and in the near future are still substantial.

The mortgage lenders are trying to ramp-up staffing for their short sale and foreclosure departments, but these efforts are not proactive, but rather reactive.

While it is in the banks’ best interests to work with their borrowers to modify the loan terms and keep the borrower in the home, there are many circumstances where no reasonable workout can be made. Instead of the banks letting these homes go through the foreclosure process, they should attempt to work with the borrower to get the home sold directly from the borrower to a new buyer, with the bank accepting a sales price that only returns a portion of what they lent back to them, which is called a “short sale.”

The approval of a short sale is a long and difficult process that can take a lender 60-90 days to approve once an offer has been submitted. The largest problem with short sales is that many buyers simply do not have the time nor the patience to wait 2-3 months for a response. Further, the process is not the most appealing for sellers either, since they receive no monetary gain from the sale, many borrowers see little value in the enterprise. These short sales are seller-initiated and more than 1/2 of the listings never close.

A New Way to Handle Foreclosures

Lenders can be more proactive with their defaulted borrowers by initiating a short sale process when the probability of foreclosure is high and the likelihood that a lender-negotiated loan modification that will allow the borrower to become current on their mortgage is low.

Based upon my analysis of sales in Maple Grove and Plymouth in the last 10 months, bank owned properties on average sold for 23.4% less than their previous sale but short sale properties sold for only 16.4% less than their previous sale. Taking into account many of the other costs I mentioned earlier in this article, the savings to lenders could easily be in the 10′s of thousands of dollars vs. letting the home go through the standard foreclosure process.

Here’s the overview of the concept:

  • For loans in default where the borrow and lender are unable to provide a viable loan modification program, the lender refers the loan to their short sale department.
  • The short sale department immediately initiates the approval process for a short sale, including reviewing the borrower’s financials (which they have updated copies due to the failed loan modification program), get BPO’s (Broker Price Opinions) of the property, and send a letter to the borrower detailing this new option.
  • The borrower is presented the option to basically do nothing and let the home eventually go through foreclosure or work with the lender to get the home sold via a short sale.
  • If the home is successfully sold via a short sale and the foreclosure process is averted, the lender would offer the borrower monetary compensation for their participation and their assurance to maintain the property and leave it in good condition when they vacate.
  • If the borrower agrees to the terms, the lender sends out one of their pre-approved real estate agents for a more in-depth valuation, lists the home for sale and actively markets the property.
  • There is no cost to the in-default borrower for participation in the program… all costs are borne by the lender.
  • When an offer comes in, review and negotiation of the offer can occur quickly since the lender has been working on the file for some time already and can better rely on the advice of the listing agent as it is someone whom they have an existing relationship with and knows their processes.
  • The home is sold directly from the in-default borrower to the buyer, giving the defaulted borrower some money to walk away and the lender with substantially fewer expenses, return of more of the original investment, and substantially less risk of damage to the property in the meantime.

Caveats

To discuss a new way to handle foreclosures is not helpful if it ignores the realities in the market. Here are the biggest hurdles (as I see them) that could make such a plan difficult to implement:

  • Banks can’t sell real estate
  • 80/20 loans where the 20% 2nd lien is not held by the same bank… much harder to coordinate but quite often the 2nd lien holder gets NOTHING from a foreclosure so it is in their best interests to cooperate.
  • Mortgage insurance companies that don’t want to get with the program
  • Investors/CDOs/etc that add so much complexity and/or bureaucracy that makes it a logistical nightmare
  • Already overburdened Short Sale Departments that simply cannot handle more files
  • Simple inertia: with so much of this problem centered in large banks, it is likely that only smaller, more nimble banks could
  • As Minnesota has one of the longest (if not the longest) timeframes from default to end of redemption, banks may not understand the true consequences of a 12 month process.
  • No one to champion the cause. Someone would have to step up and try this as a “guinea pig” before it is likely any other banks would adopt it.

Conclusion

Until these properties cycle through the system and are resold to new buyers they cast a negative effect on neighborhoods, other homes for sale, and other foreclosures too. Waiting for defaulted borrowers to complete the foreclosure cycle when it is all but a sure-thing earlier on in the process is not the best way to protect the investment but rather employing a proactive approach is something can benefit all parties involved and the housing market in general.

 

Search Terms:

  • best way to handle a forclos re
  • best way to handle a foreclosure in washington
  • minnesota foreclosure laws when to vacate property
  • water bill foreclosure

Tags: , , , ,
Posted in Community Issues, Foreclosures & Short Sales, Info for Sellers, Mortgage Market, Opinion, Personal Experiences | Comments (7)






Carnival of Real Estate Makes Another Visit

May 18th, 2008

Welcome to the 91st edition of The Carnival of Real Estate. This is my 2nd time hosting the carnival and I think there’s some good articles in this week’s carnival but I couldn’t pick one that stood out from the others… I suggest you browse them all.

From 20+ posts I’ve whittled it down to 9 that I think are worth your time.  To be honest, the spam posts were much higher this year over last… it is a shame that such a great tool is taken advantage of by so many. Maybe we should figure out a way to block repeat junk posters?  There was also some submissions that were so location-specific or minuscule in subject that they just did not make good candidates for a national blog carnival.

Trevor Mauch presents Marketing To Pre-Foreclosures – Why Most People See ZERO Results? posted at Real Estate Investing Brain. This article explains how mailing to pre-foreclosures is a numbers game… you have to be in front of them not once, but many times to get the point across… not unlike farming a neighborhood.

TerryT2 presents Negotiation Tactics and Tricks posted at Actual Real Estate Profits. A good list of tricks to employ or defend yourself against.

Sagar Satapathy presents The Foreclosure Investor’s Cheat Sheet: 100 Useful Web Resources posted at International Listings Blog. A good list of web sites for reference… several of which I bookmarked.

Ken Haedrich presents The Whole World is Waiting for Ourselves posted at Annapolis Home Digest. I have to agree Ken… I feel you on this 100%.

MoneyNing presents Right Time to Buy a House? posted at Money Ning. I get this question a lot too and if you look at the comments, they run the gamut of responses.

Debt Freedom Fighter presents Home Equity Loans: Why They Don’t Make Sense as Part of Debt Reduction Plans posted at Discover Debt Freedom!. Seems obvious to me, but I know a lot of people who get trapped by this.

Dan Melson presents A Good Listing Agent’s Most Important Responsibility posted at Searchlight Crusade. Yep, Dan’s right on the money with this.

Tim Soper presents “Walk Away” Foreclosures Sign Of Times? posted at Will & Grundy County IL Real Estate Report. I see this trend too… it’s disgusting. Maybe we need teacher unions that invested heavily in CDO’s to do a course on “responsible borrowing” and teach little Johnny & Jill to go home and tell their parents to own up to their responsibilities….

Joe Manausa presents Short Sale Advice posted at Tallahassee Real Estate Blog. Some good tips from Joe on how to be prepared for a short sale and what to expect.

That concludes this edition. Submit your blog article to the next edition of carnival of real estate using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.  Thanks for stopping by!

Technorati tags: , .

Tags:
Posted in General | Comments (4)






Aaron Dickinson and MAAR Publish Report on Foreclosures and Short Sales on Twin Cities MLS

May 5th, 2008

Check it out now

Posted in Info for Buyers, Info for Sellers, Market Stats, Opinion | Comments (1)






Short Sales are Locking Up Minneapolis/St. Paul Buyers

May 4th, 2008

With so many short sale listings on the MLS in the Twin Cities right now, there are a lot of buyers that are “locked up” in offers on these properties for weeks… and months… with the high probability that they will ultimately not be able to purchase the house at the price they offered.  See my previous article for more background on my short sale experiences.

Since many times the eventual response from the bank is a no or “you need to bring your offer up x%” or the buyer gets outbid by a later offer, these properties could be tying up significant numbers of buyers who would otherwise be purchasing (and closing!) on another property.  This weekend I was told there were 4 offers on a short sale I was showing to my buyer.  That means 4 houses with ready, willing and able sellers (“traditional sellers”) are stuck waiting for the bank to reject 3 or all 4 offers sometime in the next 30 – 75 days before they’ll get their chance at those buyers.

 

Search Terms:

  • why so many short sales in minneapolis

Posted in Foreclosures & Short Sales, Info for Buyers, Info for Sellers, Opinion, Personal Experiences | Comments (1)







Edina Realty
612-605-2252
Edina Realty Aaron Dickinson
Licensed in MN


Search the Blog



Search Homes for Sale


Twin Cities Homes for Sale Search

Foreclosure Homes for Sale

Search just foreclosures

Short Sales for Sale

Search just pre-foreclosures and short sales



Tags

afforable housing affordability bank batc bob peltier bubble builder's association Builder's Association of the Twin Cities buyers carnival of real estate commercials comparables comps countrywide crisis dirt earnest money edina realty edina realty is awesome energy efficiency fluorescent bulbs forclosure forclosures foreclosure foreclosure prevention foreclosures foreclosure stats foreclosure workshops funny guest blogger hocmn house prices houses for sale housing affodability interest rates jobs lender lender mediated lenders listings lol market statistics mhfa short sale short sales


Meta

Browse Homes for Sale








AaronSOLD.com is not a Multiple Listing Service MLS, nor does it offer MLS access.
This website is a service of Aaron Dickinson of Edina Realty, a broker Participant of the Regional Multiple Listing Service of Minnesota, Inc.


Sitemap
Short Sales are Locking Up Minneapolis/St. Paul Buyers