No matter how you slice it, conditions are intensifying for residential property foreclosures across the country and mostly point upward to significantly higher rates this year -- led by Michigan. But panelists at a conference last week identified opportunities that exist with delinquent borrowers.
Those predictions are bad news for borrowers, unable to keep up with mortgage payments, and for creditors watching arrears spread.
But it's a "huge opportunity" for real estate professionals taking advantage of market trends, said Rick Sharga, vice-president of marketing, RealtyTrac, Irvine, Calif., which bills itself as "the nation's number one database of pre-foreclosure, auction and REO properties."
According to Sharga, who led a roundtable discussion at a real estate conference in New York last week, foreclosures were 50 percent higher in 2006 (roughly 1.3 million foreclosure filings vs. just over 850,000 in 2005). The company predicts that foreclosures will jump another 25 percent in 2007. Last month, it reported that 109,652 new foreclosure properties were added to the rolls in December, with Colorado recording the highest foreclosure rate of any state for the month.
"About 80 percent of all [defaulted] properties never get back to the bank," Sharga reported, identifying that broad number as fertile territory for real estate professionals, like Realtors, to step in and arrange a sale prior to foreclosure. "It's a win-win," he said; "You help the homeowner, buyer, bank, community -- and, you get a commission on the sale."
Modifications Could be the Answer
With a wave of adjustable-rate mortgages resetting this year, monthly payment increases of $400-$600 will not be unusual, said Penny Paplanus, vice-president, compliance, New Century Financial, Irvine, Calif. "It's not pretty," she remarked, noting that "modifications could be the answer," for borrowers unable to afford higher payments and lacking the equity or qualifications to refinance.
A lender may agree to modify the terms of a mortgage without requiring refinance. This allows the loan to be reinstated, and results in a payment the mortgagor can afford. The bank's biggest fear, in any case, according Rick Sharga, "is that they don't want the risk of average property values getting softer."
Adding some complication to the situation, Sharga points out that every state has its own set of laws governing the mortgage foreclosure process. In some cases, a foreclosure feature called "redemption," also can present hidden misery.
Redemption is defined as the act of buying back property previously sold in judicial proceedings, which remains available for a period after the foreclosure concludes. While a judicial foreclosure is possible, it is rarely used with Deeds of Trust in places like California. Non-judicial sales have no period of redemption.
Big Burst Just Hitting Michigan
"What scares me is that I've never seen a market as fractured as this one," remarked Sharga. Conditions can vary wildly from one state to another. "In California," he said, "they're getting 89 cents on the dollar [in foreclosure sales]; and 57 cents in Ohio. For contrast, investors want to pay about 70 percent of market value on (foreclosure) properties, he noted.
Surveying the landscape, Sharga said some parts of the country are sustaining higher foreclosure rates than others. Ohio has the highest foreclosure rate in the nation, measuring three times the national rate (1.1 percent) and outpacing the national average every quarter dating back to the last three months of 1998.
The Buckeye State, along with Indiana and Michigan, will get worse because of a continuing loss of jobs there, according to Sharga. "There's a big burst just hitting Michigan," he said, taking lenders to task for loosening mortgage approval standards. "They are exacerbating the situation," he argued, citing "creative loan products" as a problem. "It's like you gave a loaded weapon to someone and said ‘don't shoot yourself'."