Tuesday, October 12, 2010

The new foreclosure moratorium. Another blow to an already frail Real Estate Market.

At a time when our fragile real estate market looked like it was finally showing signs of a slow but certain recovery, major banks including Bank of America, J.P. Morgan Chase and GMAC announced that they are putting a halt on foreclosure sales and taking thousands of their foreclosure properties off of the market. Apparently these major banks have been accused of not properly foreclosing on homes. Employees of these major banks have testified to signing thousands of foreclosure documents every month without even reading the documents they were signing. This includes the employee for Bank of America dubbed "The Robo Signer" who said he signed as much as 10,000 foreclosure documents a month without reading any of them. Also, these banks are being accused of losing the deeds to properties, not verifying documentation throughout the foreclosure process and even foreclosing on properties that they had no business to foreclose on. Because of this, these banks are having to suspend the sale of thousands of foreclosure properties throughout the country so they can fix all of these problems. The banks in some cases are even having to re-foreclose on some of the properties.

Make no mistake about it, this is going to be bad for our economy. There are hundreds of thousands, if not millions, of foreclosure properties on the market for sale right now. In most cases, these properties are priced below market value, and they continue to suppress home values throughout the country. In order for our real estate market to recover, we are going to have to get these distressed properties sold so real estate values can continue to increase. This foreclosure moratorium being carried out by Bank of America, Chase and GMAC will delay the sale of foreclosure properties by as long as 6 months to a 1 year. Also, keep in mind that there will probably be more banks who will also join these three banks and also issue foreclosure moratoriums on their foreclosure properties. Citi Bank is one bank that is currently being investigated. They have not suspended their foreclosure sales yet, but don't be surprised if they do.

Another issue is arising that is directly tied to the problems these banks have had with their foreclosures. Some title companies are not writing title insurance policies on foreclosure properties that are owned by Bank of America, Chase and GMAC. Title insurance protects the buyer and the buyer's lender from issues pertaining to clouds on the title that are not discovered in the title search that is done before closing. Examples include claims of ownership by unknown previous owners and liens on the property that were unknown prior to the buyer purchasing the property. If title insurance companies won't issue title insurance on these foreclosure properties, that means that buyers will most likely not purchase these properties. This will also slow down the sale of foreclosure properties.

Foreclosure sales have been a big part of my real estate sales this year. This year I have seen a lot of investors, who have lots of cash, come out and start buying many of these foreclosure properties. Investors have been doing this because they can't earn a high return on their money in the banks right now, but with real estate prices being so low, they have been able to earn a good return on their money by investing in real estate. These real estate investors with lots of cash have accounted for a very large number of real estate sales this year thoughout the country. All of the issues with the banks improperly foreclosing on properties might scare many investors away from buying foreclosure properties. This could really dry up property sales.

In our last 7 recessions that we have had in this country, real estate has pulled us out of those recessions. Real Estate will probably be what pulls us out of the current recession as well. Now that this foreclosure moratorium has occured, the recession could drag out much longer than expected.

My advice to real estate investors who still want find good deals on properties and buy them is to start looking at short sales. A short sale is when the current owner has not had their property forclosed on yet, and the current owner's lender agrees to accept an offer on the property that is lower than what the current owner owes on the property so that the lender does not have to foreclose on the property. Lenders are motivated to agree to short sales for a couple reasons. First off, going through the foreclosure process actually costs the lender money. Second, since we are in a declining real estate market still in most areas of the country, the value of the property will probably be less after the bank forecloses on the property (which could take 6 months to a year since the courts are so back logged with foreclosures) and put the property up for sale at a later date.

Short sales may take longer to close than a foreclosure sale, but there are usually less unknowns with a shortsale. With a shortsale, the current owner usually knows much more about the property compared to a bank who has foreclosed on the property, so the buyer knows more about the property with shortsales before they put an offer on the property. Also, with a shortsale, the buyer usually is the one who picks the title company to handle the closing. With foreclosures, the bank who owns the property usually requires the buyer to use their title company. These title companies that banks use with to close on their foreclosure properties are usually located out of town, and from my experience they don't provide good service. Lots of times, these out of town title companies cause closings to get delayed due to not getting their work done before the closing date. If the buyer can pick the title company, that title company will usually provide good service because they want the buyer's repeat business. These out of town title companies that you have to deal with when buying a foreclosure property are not concerned with the buyer's repeat business since they are out of town.

If you have any questions about foreclosures or shortsales, please feel free to contact me.