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One great improvement that we have been seeing at the Tallahassee Real Estate Blog is feedback from our readers. Yesterday, “Steve” wrote such a great comment that I decided to feature it as today’s post, as it contains great information on the subject of real estate foreclosures. Here is what “Steve” had to say:
As you explained, most Lis Pendens filings do not result immediate foreclosures.
Traditionally this happened because: (1) The borrower found a way to make their mortgage current, (2) The borrower had enough equity to make a quick sale and pay off the morgage, or (3) The lender accepted a Deed In Lieu of Foreclosure.
However, that’s not what’s going on right now. The vast majority of LPs will ultimately end up as REOs on the market, just not yet.
So, why is their a huge discrepancy between the number of LPs and the number of REOs that are hitting the market?
The reason happens to be one the most under-reported issue in this whole housing/mortgage crisis: Most lenders are not taking little or no action on seriously- deliquent notes.
Traditionally, within 3 months of filing an LP, lenders would take some sort of action on the mortgage. However, now it’s not unsual for lenders sit on a unpaid mortage for 9 months or more without taking any action.
I have clients who have been living in “their” homes for more than a year without making a single mortgage payment and lenders have not taken any action whatsoever (beyond a bunch of threatening collection letters). Anyone who has worked in real estate lately have seen houses that sit empty for over a year after their LP were filed that still don’t end up on the REO list.
So, what’s happening? It’s an accounting game; lenders are avoiding marking their assets to market.
Let’s say a lender is holding a seriously-deliquent note for $300,000 on a house that is now worth $200,000. As long as they do not foreclose on the house, they do not have to (1) recognize a $100,000 loss and (2) write down their assets from $300k to $200k.
So, instead of progressing with the foreclosure process, the lenders simply allow the homes to sit idle for months at a time.
Short sales are another delaying tactic by lenders. They allow the borrowers to put up their house as a short sale. However, they keep rejecting reasonable offers after taking more than 90 days to “decide” each time (any one who has worked with short sales has seen this delaying scheme). Again, this is just another tactic so the lenders do not have to recognize the sizeable loss.
Unfortuantely, these delaying tactics will only work for so long. Eventually, the lenders are going to have to recognize the loss and convert the homes to REOs. Once the lenders start marking their assets to market, REOs will be dumped at fire-sale prices. This is good news for most real estate professionals that make money of real estate transactions (sales will pick up significantly when the REOs really hit) and those in the market to buy real estate. However, it’s terrible news for current homeowners and real estate investors.
These are some excellent points and I agree with Steve’s summary to a great degree, however we are already experiencing success with short sales, so maybe we have moved to a “next phase” where lenders are now ready to recognize the loss that they are going to take when accepting a short sale.
Thanks for the great input Steve and I hope we see a whole lot feedback from all our readers. Feedback helps determine the direction of future blog posts and the readers are our reason for maintaining a real estate blog.
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{ 5 comments… read them below or add one }
Thanks for the information, Steve!
Thanks to Steve for the additional information. I believe however he intended to say “Most lenders are taking little or no action —- rather than “Most lenders are NOT taking little or no action —
Thank you for the complicated but clear analysis.
Aloha,
Keahi
Bill,
Yes, that is what I meant. Fat fingers.
Someone forwarded me this article:
http://redtape.msnbc.com/2008/09/post.html
These mortgage rescue scams may also contribute to the large discrepency between LPs and REOs.
These are very interesting times. With the brokerages failing left and right, I’m wondering if W plans on trying to save everybody? It is definitely time to buckle your seat belt!