Discover Flaws In Florida Foreclosure Reporting
With all the national talk about foreclosures getting louder this year, we decided to start tracking foreclosures in Tallahassee. The first thing that we discovered is that not all foreclosures are alike, so we have some explaining to do first.
When somebody has been late on payments on a loan secured by real property, the lender can utilize a legal proceeding called a foreclosure in order to sell or repossess the property with the goal of satisfying the lien.
The first step in the foreclosure in Florida is the public filing of a "Lis Pendens" in the courts. The lender is not required to notify the borrower of the beginning of the foreclosure process, but the borrower most likely "sees it coming" as typically no payment has been made for some time.
The next step will come when the courts make a ruling on the Lis Pendens, allowing the lender to then auction (sell) the property in a public sale. Normally, this occurs roughly three to five weeks later, though with the state of foreclosures being so common, I would not be surprised if this traditional time period started to lag due to the heavy work-load in the courts.
A Lot Can Happen During The Foreclosure Process
During the entire process, the borrower is allowed to "make good" on the loan and keep the property. If the borrower repays the loan, plus the costs of the foreclosure, the buyer can redeem the property at anytime up to the foreclosure sale.
With the right of redemption allowing the borrower to abruptly end the foreclosure process at any point, we must closely observe what we read about foreclosure activity. The fact is, most foreclosures do not make it to the public auction.
Why Most Foreclosures Are Resolved Before Auction
The fact is, the further the foreclosure moves in its process, the more money the lender is going to lose. Wise lenders want to fix the situation as fast as possible, without losing any more money in the process. Even without the buyer redeeming the property, there are some other solutions that can occur:
Forbearance - Any course of action a lender takes to delay foreclosure or legal action against a delinquent borrower. Often times, if the lender thinks the buyer can overcome the reason for the current default, the lender will modify the current loan and use a method to "make it current" so that the buyer can move forward without being in default.
Short Sale - With the approval of the lender, the borrower might sell the property for an amount less than the amount necessary to pay off the mortgage loan. This can result in a deficiency judgment against the borrower and is usually negotiated between the borrower and the lender before the short sale is approved.
Deed In Lieu of Foreclosure - A borrower, with lenders approval, may be able to voluntarily "give back" the property to the lender, which will save time and money for the lender and might be less damaging to the borrower's credit.
Video Explaining Borrowers' Options to Foreclosure
National Reports Of Foreclosures Must Be Scrutinized
With so many reporting agencies and processes, it is important to understand what somebody means when they are counting foreclosures. As stated earlier, most Lis Pendens filings in Tallahassee do not make it to the sale at the court house steps, which is a full foreclosure.
So, when you read about foreclosures, find out if the "foreclosure count" is of final filings or rather if it is a count of Lis Pendens filings. Either way, the information can be misleading without full disclosure of the reporting methodology.
Lis Pendens Filings In Tallahassee still Robust
Unfortunately, we are not seeing any slowing in the foreclosure activity in Tallahassee.
Tallahassee does not appear to be doing worse than the rest of the United States when it comes to foreclosures, and unfortunately, I do not have historical data that shows how our filings are compared to the past. In the future, the Tallahassee Real Estate Blog will compare filings with final judgements to see how many Tallahassee Lis Pendens become final foreclosures.
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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.
Steve, it's official. That is the longest comment I have ever received (not including spam). I should cut and paste that as the follow-up for tomorrow's post. Excellent insight and I agree with you, though we are seeing some success with short sales (maybe we've moved to the next phase that you refer to).
Thanks for the excellent, post-improving comment Steve.
Hi, Excellent post, some really useful foreclosure information here.
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