Mammoth Avalanche of Foreclosures?

From the March issue of Mammoth Real Estate Times.

Q: What’s going on with foreclosures in Mammoth? I haven’t seen any advertised. Are there any or are there going to be any in the future? We’re looking for a good buy in Mammoth.
A: Foreclosures (or the lack thereof) are a clear indicator of a local real estate market’s health and the direction it is heading. A small number of foreclosed properties is normal in any market. But many real estate markets in California and Nevada are beginning to see a significant volume of properties entering the default or foreclosure process. Most of it appears to be a by-product of the no-down-payment cycle of lending that we have experienced in the past few years. Unlike any other era, this has been a period of very liberal lending, and now the result will be a rash of foreclosures. But we’ll examine the specifics of the Mammoth market in just a moment.
First, let’s talk a little about the process. The Internet will change the information pipeline and some of the procedures this time around. So far the process doesn’t appear to be a well-greased machine or widely understood–at least not yet. Today, specific websites/databases provide the public with a great deal of information that used to be, let’s say, less public. The Notices of Default and Sale will still be published in the Public Notice section of the appropriate newspaper. In the major markets where foreclosures are proliferating, the time frame from the filing of the Notice of Default to the completion of the foreclosure is currently running about 150 days. From there it may take another 2 to 3 months for the bank to actually get the property on the open market.
In many of these more active foreclosure markets, there is likely to be some “play” going on. Based on everything that has happened since 2000, we’re heading into some un-chartered waters. Sellers and brokers in these markets are already trying to work out “short” sales with the lenders of record. A short sale requires that the lenders discount the face value of the loan to facilitate a sale to a qualified buyer. Normally, the distressed sellers have to prove that they have no other assets (basically destitute) before a lender will agree. But more enlightened lenders, if there are any, may just see that it is to their benefit to discount the loan if there is a ready, willing, and able buyer.
The big problem now is that these originally 100% financed properties have two (or more) lenders, and if the local market values are declining, then who knows, it could be worth it for the primary lender just to foreclose, but they really don’t want the property on their books. And then are there motivated buyers? And do the brokers want to, or can they, get through all of the lender bureaucracy? And as the volume increases then the whole system becomes more clogged. And then…
Once the foreclosure process is complete, the properties are referred to as REO’s or Real Estate Owned (by the bank). REO’s on the bank’s books are have-to-go assets. They become “must sell” properties. The banks are very motivated and unemotional sellers. Once these REO’s are in substantial numbers, the values in the local market inevitably fall. Exacerbating the whole cycle this time around is likely to be all of the information available to the public. They will be able to watch the existing inventory like they do now, but they will also be watching the volume of properties heading into the foreclosure process–knowing that values are not likely to stabilize until the foreclosure bound properties are run through the system. In some markets it may take years. And these sellers (the banks) aren’t move-up sellers, so these sellers won’t be buying or adding to the overall transaction activity.
So now let’s talk about Mammoth specifically. Using the information online and in the local Public Notices as an indicator, then foreclosure activity is almost non-existent at this time in the Mammoth and Mono County market. There are a few here and there–borrowers showing late on payments, but not ending up in foreclosure. We’ve seen a couple of actual foreclosures, but as I said in an earlier column, locals know there were extenuating circumstances, certainly not a market trend. Of course in months past here in Mammoth, if an owner was in trouble, there was still a strong enough market to liquidate a well-priced property.
To challenge my own observations, I recently questioned two of the most prolific lenders in the Mammoth market about their take on the quality of the borrowers in the Mammoth market the last few years. They reiterated what I have observed in the closing statements of my company–that there was not a significant volume of highly leveraged purchases in Mammoth. And some that did use leverage, were affluent investors with excellent credit and cash flow. I asked these lenders because they get to see the nitty-gritty financials of the borrowers. They have a much better knowledge of the financial wherewithal of the borrowers/buyers in the market. Their account is that these recent borrowers are a sound group.
I also know that in the past few years we had a significant amount of cash buyers, large down-payment buyers, and plenty of buyers utilizing IRS 1031 tax-deferred exchanges. These are cream-of-the-crop owners in our local market.
So where might there be some vulnerability? My hunch is in the newly built condominium projects where there has been some speculation and reliance on rental revenue. To refine that down even further, I would pinpoint the projects that were more recently pre-sold and haven’t experienced any significant appreciation. Wrong says my lenders–those owners might not have much equity, but they are financially sound. Maybe they wished their money had been in the stock market, but they aren’t going to end up in foreclosure.
So maybe there are some over-extended locals? We’ve seen a few. They are some of the ones that have showed up in the Internet databases with late payments. They might even have their properties on the market right now. I have no doubt there are, and will be, some distressed properties from this segment of owners. But will it create a significant market trend? I don’t think so–there just isn’t enough volume of local owners who don’t have some sort of equity, whether through their original down payment or through appreciation. But then again we don’t know how many re-finances and home equity loans might be putting these owners in jeopardy.
One thing I can tell you is that nobody is going to be able to blame the local appraisers for any foreclosure trend. There are rumblings in many markets about appraisal fraud–basically bogus appraisals that have allowed borrowers and buyers to borrow excessively on properties. This un-checked lending is going to lead to even greater foreclosure numbers in other markets–but not here in Mammoth. The appraisers have been straight up, sometimes to the disappointment of local agents (myself included).
Time will tell on all of this. This is a topic I will be re-visiting many times in the next few years. There are plenty of sub-topics to discuss like non-recourse and recourse loans and one of the hot topics of today–sub-prime loans. For buyers, foreclosures are not always the best deals. I doubt if any “you-really-want-to-own” properties will become REO’s. More likely they will be very competitively priced on the open market with a “motivated seller”. That would be the time to buy. And if by chance the interest rates come down a bit, the combination of a great property, purchased at a good price, with a low rate, is tough to beat.