Mammoth Foreclosures 6.0 –– When Limbo Isn’t Really Limbo

The flow of foreclosed properties has slowed in Mammoth, but it is a temporary lull. There are plenty of properties with repeatedly postponed trustee’s sales, properties in default, property owners not making payments (some for MANY months), and general signs of distress on every street. The banks and lenders are clearly not moving quickly to foreclose, at least right now. The banks and their departments that handle these matters are seriously overloaded with work. They are reluctant to hire more people only to have to train them, supervise them, and most likely have to let them go in a few years. They’re better off just letting the experienced professionals work through the crush, even if it takes a little more time. Then there is all the almost disgusting government intervention including the new push to incentivize short sales beginning in April. And forget most of what you might read or hear about in the media about all of these dynamics, the Mammoth market is the orange in the bushel of apples. The local market is more impacted by snow conditions and affordable lift passes then national economic news and government hoopla.

I can hypothosize all day, but one thing I’ve learned is that the people in the leadership of these lending institutions are not stupid. Most have seen this show before at least once, and some more than once. This might be the worst of these cycles, but the difference isn’t that much different. The banks are clearly in touch with the market, even a micro-market like Mammoth. By the time they end up owning a property (via foreclosure, deed-in-lieu, etc.) they have a variety of appraisals (by appraisers), broker price opinions (BPOs) by local agents, and a host of inspections. They might be on the 14th floor somewhere in Texas but they have plenty of good information. What the information from Mammoth is telling them is that the market is no longer in steep decline, and in some segments, primarily the condo market, there is data supporting stability if not slight increases. The local appraisers stopped defining Mammoth’s condo market as “declining” about four months ago. And appraisers are historians––they can only look backwards.

Meanwhile, sales and closings for January and February have been strong, which is not typical for this market. (I know, I know, we’re in a global financial crisis.) Sales of homes in the $1 to 3M range have finally moved. These buyers are making great buys. (Some of these buyers are “move-up” buyers in local market.) But all of these closed sales are reflected in the information the banks are receiving. They can see the closings, the low inventory numbers, and the market trend. They aren’t necessarily betting that the assets they will likely own will be worth substantially more in a few months, but they’re not likely to be worth substantially less. The gamble is they could be worth a little more, maybe substantially more. In a market like Mammoth that isn’t affected by first-time homebuyer tax credits and FHA financing, it might be a good gamble.

So what’s the future for Mammoth foreclosures? There is a small supply in the pipeline. The properties that do come to market are bought up sooner or later. If they’re in decent shape they go sooner. The ones that are in rough condition or generally un-lendable usually take a bit more time. The new federal guidelines for short sales, known as HAFA (Home Affordable Foreclosure Alternatives), doesn’t apply to much of Mammoth because it is strictly for primary residences. And most of the owner-occupied residences in default in Mammoth are now riding out as many free months in their homes as they can. These aren’t the coined “strategic defaults” in the media. These are what I call survival defaults––living for free as long as possible because the little money they have is best spent for something else. And when the day comes, they will probably be paid a sizeable check to move out (known as cash-for-keys), assuming they leave the property in good condition. Many others are filing bankruptcy and the reality is they may live in the home for another couple of years while that gets sorted out, all while not paying a mortgage (or rent) and in some cases not paying common area fees too. But these properties will come to the market someday. Only time will tell if they sell for significantly more than what they are worth today.

Even with HAFA in place, banks are still in position to negotiate traditional short sales. A significant chunk of Mammoth’s “pending,” or in escrow, inventory are short sales. Some have been in escrow more than once and some have been in escrow for many, many months. Some banks are becoming more workable. The big obstacle is if there is a second mortgage holder. And from our past goldilocks era, there are plenty of second note holders on the distressed properties. If the same bank has the first AND the second, then there is greater hope. The key is that there are no real “deals” in the short sale market for buyers. Again, the banks are doing their homework and their policy requires buyers to pay market value. But the short sale buyers closing at “market value” will only continue to firm-up the market. And sellers continue to be asked to sign promissory notes for deficiencies or put cash in to close. The short sale process is trying in any market, but in a market like Mammoth with a preponderance of non-owner occupied properties and non-hardship sellers, the process continues to be a deck of wild cards.

The short sale mania has spawned all sorts of spin-offs. Third party negotiators with “connections” to various banks are now the rage. They want a good cut of the commissions for their services. (I warned many months ago––nobody should be paying any upfront fees to short sale negotiators or loan modification specialists.) Whether these people can perform and whether the resulting transaction is a win-win for the parties involved (besides themselves) remains to be seen and is a case-by-case situation. People involved really need to look closely at who is reaching across the table for their chips. Many sellers are desperate to dump the property. Agents are desperate to close deals they’ve worked long and patiently on. Plenty of other scammers are trying to get on the bandwagon, with plenty of enabling from our government, with the end result being a bubble unto itself. Every day I am bombarded with solicitations for seminars, webinars, classes and conventions all promising me the path to riches by being a short sale expert. Sorry, I’m a little distracted, the skiing happens to be great and my life is too short for short sales. Ask one of my associates who is a “specialist.”

The next foreclosure wave in Mammoth will include substantial commercial properties that are already in default and/or heading to receivership. The commercial side plays their own game called “extend-and-pretend.” The banks just extend the inevitable so they don’t have to mark down the assets on the books, and pretend everything is fine. These were the buyers who thought Mammoth’s commercial rents were undervalued (they couldn’t grasp the concept of a seasonal economy). Now we’ll see the end result of that thinking, but it may take a couple of years. We’ll just pretend. And sooner or later we’ll find out how long the owners of the Village can pretend.

The next wave is also likely to see an increase in deed-in-lieu activity. At least that’s what the banks are saying. These would be owners who have already danced with the banks via loan modification and short sale negotiations without successful results. Some with early-on loan modifications will now become strategic defaults (why continue the pain). Others are current “pendings” in the local MLS. But in Mammoth, many second home owners have figured out that playing their own game of extend-and-pretend has supplied them with additional quality (yet cheap) ski days on their MVP, or more rental income off VRBO. The banks are starting to catch on.

So amidst all this craziness, where is the market going? The buyer interest for this time of year is very high. The inventory is very low, especially if you scrub the data. The snow we’ve received in the last week has cemented (pun intended) a great spring season. We’re heading into what is traditionally the busy early spring selling season. Buyers are frustrated by the lack of good inventory. That just leads to more questions. When will new inventory, including new REOs, come to the market and where will the pricing be? Will there be elasticity in the demand in the next round if the pricing is higher? And what about when the winter euphoria evaporates into summer? So many questions, so little time. Time to go skiing before the next storm rolls in.