The controlled burn of foreclosures in Mammoth flames on but the buyers looking for the screaming deals continue to be discouraged, but it is all relative. And what would a “controlled burn” be without things getting out of control just a little bit? The media, and especially the real estate related media, is full of stranger-than-fiction foreclosure stories. The stories range from indignant and somtimes belligerent squatters, to properties bizarrely damaged or neglected, to champion attorneys taking on the big banks in court. Relatively speaking, the foreclosure world is pretty sedate here in Mammoth Lakes and the eastern Sierra. Sure, there are properties that have been walked away from and some that are literally buried in snow, properties that have been flooded and are just sitting, evidence of strange and unexplainable coming-and-goings (properties with card keys keep good records), and of course the occasional human and emotional drama. But all is rather civil for the most part. So far.
Scarcity and demand continue to allow the banks and investors to keep a nice pace in both Mammoth and places like Bishop or June Lake. There are no endless subdivisions with street-after-street of bank owned homes and no buyers. The appraisals hired by the banks clearly speak to that. They all seem to be in unison with pricing bank owned properties on the high side to see what the market will bear. In most cases the prices drop a little in the following weeks and soon after that there is a sale. And sometimes the best properties get snapped up immediately. But even with these demand and supply dynamics, nothing is happening in a hurry.
Individual banks and investors seem to be ebbing-and-flowing in their push to foreclose. Even Fannie Mae appears to be in on the game. They all seem to have their hands on some imaginary water valve, controlling the flow as they see necessary. Or maybe this is just a byproduct of being overwhelmed. But not all of it is contrived. Lately, the delays seem to be increasingly centered around paperwork. There are more and more legal challenges to the administrative handling of the necessary documents. Even in California where almost all foreclosures are of the non-judicial type, we are seeing long-standing scheduled (and often postponed) trustee’s sales being canceled and soon thereafter being re-issued with all new filings. This is becoming more commonplace. The bank’s attorneys are obviously making sure everything is defensible. And of course there’s the whole MERS (Mortgage Electronic Registration Services) debacle. While thousands of owners are being foreclosed on these issues are being argued in court. I wonder how we’ll look back on all of this 10 years from now. But it is all contributing to the controlled burn.
The short sale side of the business seems almost as congested, and perhaps deliberately so. There is still very little rhyme or reason as to why some happen quickly, some happen slowly, and some don’t happen at all. It really helps if there is a solid, committed and patient buyer. But the banks and investors sure seem to have their hands on this water valve too. One thing that seems to help is a lengthy seasoning of the property on the market, especially with occasional price reductions (as I have been known to say, “the market has spoken”). And the banks aren’t letting any buyers steal properties, at least not what I can see here in Mammoth. (For buyers, the key to a short sale is still acquiring an excellent and desirable property.) The short sale negotiators play tough and place heavy weight on the appraisal(s). And they almost always want the seller to contribute something. And trust me, they are very strict that the seller receives no proceeds from the sale. Some of the success in the short sale process is strength and credibility of the seller’s claim (letter) of hardship. Sellers have to present their case, often in more financial detail than qualifying for a loan, including why they should qualify for the short sale. Sellers with true or real hardship appear to have an easier time getting to completion, particularly if they have been in default for many, many months. And potential short sellers are beginning to seriously educate themselves and weigh the total impact on their lives, finances and FICO scores. Which leads me to…
Recently, an increasing number of people are coming in my door for discussions about what is commonly referred to as “strategic default.” These are not the gamblers who have already been foreclosed on and are down the road. These are the earnest people who bought at the wrong time or re-financed too much. This round of people have a true moral problem with defaulting. It simply goes against their grain. I can offer them a macro discussion of their problem. Some are potential short sellers, most are not, and most need to speak to their attorney and/or accountant (always recommended). Some have employer/employment concerns because a foreclosure could have negative impacts. Most have to seriously think-it-through for several days before they can get past the morality of it. And a common question is “when do you think the market will go back up?”
These are becoming what I refer to as “The Common Sense Default.” (And seeking a variety of professional advice as well as doing your own homework is critical.) For many, getting their arms around the simple math is a big first step to getting beyond morality. A discussion with a knowledgeable attorney often comes next to understand the legal ramifications and mechanisms. This can be critical in California––the state is full of non-recourse and recourse loans, and not all loans are created equal. And if the attorney believes this could trigger a taxable event, then the accountant discussion should be next. And after that, perhaps discussion with a psychiatrist, priest or rabbi? The federal government as well as the State of California have altered some of these taxing rules in the past few years and some have upcoming “sunsets” (which may be extended) so even more reason for knowledgeable professional guidance. Losing a property can be one thing, getting a 1099 can be another.
What is even more telling about this “common sense default” is that it is apparently becoming more common, or at least considered. The credit agencies have recently reported increased monitoring of people with quality credit scores for this type of activity. Seems that if you have a high FICO score and very little other debt, you are now considered a prime candidate to default on an underwater property. Another question I often get is “What is the credit score difference between completing a short sale and being foreclosed upon?” The answer is up for debate, but everything I can get my hands on says the score will decline about the same. But the real difference is in the timeframe to recover to an equivalent score. That favors the short sale. Purportedly, people who start out with a high score will take longer to recover their high score. That may be a shot-across-the-bow to the potential common sense defaulters. But who really knows? Lately, we’ve found ourselves in so many changing financial scenarios. Will the banks hold a long-term grudge against quality people who made a one-time decision to dump a property? The way this world is going I would expect some type of new incentive program in the future to lure them back to borrowing. Regardless, this new round of defaulters will only prolong this cycle and prolong the controlled burn.
Meanwhile, it looks like Mammoth has worked its way through most of the high-end ($1M+) distressed properties (except for one infamous one). There are a few lurking in the pipeline (they may fit the “common sense” criteria) but they don’t appear to be chronic. They won’t be on the market anytime soon. The balance of distressed and REO properties continue to be through the entire spectrum of Mammoth real estate––from The Westin Monache studios, to Snowcreek town homes, to relic condos, to classic crashpads. Foreclosures continue to impact the market values, but there are no real screaming deals. The banks and investors continue to do their best to uphold values. But there are good buys for buyers who are willing to negotiate their way through the foreclosure jungle. That can be a combination of patience, timing, and risk assessment. And there’s always “the other buyer.”
The long, wet winter should make for a beautiful summer. That is if it ever comes. I’m heading for a couple of weeks in the tropics to shake the wintertime blues.