Mammoth Short Sale Burn Out

The Mammoth foreclosure pipeline will soon take a respite of unknown duration. It’s all part of the ongoing “controlled burn.” The California Legislature is the major culprit this time. I’m not complaining, this happened last summer and it made for a enjoyable summer after a busy fall, winter and spring. Regular real estate keeps me busy enough. But the new California Homeowner’s Bill of Rights will put a damper on short sales too. That break is welcomed because right now we are experiencing Short Sale Burn Out on several fronts.

But the relative question is; Who Is burned out more?? The short selling sellers? The short sale buyers? The agents working these short sales? Or the banks trying to process these short sales? Or, all of the above? (It’s E. All of the above).

The major banks have all recently revamped their short sale processes (and all differently too, I might add). Some of it is internally motivated, and most of it designed to conform to new and various government regulations. The industry is having difficulty keeping up with all the changes, but as long as the Fed keeps pumping money into them, they have to play along. And “the only thing constant is change…..”  It all keeps the bank’s (phony) balance sheets healthy. We are now in the greatest era of government intervention (and interference) the real estate and mortgage finance industry has ever experienced (and just wait for the real Dodd-Frank regulations to kick in). The burn out factor has risen to such heights that many participants are beginning to shun it all together.

Because of the “Bill of Rights,” distressed and defaulted property owners now have to attempt a loan modification first. Good luck with that in Mammoth. Who wants a loan modification on a grossly underwater second home?? And what if there is job and/or income loss. A loan mod may be good for someone who needs to keep a roof over their head (although they might just be better off renting a home from some new hedge fund “investor”). Distressed second/vacation homeowners, especially condo owners, are more likely trying to relieve themselves of the common area fees because those are “personal obligations” rather than “running with the property.” The ongoing expenses for an asset you are planning on walking away from can become an albatross. And drought winters don’t help the income stream either.

In most cases the loan modification offers from the bank aren’t substantial enough. They are mostly noise. They might make the payments lower but they extend the life of the loan. Or something equally unpalatable (occasionally some owners get something valuable, but rarely). This can go back-and-forth for months. Some owners have already remarked that it is “loan modification hell” because they are now mentally resigned to get rid of their property but they are stuck in this bureaucratic quagmire with the bank. There are (were) really two scenarios out (this is not legal advice); work towards getting the bank to accept a deed-in-lieu-of-foreclosure (DIL) or just rent the property out, collect rent, stay current on your obligations except for the mortgage payment, and wait for foreclosure (your tenant will ultimately get some free rent and “relocation assistance” in the form of a check from the lender). I’ve seen many owners work the second scenario, but now more and more are working for a DIL.

Now the CA Bill of Rights says that if the owner can’t come to terms with a loan modification or DIL, that they have to attempt a short sale. Talk about more delays of the inevitable. One of the problems with a short sale is the owner/seller has to be motivated. They have to jump through the hoops to “qualify” which includes more work than qualifying for the loan originally, and bearing one’s soul, and facing a failure of sorts (I haven’t met a short selling seller yet who didn’t have some moral or emotional trepidation over their short sale). But owners who are trying to rid themselves of the albatross are motivated. Owners who have paying tenants might not be.

Then a successful short sale has to have a willing buyer. Buyers looking at short sale offerings are becoming more wary, and weary. The stories of burn out are frequent. Sometimes buyers play “the option strategy” and find another property while they are waiting. Short selling buyers in a second home market can be more patient, but frustration is still common. Some are rewarded nicely (screaming deals?). But more potential buyers are leery of short sales. People despise uncertainty. I hear “I don’t want to get involved in a short sale” all the time. Another burn out for buyers; potential Mammoth buyers who are watching one of the various IDX (Internet Data Exchange) driven websites are looking at “available” properties when in fact they are under contract as short sales. I get these inquiries all the time, “No, sorry, that property is tied up in a short sale,” click. These pseudo available property listings sit in the system for months. I know there are people burned out on this, but don’t shoot me, I’ve tried to change this in the local MLS, but to no avail.

So the sellers are burned out, the buyers are burned out (but don’t necessarily know it), and how about the agents working these deals? Some Mammoth agents are adamant about not engaging in a short sale, either representing the buyer or the seller. Representing a seller in a short sale can equate to a ton of work above-and-beyond the work of a normal real estate transaction. There are a handful of Mammoth listing agents who really shined at the process in the past, and assuredly they were financially motivated. But I get the sense that most are becoming burned out too. Right now there is better business and opportunity outside of short sales. But the short sales are likely to come around again in volume, so we’ll see who steps-up and who steps-out. Meanwhile, whole industries have cropped up to assist agents in becoming short sale “experts.” But most burned out agents are opting for vacation time instead.

And the banks are burned out too. Their personnel turn-over and burn out is real even in this high unemployment environment. The volume of paperwork is staggering, and the stress too. Every time they turn around there is a new government program, or new federal or state laws, or new corporate procedures. Some banks are trying to turn this process over to third parties and/or the servicing companies (who aren’t prepared for the volume/stress either). None of it is running smoothly. These “loss mitigation” folks at the bank are handling hundreds of files and then mysteriously disappear for a week (a symptom of burn out?). And as the delays and frustration builds somebody (everybody) is bound to lose their temper. Files get “escalated” to higher-ups for review and for expedited decision making. And for certain nobody at the banks is really in that big of a hurry to move the loans off the books at greatly discounted values.

So there is short sale burn out all around. Right now the flow of short sale opportunities has ebbed because of the California Homeowner’s Bill of Rights that was enacted on January 1. The banking and real estate industry are trying to find their way again. And nobody knows exactly where this is going. Barring some dramatic rise in real estate values here in Mammoth, we are bound to see short sales come back around. From everything I can tell there are still plenty of distressed owners making up the shadow inventory. Many simply aren’t making payments and haven’t for many months and years. Some of those are quite content with the arrangement because they are still getting some sort utility out of the property (even if it is just good ski days and “pretending” they still own the property). And still others are now beginning to seriously assess the potential exit strategies from their albatross.

I can scour the MLS data from the mid-2000’s and there are hundreds of owners who financed purchases at peak prices and still own. There are bound to be hundreds more who refinanced at peak values and still own. How long will they keep making payments on grossly underwater assets? Especially if the HOA bills keep coming and their enthusiasm for their Mammoth property wanes. And for those that own homes the peeling paint is starting to look really bad. Many of these owners may now become candidates for DIL if they enter the now mandated loan modification process (and they can avoid short sale burn out). Especially since the negative credit impact from any of these resolutions appears to be becoming less and less all the time. Some will certainly see the value of a quick, clean separation from the property (and they can keep their furniture too!). Of course some owners will choose their own version of “extend and pretend” and keep using their property and keep up the “appearances” of really owning. But they too may become burned out.

2013…..real estate bizarro world….thankfully there’s still some good skiing to be done before the end of the season, and summer is on it’s way.

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