The Mammoth foreclosure market is going nowhere. The causal observer thinks the foreclosure cycle is over. Insiders know differently. There are still plenty of distressed, underwater, and non-performing properties. This broker has no clue what the future holds. But for now the air is still, and where we get blown to next will be a function of Mr. Market, the continuing dysfunction of state and federal governments, and which “solution” the banks see fit to implement next. Welcome to the age of “extend and pretend” and “muddling through.” What I started calling the “controlled burn” several years ago simply continues on, except the fire is smoldering for now.
So here is the empirical information;
Mammoth Lakes remains a unique market in California. It continues to be, and maybe more so than at any time in history, driven by affluent second home owners and recreation seekers. Despite the travails of Town government and the lackluster “Starwood” period (thankfully the Wall St. mentality hasn’t destroyed the skiing), the interest in and demand for local real estate remains strong. Unlike many of the California real estate markets, there has been no hedge fund/equity fund mass purchasing of properties. So the demand is “organic” as the media likes to say. Also, there has been no rash of foreign investors bidding prices up. Neither of these influences are affecting the current local market. And recent interest rate rises have had no real affect; Mammoth remains a significant cash buyer market. Simply, the “haves” of Southern California have Mammoth on their minds.
But despite the last six years of foreclosures and short sales there is still underlying stress. The mid-2000’s experienced a large volume of purchases and re-finances in Mammoth at peak values. The macro-market forces were in play as well as the micro-market excitement; the emerging Village improvements, plenty of Intrawest hoopla, and ultimately the Starwood acquisition of the Ski Area (and all the promise that held). Many of these buyers/owners still own. Some list their properties for sale at exorbitant prices only dreaming that a sucker will come by and relieve them of their debt. Forget recouping the downpayment and other sunk costs. Those that bought for enjoyment, recreation and quality times are okay. Those that bought purely on hype are another story. Many can’t fathom walking away. But with less stigma and credit damage now attached, that may become a viable option. And the recent push for increased values gave some of them new hope. And then there are some that haven’t made a mortgage payment in months or years.
Trustee’s Sales are few and far between these days. Most are repeatedly postponed and then disappear. There ARE title issues with many of these properties. The infamous MERS is an abyss for some. But the bottom line is the banks aren’t moving towards foreclosures. New REOs are more likely to be the result of a hard negotiated deed-in-lieu of foreclosure (DIL) than an actual foreclosure. The Jan. 1, 2013 California Homeowner’s Bill of Rights threw a big wrench into the mess too. It mandated that distressed homeowners be offered loan modifications before any short sale or foreclosure process. There are many Mammoth property owners mired in the loan modification process. Some for the second time. The process has become painfully slow and uncertain. Some believe it is the result of ineptitude. But it is really more a grand delay tactic. I talk to owners who are in the loan modification process and they report that months can go by between communications with the bank. There are always new or changing “loss mitigation” personnel, or lost files, or some other reason ….The banks simply don’t want to realize the loss (mark-to-market), or that maybe the properties will appreciate enough and that will “solve” everything, or maybe the owner’s income will magically increase, or….As long as the Fed keeps pumping money at them, the banks really don’t have to do anything. And for most owners who are in this protracted and uncertain loan modification process, it can be unnerving. I call it “lobodo-modification.” And more and more of these people just want to be finished with the property; please foreclose, please let me DIL, please….And some are just delighted to be living rent free or collecting rent while not making payments.
The Mammoth real estate market mirrors the entire country in many ways. Just in the last few days some of the major servicing companies (like LPS who was a big client of ours the last few years), have come forward with some statistics. All-in-all there are nearly 5 million non-performing mortgages in the United States. And recently the big foreclosure-tracking entity Realty Trac released new information and coins a new phrase “Vampire REO.” What their data reveals in many major metropolitan areas is that nearly two-thirds of bank-owned homes are still occupied by their previous owners (a Vampire REO). In Los Angeles the number is 61%. So everything appears just fine. This has been a great way to create the illusion of scarcity. I’ve been actively tracking all of this in Mammoth the last six years and there are very few of the Vampire REOs here. But I can tell you there are plenty of dead-beat owners stuck in the lobodo-modification process.
Meanwhile, the handful of foreclosures that are coming to the market are subject to a new marketing strategy. The big banks, especially Bank of America and Chase, are using online auctions to now market their REOs. Sites like Auction.com and Hubzu.com are utilizing eBay style processes. Buyers have to register to place bids. The sellers have minimum bids but also (high) reserve prices. The buyers also have to pay a “premium” (commission) to the auction company (most time 5%). But there are several problems. The process lacks transparency in many ways. We are currently handling the “listing” portion for one of these online auctions for a REO home here in Mammoth. Some buyers think they actually have the opportunity for a “screaming deal” with one of these auctions. Forget it. Other buyers are quite sincere and are making outstanding bids, bids that a normal asset manager would gladly put to contract. These buyers are even agreeing to the 5% premium. But these bids go nowhere. Obviously the buyers become frustrated. They quickly become leery of the process and the intent of the seller (or the auctioneer). We’ve been through four auctions on this property. There are great offers being made by qualified buyers. But again, it goes nowhere. We’ve tried every resource to alert the seller that his is happening and “time is of the essence.” Still nothing.
Again, these REOs aren’t the cheap or bargain offerings of the past few years. Even the random REOs that are coming to the market by traditional methods aren’t bargain priced. The real opportunities are gone. At least for now. But if the sellers continue with a dysfunctional online auction process like the ones we have experienced, then the serious buyers will shun the process altogether. Then what? (The online auction should have a “Buy It Now” button at a high price…done.)
But all of this gets worse. This online auction direction has to be (in part) the result of the Dodd-Frank regulations that are moving into place in the next few months. Washington DC has now swung the pendulum the other way. The ills brought-on by the sub-prime and other recent finance and banking fiascos are now resulting in absurd over regulation. Not only will it result in tightened lending, but every step of the lending and real estate process will be more regulated and scrutinized. The inevitable result will be higher real estate transaction expenses. The local title and escrow company is now mandated to have third party security checks on every person who touches any part of a real estate transaction including couriers. They are now also required to have regular third party audits that they have never had before. So the banks and servicing companies are heading another route to dispose of REOs; it has become too expensive and too complicated to do it in-house. Rather, just dump it onto some electronic platform and see what happens. I don’t think the computers don’t need security checks.
Meanwhile, many of the people who have been through foreclosures and short sales in the past few years are almost shocked at how little their credit has been compromised and they are back being offered new mortgages. The responsible (and underwater) owners who have held on hoping for some relief are now the losers. The negative effect of foreclosure and short selling appears to be very short term. We’ll see if the Debt Relief Act of 2007 that was extend a year ago and is scheduled to sunset at the end of 2103 will be extended. This has been driving the short sale market. But this is for primary residence owners so it only applies to true local Mammoth homeowners. If they offered it to second homeowners we could see an explosion of inventory here in Mammoth. I doubt that will happen, but in this whacky world…..The biggest short sale obstacle for most underwater Mammoth property owners is still the 1099 income for the relieved debt. But for many, it still makes sense.
As the spring and summer bloom subsides off the So Cal real estate market, the subsequent excitement in the Mammoth market will cool also. But a good winter can change that. Snow, and/or some better inventory can get this market out of the doldrums. But for now the distressed property opportunities are almost non-existent in Mammoth, and those that appear aren’t likely to be considered special deals. And for the broader market, the lack of distressed properties is stabilizing values.
So far, we’re enjoying the breather…