The Ever-Increasing Foreclosure Pipeline of 45,000 - Homeowners in Limbo

Over the last 3 years more homeowners in Phoenix have entered the foreclosure process than have come out of it. Currently the system is backed up with more than 45,000 homeowners who are waiting to be foreclosed on. These pending foreclosures have been growing from just 2,300 in June 2006 to the astonishing number it is at today. Experts predict foreclosures will increase even more before they level off, most likely in the next 12 months.

The reasons for the backlog are heavily argued:

- banks are purposely limiting the flow of foreclosure homes into the market, which prevents further sliding of home prices and would allow the Phoenix market to stabilize sooner

- banks are stalling the foreclosure process because the demand for higher-end homes is very low and selling off assets at sharply reduced prices could cause smaller banks to fail

Banks have been quiet about their strategies for working with pending foreclosures. One thing is for sure, the number of pending foreclosures (properties that have received a default notice because they are 90 days behind and have 90 days left until auction) have increased steadily. Over the last 3 years 73,000 home foreclosures were completed.

Currently numbers indicate we are on track to reach 5,000 foreclosures by the end of June for this month alone, which would be the second-highest month, behind February 09 with 5,240.

Some foreclosures are taking longer that 90 days because borrowers are attempting to work out a loan modification or short sale with the lender. Short sales have increased over the last year but are still only less than 5% of home sales.

One theory of lenders stalling the process is that they are waiting for the bailout funds. The pipeline is a sort of warehousing of properties until it would be helpful to bring them onto the resale market. Dumping 45,000 homes onto the market at one time would deliver a knock-out punch to a real estate economy which is already struggling.

Loan mod guidelines issued by the Obama administration in March appear to be doing a better job of keeping borrowers out of foreclosure.

More than 1/2 of loan mods negotiated prior to the Treasury Department launching of the $75 million Making Home Affordable program in March were back in default within 6 months.

In May the rate of "re-default" fell by about 12% when homeowners payments were reduced through a loan modification.

One reason for the high volume of foreclosures is job losses. Job recruiters are seeing the job market get worse before it gets better. That and homeowners who are simply walking away from mortgages because they owe more than the home is worth.

Commercial property owners and lenders are preparing for a storm of foreclosures as well. The office and retail markets are expected to be hit hard in the coming months. The value of high-end homes and commercial real estate is still on the decline, which means that waiting may cost lenders more, even though they have no desire to take those properties back.

- Arizona Republic Business section 6/23/09

Homeowners Strip Homes Before Losing to Foreclosure

A rash of home stripping is starting to happen around the valley, as homeowners are trying to salvage whatever they can to raise money before they lose their homes to the bank. Often the items will appear on Craigslist or at garage sales. The stripping has nothing to do with attempting to reinstate the mortgage, rather giving the owner cash to get a fresh start where ever they may roam.

Commonly removed items are doors, light fixtures, toilets, but some sellers have been know to take the a/c unit, over, and dishwasher, bathtubs, and even a spiral staircase. Homeowners caught in the act may be subject to criminal prosecution, including damage and defrauding a secured creditor. Authorities must be able to prove that is was the homeowner that stripped the home of valuables, and that the person knew it was illegal to do so. If someone in good faith doesn't know than it would be questionable whether or not the person would be charged. Fixtures are a part of the home, and are not supposed to be removed, per the deed of trust signed by the owner at closing.

If you notice a neighbor removing fixtures, report it to the local police. You can also contact the FBI's Mortgage Fraud Task Force at px_cashback@ic.fbi.gov or 602.279.5511

The Phoenix Investor Boom, part 2 - A New Breed

Investors are definitely back, causing concern that the market is becoming speculative once again. The enticement of great deals for investors, which have been estimated to account for 50-70% of recent purchases, may be hindered by the ability to rent those homes to tenants.

Some long-time investors say they have started seeing a large number of naive, newbie investors with an attitude of sure-win that may have got us into trouble just a few short years back. Some investors are speculating, which could lead to an oversaturated rental market. Although the need for rental properties is still healthy, investors who are expecting huge returns could be in for a rude awakening, particularly if they don't put adequate time and effort into making the home the best it can be. Investing practice solid investment practices, speculators look for big return quickly with minimal effort, something that often will collapse on itself.

The vast foreclosure market has no doubt created the need for more rental properties.

Many investors are now purchasing with cash, lessening the chances of the home going into foreclosure again, and minimum down payments for financing properties are 20-25%, sometimes more. Investors will not be as likely to walk away from a property where so much of their own money is tied up.

Now investors and first-time buyers are clashing over some of the same properties. The competition that is causing frustration for buyers is also keeping prices from falling further, creating a double-edged sword. If there were only starter-home buyers are not investors the market would not have absorbed nearly the inventory as it has, creating what we are now seeing as a more stabilized marketplace.

Investors have fixed up and brought value to many valley homes where otherwise there may have been an abandoned property. Because of the investor presence neighborhoods are recovering.

Foreclosures Likely to Climb Again

There has been a trend toward fewer foreclosures in the last few months, primarily due to a temporary moratorium imposed by some lenders who were waiting to see if government incentives to modify mortgages for borrowers at risk of foreclosing would have a positive effect.

Most people trying to do loan modifications are not qualifying because they are too far upside down on their loans.

The trend will be to see more foreclosures based on layoffs, bankruptcies, etc., and the downward trend we have been seeing is going to reverse itself.

Despite the fact that more foreclosures will be entering the market, homes sales hit a 12-month high in May at 6.945 properties, up from 4,315 a year earlier.

Phoenix Home Prices Up Last Month Despite Higher Number of Foreclosures

The median home price rebounded slightly over April. The number of homes sold also increases to 8,690 from 8.156. The median sales price came in at $130,000, representing a 3% increase. The majority of activity is still happening in the lower end of pricing, however, the activity is starting to move up the pricing chain into "move-up" homes as well, homes in the $250,000 plus range.

Another interesting fact, the percentage of home sales that were foreclosed homes DROPPED last month from 68% to 57%. That being said there were still an increase in the number of foreclosed homes in April, 3809 vs 3103 last month.

Notices of trustee's sale, which is a notification that the property is 90 days out from being foreclosed, were down, 8600 vs 9100.

Avoid the Pitfalls of Buying a Home

With the plethora of great deals that abound on the market today, buyers need to be cautious about certain areas, as buying a home is certainly not for the faint of heart. Here are some tips to avoid the snags:

1. Financing

In today's environment have solid financing in place and/or the cash you will need to close. And, avoid making an offer contingent on the sale of your home - these offers most likely will be rejected. Sellers, for the most part, are not interested in contingencies, especially if the home is priced below market value, and the next offer may just be around the corner for them.

With foreclosures, many banks ask the buyer to prequalify with one of their financial institutions, and in some cases offer special incentives to use that lender (free appraisal, reduced closing costs, etc). It is not a requirement to use their lender to complete the purchase however.

Earnest money deposits, which is the buyer's good faith gesture to show seriousness in a property, are becoming larger and larger, particularly with properties that are drawing multiple offers, for example $5000-10000 earnest money figures are not uncommon. Beware that if you walk away from the home after the inspection period this money is likely to be kept by the seller.

2. Properties in questionable condition

It is amazing what former owners have been known to do to their home before the bank forecloses on it: seeing the home stripped of a/c units, doors, hinges, light fixtures, appliances, baseboards, entire kitchens, and wiring have all been known to happen.

Buyers may find that it is too difficult and/or expensive to put a property back into livable condition. FHA offers a 203k mortgage-loan program that includes money required to fix-up the property. The loan amount includes the repair costs, and the appraisal must come in for the entire amount of the purchase price plus repairs. The buyer must put 3.5% down and the maximum loan amount is $346,250. When appraising the market value including repairs is the number worked towards. The program generally takes longer to complete, but may be a viable option for a buyer who doesn't have money available to do massive renovations.

3. Be patient - competition is fierce

The home you have been pining for is finally on the market, and the price is just too good to be true. Often times, that can be the case. Homes can be priced at unrealistically low prices and bring with it bidding wars. This also takes time and can become very frustrating. This can be the case with bank-owned homes or short sales. With short sales, some are able to obtain quicker responses, but for the most part it is taking weeks or months longer to hear back than a foreclosed home, as the lender, not the seller, has to agree with the offer.

With a short sale a buyer can think he got a great deal, only to have the offer rejected by the lender, regardless of whether the offer was made at the asking price. This can come as a result of other buyers bidding up the once attractive list price of the home. However, if an agent can support the listing price and is familiar with the area and the financial institution, a short sale can be negotiated within a reasonable period of time.

4. Think location

Is the property in a neighborhood where lots of homes are for sale? Will you have a substantial commute to work each day? Be cautious, there could be the areas that will take the longest to recover in terms of value. What buyers are looking for today is a combination of great pricing and a return to basics, i.e. home close to family, jobs, entertainment venues, etc.