Arizona is now in the news and not in a good way. The latest figures from RealtyTrac.com show that during the first quarter Arizona had the second highest rate of foreclosure actions in the nation, trailing only Nevada. One out of every 54 Arizona homeowners received a foreclosure notice during the first three months of the year.
Go back to April 2007 and the whole state had 4,129 auctions, REO sales (real estate owned by lenders) and default notices. By March 2009 the total had zoomed to 18,876 foreclosure actions.
Gloria Handley, a real estate agent in Chandler with RE/MAX Achievers, says that across the state there have been roughly 20,000 home sales so far this year. Of that number, she estimates that 75 percent were lender owned or short sales.
Handley, at http://www.simplysistersrealty.com, says that recently in one Scottsdale subdivision there were 17 active listings of which 13 were short sales and two properties were REOs.
On a recent trip through southeast Arizona you can’t help notice that some stores have marked down merchandise by 50 percent or more, or that obviously abandoned homes are plainly visible.
If you look at the numbers they confirm your impressions. RealtyTrac statistics show that Tucson had 461 foreclosure actions in April 2007, a number that rose to 1,071 by March 2009. During the same period foreclosure actions in Phoenix rose from 1,111 to 5,012 and from 173 to 600 in Chandler.
The REO Surplus
What the numbers from Arizona and elsewhere generally don’t say is that while bank-owned properties make up a growing percentage of the homes available for sale, banks are actually keeping large numbers of properties off the market.
A study by RealtyTrac compared homes held by banks with homes actually listed on local MLS systems. The result? RealtyTrac’s senior vice president Rick Sharga estimates that only 30 percent of bank-owned properties are listed and that 600,000 to 700,000 foreclosed homes nationwide are being held off the market by lenders.
“If lenders opened the foreclosure floodgates and listed every bank-owned property for sale the marketplace impact would be catastrophic,” says Sharga. “If the homes now held by lenders were immediately offered for sale home prices would fall, property tax collections would plummet, unemployment would instantly rise and the economy would quickly deteriorate. By keeping foreclosed homes off the market lenders have reduced the inventory of homes available for sale and thus prevented housing prices from dropping further.
“Alternatively,” says Sharga, “the cost of holding hundreds of thousands of homes is enormous and cannot continue indefinitely. If the inventory of unsold properties is not reduced or eliminated the results will damage the entire economy.”
The huge inventory of unsold REOs would be a problem if it was suddenly dumped on the market, but it’s also a problem when left unsold. Unoccupied homes can be vandalized, appliances can be stolen, pipes removed and windows broken. In warmer climates, abandoned pools can become festering cauldrons of mold, mildew and mosquitoes, a health hazard for entire neighborhoods.
It might seem as though lenders would be obligated to maintain foreclosed properties but in practice that’s not the case.
One common lender strategy works like this: The home is foreclosed but the deed is left unchanged for months on end. Since title remains in the name of the homeowner, it’s the homeowner who actually remains responsible for maintaining a property he no longer owns.
“The financial institutions or successors/assignees rush to foreclose, obtain a default judgment and then sit on the deed,” said Federal Judge Christopher A. Boyko, in a ruling that voided 14 foreclosures. The lenders avoid “responsibility for maintaining the property while reaping the financial benefits of interest running on a judgment. The financial institutions know the law charges the one with title (still the homeowner) with maintaining the property.”
A second strategy involves mortgage agreements, contracts written by lenders. Mortgage contracts typically include an “abandonment and waste” provision that says lenders have the right to enter the properties they finance to prevent vandalism and damage. The catch? While lenders have the “right” to maintain properties they are not obligated to do so.
Across the country local communities have begun to address the problem of unoccupied bank-owned properties. According to a just-released report from the United States Conference of Mayors, some cities have started to crack down. For instance, Chula Vista, Calif., requires lenders to maintain properties even if the foreclosure process has not been completed. Each abandoned property must be registered with the city at a cost of $70 and the lender must designate a local property management or maintenance company to oversee the home. Failure to comply can result in stiff fines.
In Louisville, Ky., the approach is different: Owners face higher property taxes — generally three times normal — if properties are not maintained.
The problem is that such programs can’t keep up with soaring foreclosure volumes. The Mayors’ group says that “71 percent of the cities report that the number of vacant and abandoned properties has increased during the last year as a result of the mortgage foreclosure crisis.”
In The End
There is, of course, a solution to the REO surplus which could benefit lenders, cities and local communities: Increase the pool of potential buyers. How? Deal differently with investors.
“We believe our policies must be designed to mobilize and leverage private capital, not to supplant or discourage private capital,” says U.S. Treasury Secretary Tim Geithner. “When government investment is necessary, it should be replaced with private capital as soon as possible.”
But Geithner’s view extends only to banks, hedge funds and stock brokerages. It does not include local real estate investors, community people in the private sector with an interest in neighborhood properties and the dollars to buy them.
For instance, the FHA allows buyers to purchase properties with one to four units — but only if one unit is owner-occupied. Pure investor financing has been unavailable for years. Last year the government got rid of possible income taxes for residential borrowers who do not fully repay their mortgage debts — but not for investors. This year, the Obama Homeowner Affordability and Stability Plan includes “common sense restrictions” such a requirement that only owner-occupied homes qualify for federal assistance — investors need not apply.
The distinction between investor-owned real estate and owner-occupied makes no sense, common or otherwise. When you see a boarded-up house you don’t know if the property was foreclosed because someone lost a job, bought more than they could afford, was defrauded, got sick, had an accident or had a tenant who moved without notice.
What you do know with absolute certainty is that the property is a neighborhood blight, that it reduces local property values and that its sale would benefit everyone.
Whether a foreclosed property is owned by an investor or an owner-occupant is irrelevant. The instant and immediate need is to get such properties off the market and occupied. If we can keep properties with one to four units out of foreclosure or off the market, more power to us, regardless of who owns them. And if we can get investors to purchase foreclosed homes then we ought to welcome such buyers and not drive them away.
Don’t believe it? Just ask folks in Arizona — or anyone with an abandoned home on their block.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.