Banks are letting delinquent borrowers squat rather than foreclosing on them and booting them out. At first, it was a self-preservation measure by the banks taken out of desperation when the first wave of foreclosures caused prices to crash. However, now the banks are content to allow squatting, even for years, because squatters do not become MLS supply weighing down prices. The houses occupied by squatters are effectively removed from the market creating an artificial shortage. The lack of MLS homes for sale and high affordability is causing prices to rise, and as prices go up, banks have collateral backing on their bad loans.
Rising prices due to rampant delinquent mortgage squatting creates an unusual set of circumstances for lenders. When prices were falling, banks chose to foreclose on the least desirable properties and a random mix of nicer properties. The random selection of properties was intended to frighten underwater borrowers who were still paying their mortgages into continued payment. This terrorist tactic is the only real option they had short of widespread foreclosure processing. However, now that prices are going up, they have a new option. They can foreclose on underwater squatters as they hit the surface.
When a borrower is deeply underwater, it doesn’t do the bank any good to foreclose on them because the loss severities are very large. Once the value of a property rises back to breakeven, the bank has no reason to allow the delinquent mortgage holder to stay in the property because they can foreclose and recover all they are owed. Now that prices are rising, it’s likely that banks will abandon their random terrorist approach to foreclosures and instead target those reaching the surface. Personally, I think it’s a great approach. The last thing I want to see is someone who squatted for four years selling for a profit and getting a cash reward for their years of missed payments. If the banks are concerned about moral hazard, they won’t want that either.
The decrease in default notices, coupled with a decline in home repossessions, could help quicken the recovery in the real estate market.
By Alejandro Lazo and Andrew Khouri, Los Angeles TimesJanuary 23, 2013, 4:03 p.m.
California’s foreclosure crisis eased considerably during the final quarter of last year, with the number of homes entering foreclosure dropping to a six-year low.
Remember, this isn’t happening because they’ve run out of delinquent borrowers to foreclose on. This is a calculated and deliberate attempt at market manipulation that’s currently succeeding. Plus, much of the decrease over the last quarter came from cancellations in response to the new regulations from the Homeowner Bill of Rights.
The steep decline, accompanied by a similar drop in home repossessions, clears the path for a quickened pace of recovery this year. Fewer foreclosures on the market should lead to higher home prices and a healthier real estate market.
“Ultimately, fewer foreclosures means an even tighter market, which means a more rapid recovery,” said Christopher Thornberg, a principal at Beacon Economics. “I see very little to forestall the real estate market this year.”
The real estate research firm DataQuick reported a 22.1% decline in default notices during the final three months of 2012 compared with the previous quarter — and a 37.9% drop from a year earlier. A total of 38,212 default notices were logged on California houses and condominiums last quarter, the lowest number since the final quarter of 2006. A default notice is the first formal step in the state’s foreclosure process.
Since the number of new foreclosure cases peaked in early 2009, experts and analysts have feared a second wave of home loan defaults flooding the market. Three years later, that appears unlikely as banks turn to foreclosure alternatives and home prices rise.
“We are past the peak of this,” said Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley’s Haas School of Business.
A steadily improving economy has helped ease homeowner woes. And the vast number of underwater borrowers — those owing more on their homes than they’re worth — have continued to pay their mortgages instead of walking away. Rising home prices should help more underwater homeowners come up for air, allowing them to regain equity and sell their homes if they run into financial trouble.
“Home values increased through most of 2012, and the rate of increase picked up toward the end of the year,” DataQuick President John Walsh said in a news release. “That means fewer and fewer homeowners are underwater.”
And as these loanowners emerge from the depths, if they aren’t paying the mortgage, expect the banks to move in and boot them out.
As we get closer and closer to the peak of pricing, inventory should begin returning to the market. Many loanowners who are still current on their payments have been waiting for rising prices to get out from under their debts without damaging their credit. Add these listings in with the targeted foreclosures from the banks, and more inventory will finally emerge.
Another Option ARM implosion
Didn’t you think these were all gone by now? They would have been if the banks had promptly foreclosed as they blew up, but instead we see these trickle out slowly over time.
This property was purchased near the bottom of the last housing recession in 1997 for $235,000. She borrowed $188,000 and put $48,000 down. When she got her $460,000 Option ARM she got back her $48,000 plus obtained another $212,000 in gift money from a stupid lender (Downey Savings and Loan).
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Proprietary OC Housing News home purchase analysis
$455,000 …….. Asking Price
$235,000 ………. Purchase Price
9/2/1997 ………. Purchase Date
$220,000 ………. Gross Gain (Loss)
($36,400) ………… Commissions and Costs at 8%
$183,600 ………. Net Gain (Loss)
93.6% ………. Gross Percent Change
78.1% ………. Net Percent Change
4.2% ………… Annual Appreciation
Cost of Home Ownership
$455,000 …….. Asking Price
$15,925 ………… 3.5% Down FHA Financing
3.47% …………. Mortgage Interest Rate
30 ……………… Number of Years
$439,075 …….. Mortgage
$113,410 ………. Income Requirement
$1,964 ………… Monthly Mortgage Payment
$394 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$114 ………… Homeowners Insurance at 0.3%
$457 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,930 ………. Monthly Cash Outlays
($371) ………. Tax Savings
($695) ………. Equity Hidden in Payment
$17 ………….. Lost Income to Down Payment
$134 ………….. Maintenance and Replacement Reserves
$2,015 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$6,050 ………… Furnishing and Move In at 1% + $1,500
$6,050 ………… Closing Costs at 1% + $1,500
$4,391 ………… Interest Points
$15,925 ………… Down Payment
$32,416 ………. Total Cash Costs
$30,800 ………. Emergency Cash Reserves
$63,216 ………. Total Savings Needed