The foreclosure lessons

A couple of days ago, a daily Santa Fe New Mexican issue included legal notices of three foreclosure actions in progress. It’s public notice to publish the foreclosure action by a note holder against a borrower. Mostly the note holder will end up with ownership and possession of the property after a costly and long process. And the borrowers will be out, sometimes with serious damage to their credit scores and maybe a ruined marriage and/or careers. Kids will be transferred to new schools since the former owners had to move. Yes, they did not pay the mortgage payment and went into default. A narrow and cold opinion is that it was probably their own fault. At other times we have raised the spectre of greedy lenders making loans that were of such high risk that default was almost a promise; yet they made the loans anyway. OR rather, the loan officers and underwriters made the loans, usually with direction from ownership and management of the company they worked for.

Is it okay to say “we were just following orders”? You are welcome to comment on whether the people who profited from the liar loans and no doc loans in the recent past should have spoken up and stopped many of the unqualified borrowers from going ahead and buying a home or confronted their bosses about the large picture effect of so many unqualified buyers borrowing money they could never repay. They could only continue to pay if the home went up 10% or more every year and the borrowers constantly refinanced to roll the newly gained equity into a new and higher balance, with a new payment structure. Were crimes committed? Fraud is a crime, last time I checked, though difficult to prove.

So just this week the newspaper named above had three legal notices for three properties in foreclosure: one in Los Alamos, one in the Eldorado subdivision and one near Edgewood, NM. ( I just looked; none published in today’s issue)  I don’t follow other counties such as Bernalillo, San Juan, etc. I guess I should mention that 3 legal proceedings with published notices compares to the peak day from several years back when 31, count’em, 31 notices were published in one day. I recall a phone call I received from a fellow Broker asking me what was going on and was the market completely crashing? They were obviously concerned seeing so many legal notices in one day’s newspaper. I suggested the note holders were likely processing a large batch at one time and that’s how the publishing happened in such large numbers on one day. But back then, almost every day had some legal notices of foreclosure published. Foreclosures have slowed. They had to slow down. How many more homes and borrowers could still be out there and still in trouble? It seems as if we have survived the worst, and that is likely true. But as long as foreclosures continue, those homes will continue to put a damper on sales in the neighborhoods where they stand.

The lender will eventually gain title to the property and will place it on the market for sale. That home will likely be the lowest priced home of its size and shape in the neighborhood. So the family 4 doors down the street that is trying to sell a similar home will likely not be able to sell until the foreclosed home is gone from the list of available inventory. Note everyone wants to buy a foreclosed home; many have serious problems and defects. But a savvy buyer seeing a home at maybe 15% below the price of another home on the same street will probably want to pay less.

What is the lesson here? More than one lesson to be sure. Back in 2007 or 2008 or 2009, whichever year you might claim to have understood the problems we were facing with the bursting of the real estate financing bubble, our national government and the big lenders (also known as big banks) made a strategic decision not to force financial ruin on the big lenders (by forcing them to write down mortgage balances, lower interest rates or recast the payments into something the homeowners could afford). After all, we needed those big banks in our lives and many people had bank stocks in their personal retirement portfolios. The road not taken would have spread the pain among almost everyone one instead of just twisting the life out of a small percentage of families and homeowners that were unable to survive the storm. And we know what happened to the properties, too. They started to fall apart and deteriorate, but not enough to salvage the builders and contractors that went out of business when the housing market took a nosedive. So I guess you could claim that the neighbors of the foreclosed properties ended up taking a hit because of their proximity to those problems. Ask them if they would have rather lost 3% of their retirement portfolio value by virtue of some large banks failing without government support back then, versus the maybe 10% of value they cannot realize as they tried to sell their home while surrounded by uncertainty and vacant homes going through the legal system.

Back in October 2008, a famous time that almost saw the crash of the world’s economy, decisions were made to save the large companies that made those loans to the borrowers that actually did not qualify to borrow under normal lending approval criteria. What many do not realize is that the big lenders continued to make liar loans and no doc loans for a long time after it was clear that the housing market was tumbling into a huge ditch that would take 5 to 10 years to climb out of. Even in 2010, at a time when you would think everyone knew better, loans were still being made that were not properly underwritten to allow for the long-term recovery we were facing. Banks still wanted the fast profit and damn the future results. Some of those 3 year ARMs were not resetting until just a couple of years ago.

Three versus 31? I like the smaller figure much better. It seems easier to digest. And digest we must to finally move past the great recession that has strangled us without mercy for almost eight years now. Let the constipation end! Someday really soon our market will get into balance and both buyers and sellers will be able to do business over a title company settlement table without having to account for other’s mistakes and crimes. Lessons learned are sometimes necessary for us to truly move forward.

Maybe we shouldn’t dwell on past mistakes. I agree with that and will gladly report the good news as it develops. Let me assure you I have been striving to report the good news along with any other facts that are relevant. The bright spots in our little real estate market in Santa Fe, NM are not to be ignored. We just need to create more of them. Is this going to be the year?

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