Background

Foreclosures have become a hot topic as of late and have established their position in mainstream conversation.  Foreclosures are everywhere, and they represent different percentages of the market based on your location.  Here in The Woodlands, we have enjoyed a favorable position in the overall real estate market.  For the most part, foreclosures have a negative stigma - they cause declining property values among other things. 

In the following analysis, it is important to understand the terminology.  A foreclosure represents a home that has been “taken back” by the bank.  The home-owner has been forced to move, and the house becomes an asset on the bank’s books.  Two types of foreclosures are analyzed - those sitting as inventory on the bank’s books and have not been listed on the market, and those that have been listed.  A third type of distressed asset is analyzed as well.  The short sale is a property whose owners have decided, with the bank’s consent, that they are unable to continue paying the mortgage.  This property is listed for sale on the market, pre-foreclosure, as an attempt to sell it before the home owner suffers the full psychological distress and damage to credit score associated with a foreclosure.  From the bank’s perspective, this sale can save the bank some money by foregoing expensive and sometimes messy foreclosure proceedings.  Because of this, a bank will often accept an offer for less than the mortgage balance owed.

In total, distressed assets represent 14% of the overall market in The Woodlands, TX.  This number includes the homes in short sale, foreclosed upon unlisted, and foreclosed upon listed.  Only 17% of these distressed assets are currently being marketed for sale though, representing 2% of the inventory for sale in The Woodlands.  This is typical of the process.  It takes time for the homes to make it through each stage of the process.

Moratorium on foreclosures

Foreclosures have become a major talking point by officials at the Local, State, and National level.  On October 4, 2010, the Texas Attorney General sent letters out to 30 banks who have Texas mortgages on their books.  The letter asked for a moratorium of indefinite period in which these banks were to review their foreclosure process.  This moratorium was sparked by major banks admitting they did not properly process foreclosure proceedings on millions of homes in foreclosure.  This caused the industry and the practices of the industry to be called into question.  For the most part, it is assumed that these mortgages were not being paid, and foreclosure was imminent.  Yet, the process by which banks were expected to follow was circumvented; in most cases, this was due to the sheer volume of processing to be done.  Some banks were foreclosing on thousands of homes per month, and in some cases one individual was signing off on all the paperwork sight-unseen (robo-signing).  Congress is now examining a potential national moratorium on foreclosures.  If a national moratorium is granted, it would likely take 6 months to 2 years for a resolution on the status of the current and past foreclosures, not to mention the future foreclosures.  It should be noted that this affects all foreclosures, within all stages of the process in the pipeline.

Pocket veto

President Obama “pocket vetoed” The Interstate Recognition of Notarizations Act on October 7, that would have streamlined and eased the foreclosure documentation process by changing the way paperwork was notarized and authenticated.  The President cited fears of “unintended consequences” and worsening the foreclosure crisis.  Supporters of the bill argue that it does not affect a home owner being foreclosed on, non-payment causes foreclosure.

Justice department probe

Additionally, Eric Holder announced he and the Justice Department are opening a probe into the foreclosure process followed by the banks - specifically focusing on the banks in question.

Analysis

The increase in regulatory and government involvement as of late, whether appropriate or not, is sure to increase the pressure felt on the economy caused by foreclosures.  In an economy full of uncertainty, this adds one more worry to home buyers, home owners, and investors in bank stocks.  Those who derive income from the foreclosures are sure to be hurt: real estate brokers who specialize in foreclosures, lawyers who do home closings, law firms who do foreclosure work for banks, and contractors who renovate foreclosures.  Additionally, a smaller base of homeowners must cover the tax burden for property tax.  Banks now face potential class-action lawsuits by those improperly foreclosed upon, further tying up inventory in limbo.  Furthermore, some in the Judicial Branch have voiced concerns in proving ownership in title to properties on the bank’s balance sheets.  Many mortgages were packaged as investments and sold on the stock market, and have changed hands many times.

In the short term, one can assume prices will trickle upward on non-distressed properties if inventory is reduced (or tied up) as a result of the moratorium on foreclosures.  In The Woodlands, the moratorium could represent a loss of inventory in the amount of 167 homes, or 14% of the sale market, for an indefinite period of time.  State-wide, this moratorium could affect 24% of the market.  You likely won’t see a large increase in pricing because many consumers are still having trouble getting loans.  It is a move toward equilibrium, temporarily, until the issue is resolved.  Those with non-distressed assets on the market should see more showings and thus more offers - although some buyers who are simply "looking for a deal" will put their home search on hold for now.  Some who are unable to purchase a foreclosure will move into an apartment, which will slightly increase multi-family demand.  If prices do go up though, we could see a more robust recovery in the housing market short-term, and be in a better place when these foreclosures do eventually hit the market.

About the Author:
Michael Blount Jr is a Realtor and the Broker of Blount Properties, living in The Woodlands, TX.  Michael is knowledgeable in both residential and commercial real estate and studies the market and trends to better serve his clients.  Michael serves the greater Houston metro area.  For more information - visit www.BlountUSA.com or search for Blount Properties on FaceBook.