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Hopefully the last tidal wave of foreclosures

By August 12, 2010

Democrat columnist

Despite massive amounts of taxpayer bailout money being spent on modifying delinquent loans, the inventory of lender foreclosed homes, called REOs, has been increasing. Currently there are 166 REOs listings in El Dorado County. El Dorado Hills has 25 REOs listed in the MLS, Cameron Park/Shingle Springs has 29, Placerville/Diamond Springs/El Dorado has 29 and there are 33 REO listed above Camino. The other 50 REO listings are scattered around the county from Fairplay to Georgetown.

REO sales make up one of every four county home sales. ThatÕs not surprising when comparing prices of REO and non-REO properties. The average selling price of a county REO home is $253,000 while non-REOs sales average $397,000. REO sales typically take 49 days to attract an offer which is usually at or slightly above the listed price. The non-REOs home will typically take 79 days to and attract offers at 95 percent of the current listed price.

There is some evidence the number of new loan defaults is decreasing. Notices of Default, the first step in the foreclosure process, edged up slightly from May to June but according to ForeclosureRadar, but have decreased 45 percent from June of 2009. ThatÕs a good signal the worst is probably over. If so, itÕs about time. The excessive number of foreclosures decimated property values and eroded confidence in the housing market.

The first wave of foreclosures was attributed to the creative financing that was once so popular with buyers who had less than perfect credit and little or no downpayment. Many of these borrowers were first time homeowners seeking an equal opportunity for homeownership. With property values escalating monthly, the temptation to jump into the housing market was too attractive to resist. Lenders willingly enabled the process by offering almost everyone an opportunity to finance a home. By early 2006 nearly half of all loans made in the region consisted of: sub-prime, adjustable rates, negative amortizations, the 80/20 deals and the no income/no asset loans.

These sub-prime loans have been pretty much flushed through the system. These loans went into default and through the foreclosure process during 2007 and 2008. Most of us in the real estate industry believed the market would bounce back once all these foreclosures were completed on these sub-prime high risk loans.

Then the recession hit late in 2008. The second wave of foreclosures to wash ashore was mostly 30-year fixed rate loans, made to borrowers with average to good credit histories. These borrowers had lost their jobs and were unable to keep their mortgage payments current. Historically, when a homeowner experienced a financial catastrophe, they would sell their home, pay off the mortgage and take whatever money was left over and move on with their life. Home ownership was considered a secure investment, similar to an insurance policy. In the unlikely event of a financial calamity, the home could always be sold and some cash salvaged.

But this time was different. This time there was insufficient equity to pay off the mortgage. Unable to sell, unemployed borrowers began defaulting in record numbers. These second wave Òrecession foreclosuresÓ have been slowing processing through the foreclosure pipeline despite the legislative delays.

The state legislature in 2008 and 2009 attempted to stem the rising tide of foreclosures by adopting regulations that delayed and hindered the foreclosure process. Previously, a simple foreclosure would take 120 days. Today, the average time required for a lender to foreclosure on a home is over a year. Most of the REOs on the market today can be attributed to the 2 million Californians out of work. Historically, as the economy slowly emerges from the recession and employment stabilizes, the number of new foreclosures would decline.

Unfortunately, the historical bounce in property values that we would normally see at the end of a recession isnÕt going to happen. There is a third wave of foreclosures on the way and like an oceanÕs undertow will try to pull property values under.

Researchers from credit bureau Experian released a report last month showing 19 percent of all new loan defaults were from strategic defaulting borrowers. These borrowers have the ability to make their loan payments but simply choose to walk away from a home and an underwater mortgage. An increasing number of borrowers with 700-plus credit scores, secure jobs and money in the bank, are now defaulting on their loans. These are young professionals with college and advanced degrees and healthy IRA accounts.

The super rich are also walking from their McMansions, vacation homes and investment properties. According to CoreLogic, while one in 12 mortgages below a million dollars is delinquent, more than one in seven homeowners with a mortgage above a million are seriously delinquent. The data suggest the rich are purposely dumping their financially draining properties just as they would any other sour investment. The delinquent rate on investment homes with mortgages above $1 million is now 23 percent.

ÒThe rich are different. They are more ruthless,Ó said Sam Khater, CoreLogicÕs senior economist.

There are 11 million homeowners who owe more than their home is presently worth. How many will choose to walk away is uncertain. What is certain is the walkaway issues will remain costly and controversial. ItÕs the big third wave.

Ken Calhoon is a real estate broker in El Dorado County. He can be reached through his Website

Ken Calhoon

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