Every Foreclosure Moratorium Has A Silver Lining

By | November 8, 2010

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foreclosure moratoriumIt seems like every day we get new news about big banks and the housing market.  We hear about bailouts, we hear about foreclosures, we hear about TARP – and most of the time, it’s not the kind of news we want to hear.

Then, every once in a while, we get the kind of news everyone wants to hear: good news.

Over the past two weeks, several major banks (Bank of America, JPMorgan Chase & Co., Ally Financial’s GMAC Mortgage unit and PNC Financial) have announced that they’re instituting a foreclosure moratorium in several states due to a flawed paperwork process.  Critically understaffed and bogged down by hundreds of thousands of foreclosure filings, processors at some of these major banks may have cut corners and filed improperly using an automated system.  This, of course, raises all kinds of red flags about the lender’s ability to repossess and the validity of the foreclosures in the first place.

Wait, that’s not good news … or is it?

How The Foreclosure Moratorium Affects Buyers

 

In the short term, we can expect to see many fewer homes hitting the market.  The banks involved in the foreclosure moratorium won’t be listing new properties for at least the next few months, and will, in fact, be pulling homes from the market.  Based on the law of supply and demand, that prices should continue to firm up (they’ve already mostly stabilized – check out the stats here.)

Fewer listings means more activity, more activity means more competition, and more competition means higher prices in the long run.  A short foreclosure moratorium could actually lead to the market ‘bottoming’ … which is obviously where most buyers want to purchase. Here’s what the Wall Street Journal has to say about it:

Stretching out the foreclosure process would reduce the number of houses dumped on the market over the next six months, which could help firm up housing prices in the short term and put some extra support under a sagging economy.

If you’re currently under contract, and the bank informs you that your contract is suspended because of the foreclosure moratorium, don’t fret – it’s widely expected that the majority of the foreclosures were repossessed legally, and you’ll probably be able to close on your deal a few months down the road.  In the meantime, it’s best to let the banks sort out the situation and make sure they’re able to take title to the home in the first place.   (If they aren’t able to take title, it would create a ‘cloud on title’, and they wouldn’t have the legal authority to sell it to you in the first place.  Wouldn’t you rather know about that before closing?)

You’ve Got Options

You can wait until next year. Most local analysts believe this is the winter in which the market recovery really takes off.  Houses that are in good condition and are priced under $250,000 tend to sell very quickly; with homes under $125,000, they’ll often sell overnight.  In some neighborhoods prices are already starting to go up.  Next winter may very well be extremely busy, with a huge amount of competition – there are tons of buyers sitting on the sidelines, waiting for a signal to buy.  When that signal comes, there will be a feeding frenzy as the qualified buyers come out en masse.  Waiting the moratorium out could very well be the kiss of death for the era of super-cheap deals.

You can purchase a home that’s not distressed. These homes are usually owner-occupied and in good condition.  It’s also possible to negotiate with some of these sellers to get lower prices (although not generally as low as foreclosure prices.)  Non-distressed homes can close quickly and are less stressful than other types of transactions.  That said, most sellers who have equity can’t afford or don’t want want to sell at today’s prices.

You can buy a short sale. This is the obvious solution to the foreclosure moratorium, and for most buyers this season, is likely to be the the most popular.  These transactions usually take longer than foreclosure or non-distressed sales (expect to wait 30-120 days for price approval) but offer exceptionally good prices on exceptionally good homes.  Savvy buyers have been snatching short sales up for the last few years and tend to be very happy with the end results.  The waiting period may even be better for a lot of our seasonal buyers as they won’t have to pay to maintain a home during the approval process – which means even less money out-of-pocket before next season.

The Grain Of Salt

If the foreclosure moratorium does happen to stretch out longer than the anticipated 3-5 months, and if it affects more than the banks mentioned above, then there could be an adverse affect on the market.  An extended nationwide foreclosure moratorium could lead to a glut of homes in the future, and if the problem is more widespread than previously suggested, then some homeowners may default on their mortgages in hopes that the lender can’t foreclose.

This is a worst-case scenario, and it’s much more likely that the foreclosure moratorium will be short.  Regardless of whether any of the banks in question have taken shortcuts, delinquent borrowers do still owe the balance of their mortgages and the investors who own the mortgages are still owed.  You can expect the investors will find a way to recover.

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Alex Krumm is a Sarasota, Florida based Realtor with Re/Max Alliance Group.  He’s a Certified Distressed Property Expert, GRI, and a broker-associate with his company.  Visit him on the web at http://www.sarasotapropertygroup.com, or click here to subscribe to his blog via RSS.


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