By Sam Boykin
Cheryl Littlefield’s ideal home was pulled right out from under her. Located near Revolution Park just west of Uptown Charlotte, N.C., the 1,200-square-foot, three-bedroom brick ranch was just what Littlefield was looking for. And priced at $49,000, the foreclosed home was a bargain.
“All it needed was carpet, appliances and some very minor repair work,” said Scott Lindsley, a real estate agent with Charlotte-based My Townhome Realty who was representing Littlefield in the deal. But as Littlefield was preparing to make an offer on the house last week, it was suddenly yanked off the market.
“I was so disappointed,” she said. “I’m still looking, but all the foreclosed homes are pretty much gone for the moment. There’s a lot less to choose from. So I guess I’m going to just wait until everything is sorted out.”
That’s just example in what could turn out to be a long-term, far-reaching quagmire as some of the country’s biggest financial institutions, including JP Morgan Chase & Co., GMAC and Charlotte-based Bank of America, suspend foreclosure proceedings.
Last week, Bank of America announced it was suspending foreclosure sales in all 50 states after the company received a letter from the North Carolina Attorney General Roy Cooper asking it to do so. Cooper has launched an investigation into 14 mortgage lenders, including Bank of America, amid national reports that some mortgage companies have been using foreclosure processes that might be illegal.
In letters sent Oct. 5, Cooper called on the lenders to suspend foreclosures in North Carolina, asking them to show that their affidavit procedures comply with the law. Bank of America spokesman Dan Frahm said in an e-mailed statement that foreclosure sales will cease “until our assessment has been satisfactorily completed.”
On Wednesday, Iowa Attorney General Tom Miller unveiled the details of a multistate mortgage foreclosure investigation involving the nation’s attorneys general to review the practice of “robo-signing” and other issues that have arisen against banks and mortgage processing firms.
How long the moratoriums on foreclosure sales will last is unknown. But Jennifer Frontera, a realtor and broker at Wanda Smith & Associates in Charlotte, said that if it’s more than just a few weeks, it could have a “long-term negative impact.”
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Frontera said moratoriums lasting several months would cause thousands of foreclosed homes to bottleneck in the pipeline. And when they are finally lifted, those homes will flood the market.
“That oversupply will have a downward effect,” Frontera said. “Prices will drop, and it will cause a lot more properties to go into the hands of attorneys, the system and the courts. And this causes a burden for everybody.”
Part of that burden will also be felt in neighborhoods with a high number of foreclosed properties, Lindsley said. “It’s better to get these inevitable sales out of the way sooner rather than later. But with the moratorium, you have all this inventory that’s now off the market. And who knows for how long? And when the ban is lifted, these homes won’t suddenly be priced at market rate or go back to the owners. They’re going right back on the market at a depressed price.”
Moreover, if the situation persists, Frontera said it’s likely to create even greater confusion among potential homebuyers of homes in foreclosure.
“Consumers will lose confidence regarding a purchase and may wait to see what happens, which will have a negative impact on the market.”
Eric Locher, a real estate agent with Cottingham Chalk Hayes in Charlotte, said the uncertainty among potential homebuyers of homes in foreclosure creates “analysis paralysis.”
With potential homebuyers already reluctant to make a purchase because of the volatile real estate market, this latest glitch—which could be a hiccup or something far more serious—has many homebuyers unsure what to do, Locher said.
“As questions remain in the marketplace, too many buyers stay on the sidelines as they continue to look and consider and wait,” he said. “So sellers are frustrated because they don’t have any showings, and the prices that are obtained are lower than they anticipated. Any question marks suppress the market.”
Some see silver lining
There could be a silver lining to some of this, Locher said. While a glut of foreclosed homes on the market would negatively impact home values, it might encourage banks to negotiate on short sales, “rather than wait to foreclose and get people to move out and all the hassle that comes with that,” he said.
There’s also a political element to the foreclosure pause that is being overlooked, he said.
“Is one party or both trying to gain advantage by supporting or going against this?” he said. “And who stands to gain by either of those positions? If you slow the number of foreclosures, that’s a good thing for people who are in power at the time. However, how is that going to affect the economy down the road?”
Dan Cottingham, a partner at Cottingham Chalk Hayes, also expects the foreclosure moratoriums to not be as bad as some predict, as long as the backlog of foreclosed homes is put back on the market in a timely and organized fashion.
“Some say it will be devastating, flooding the real estate market with all these foreclosed homes. But we’ve already done that,” he said. “I still think the appetite for foreclosed homes is going to be very high. And by the time banks put the foreclosed property back on the market — and it might be three weeks, it might be three months — they’re going to be better organized, give quicker answers and be much more careful with the paperwork.”
Prices might increase
Cottingham said that while prices of foreclosed homes will likely drop once the moratorium ends, in the meantime prices on distressed properties are likely to increase. A distressed property — one that is under foreclosure or impending foreclosure because the owner can’t afford the payments — usually fetches a price below market value, such as a in a “short sale,” which is often done to avoid foreclosure.
And the mortatoriums will also help people facing foreclosure on their homes, Lindsley said.
“A lot of people are in this situation through no fault of their own,” he said. “And if you’re truly trying to work something out with your mortgage, this gives you a little breathing room.”
Richard Buttimer, finance professor at the University of North Carolina at Charlotte, said exactly what kind of impact the moratorium will have on the economy depends on what ongoing investigations reveal.
“If we find there’s a systematic inability of firms to be able to follow foreclosure procedures, it will have a big impact,” Buttimer said. “The market wouldn’t reset home prices, and it would delay the recovery of the housing market fairly significantly.”
But Buttimer doesn’t anticipate it to be a protracted process, as banking officials realize the sputtering real estate market can’t afford a long delay.
“All these foreclosure issues are procedural,” he said. “They’re designed to protect consumers. And I’ve yet to see any evidence that the loans that were being foreclosed on were improper in the sense that people were still making payments. My sense is they’re going to be able to solve this fairly quickly and get back to doing foreclosures, which is what we need right now. The last thing we want is three or four years of foreclosures being in limbo.”
Lucien Salvant, managing director of public affairs at the Chicago-based National Association of Realtors, said that while it’s still too early to assess how the foreclosure pause will play out, the NAR is already getting reports from Realtors of transactions being delayed and properties removed from listings.
“What we fear is if this moratorium continues for any length of time, it’s going to have a real strong impact on the market,” Salvant said.
Salvant said the market conditions created when a backlog of foreclosed homes is released could spell bad news.
“All that time between now and when they lift the moratorium will recondition potential buyers into thinking, ‘Is it really over? Is there still turmoil? Why don’t we just wait?’ All this will only prolong the agony of not only the families trying to sell, but the slump in the housing market and the overall economy.”
In hopes of improving the tenuous situation, Salvant said that over the past few weeks NAR representatives have been meeting with top banking officials and encouraging them to do loan modifications and short sales in order to get distressed properties off the market.
“The banks said they would consider it. But of course they’ve been saying that for two years,” he said.
Salvant said that while banks are examining their foreclosure procedures, many of the foreclosed homes were under contract or under negotiation.
“People had lined up their movers, home inspectors, landscapists. The process was under way, and this really interrupts the stream.”
Indeed, many real estate and economic experts say the foreclosure moratorium could have far-reaching implications that touch many aspects of the industry.
“There could be a huge ripple effect,” Salvant said. “And everyone up and down the line could feel it.”
Inventory could dip
Because of the recession, foreclosed homes made up the bulk of properties that many real estate agents were handling. With the foreclosure pause, listing agents and agents that represent buyers could face a seriously depleted inventory. Moreover, with the ongoing turmoil in the real estate market, potential buyers are less likely to buy and sellers are less likely to sell.
Tony Smith, president of Wanda-Smith & Associates, said he sells primarily foreclosed homes. Over the past three weeks he’s had to place 30 foreclosed properties — some of which were under negotiation — in his inventory on hold.
Smith said he hasn’t yet felt the effect of the foreclosure pause on his bottom line, “but it’s headed that way.”
Lindsley said he’s also likely to be impacted, as over the past year or so about 80 percent of his sales have been foreclosed homes.
“Every closing I have this month is a foreclosure,” he said. “So all this certainly limits what I can show my clients.”
As news of the foreclosure pause broke, Lindsley said he had to scramble to make sure some of his clients weren’t getting their mortgages from banks that were involved in the scrutiny. Luckily, he said, many were going through smaller credit unions that weren’t impacted. Nonetheless, he’s still concerned about what the future holds.
“If the inventory isn’t out there, and this whole things last five or six months, it could really be devastating to the housing recovery,” he said. “So, yeah, I’m a little worried. But to do well in this business you have to evolve with what’s happening anyway.”
On the bright side, Lindsley and Smith said when the foreclosure moratoriums are lifted and the homes backed up in the pipeline hit the market, the process should be quick and efficient.
But until then, real estate agents might be facing a challenging time.
“There’s no way that Bank of America and other banks halting the foreclosure process is going to increase home sales,” Buttimer said. “At best it will have no effect on agents, but quite possibly it will have noticeable negative impact.”
Title insurers, attorneys on guard
The pause could hurt title insurance companies and real estate attorneys, too.
Title insurance companies provide protection for owners or lenders against financial loss from, among other things, defects in property titles. If the foreclosure moratoriums continue for several weeks or months, such companies could face challenges and will likely exercise additional caution, said Smith.
“Title insurance companies have to be satisfied and willing to insure a title,” Smith said. “They’ve got attorneys and they’re going to be looking at the process very carefully. This is going to make everybody step back and re-evaluate what they’re doing.”
Cottingham agreed. While it’s hard to know exactly how title insurance companies will be impacted, it’s “going to be a hassle for everyone,” he said. “You have to be really careful on the foreclosure front now.”
Buttimer said he’s not sure if title insurance companies will be impacted, but it’s possible.
“Homes currently in foreclosure still have that liability,” he said. “So title insurance companies might have some concern if a home had gone through the foreclosure process before procedural problems were found.”
Real estate attorneys handle all legal matters in a real estate transaction, and with foreclosures being so prevalent, that made up a large percentage of many attorneys’ practices. That might come to a halt with the moratorium. In addition, the moratoriums call into question previous foreclosures, meaning old transactions might need to be reviewed and verified.
Smith said real estate attorneys will undoubtedly have to start asking more questions and doing more evaluations on each title.
With a less active marketplace, Locher said real estate attorneys, along with everyone else involved in the home-selling process — from inspectors to appraisers to title companies — will have fewer transactions, “and of course that means their personal income will take a hit.”
Buttimer said that while some real estate attorneys might lose some clients, they could also pick up some business.
“People who were expecting to go through the foreclosure may start seeking information and legal advice to see if they have new rights because of all this,” he said. “You may also have people who did a short sale to avoid foreclosure who will be going back to see if they were forced into making a decision unjustly.”
Stressful time for homeowners
A homeowner facing foreclosure is perhaps in the trickiest situation, thanks to the moratoriums.
While the moratoriums might give homeowners a slight reprieve, it also prolongs what is usually a stressful situation. Moreover, even though it means a homeowner might be able to keep their home a little longer, Lindsley said that oftentimes once foreclosure proceedings have been set in motion a homeowner just “wants to be done with it” and move on with their life.
“Those folks are already feeling anxious and distressed because they’re losing their home, and now the whole process has come to halt,” Salvant said. “Now they have to go through more worry. You multiply that by each mortgage that’s being scrutinized around the country and you’ve got a significant chunk of people who are really sad.”
Frontera said people facing foreclosure shouldn’t look at the moratoriums as a free ride or that their troubles are solved. If anything, homeowners should redouble their efforts to find a solution during this time, she said.
“People may feel like they have more time than they really do. If people are in the process of doing a short sale or loan modification, they should use any kind of grace period to push harder to get these things completed.”
Frontera said homeowners should not consider the foreclosure pause as a bailout. To do so would create even bigger problems down the road.
“Those are the cases where they’re not doing anything to correct the situation, and it’s only going to result in a foreclosure later,” she said. “You have to be proactive, study and research your situation and talk to a lender or realtor. The last thing you want to do is just sit tight and hope everything blows over.”
Questions raised for homebuyers
The foreclosure moratorium has also thrown a big monkey wrench into the process of purchasing homes, and many pending sales have halted, which means some potential buyers might have to find other living arrangements at the last minute.
Moreover, many potential buyers might be knee-deep in the process of hiring home inspectors, appraisers and repair people. Now the big question is whether to proceed with the sale.
“If someone was getting ready to close on a foreclosed home, and say they’ve turned in their notice at their apartment complex or made whatever arrangements necessary to move, suddenly all that has to come to a halt,” Smith said “These people are going to be negatively impacted. They’ll have to seek out other housing, and nobody knows how long this is going to last. That’s who I worry about it, the buyer who’s done everything right, found the right home and put down money. Those are the people I feel for. It’s going to be a huge headache.”
Locher said if a foreclosed home is under negotiations to sell but still owned by the bank, a bank can pull it off the market.
“But if there’s something under contract, and a price and terms are agreed to, it will be difficult for the bank to pull out. Likely there’s more houses being negotiated than there are fully under contract and waiting for closing.”
Ben Mook, staff writer for The Maryland Daily Record, a sister publication to The Daily Reporter, also contributed to this report.[polldaddy poll=”3906862″]