A Blog Report By Association Lien Services and SwedelsonGottlieb
Many of our clients have been asking for our forecast as to when their assessment collection nightmares are going to end. While we don’t have a crystal ball, we do monitor what the experts are saying. And this very question was addressed in an article in the March/April 2011 edition of CAI’s Common Ground magazine. The article, entitled “Foreclosures, Rocky Road” (and thus the motivation for this blog post) states what we all know, that “the housing crisis has been a turbulent ride.” The article went on to state that “as we enter year four, experts predict we may finally hit rock bottom. That would be welcome news for homeowners and associations alike.” The problem is that rock bottom is so far down, it is going to take years to get back to normal.
Very few California community associations have been spared by this recession. But many have suffered larger losses than others, especially those communities that were developed in the last seven years where many owners bought at the top of the market, hoping that their property would appreciate, and now they find themselves underwater. The Common Ground article went on to state that “with 1.2 million U.S. homes currently in foreclosure and another million already foreclosed, finding creative ways to continue operations [by community associations] is necessary. Experts like Rick Sharga, a senior vice president at RealtyTrac, an organization that follows foreclosure trends, expects no major improvement in the real estate market until 2014. Sharga believes 2011 will yield the highest number of foreclosures and lowest cost of housing of the crisis, local housing costs should drop only 3 to 5%. He anticipates 2012 and 2013 will stay stagnant. Part of the long recovery is due to the sheer amount of repossessed homes that need to be sold.”
Sharga was quoted further, “The number of foreclosed homes being purchased is going up dramatically. Unfortunately, that number isn’t going up as fast as the number of homes being created in distressed [areas], so banks are still repossessing more homes than they’re selling.”
As Association Lien Services is in the assessment collection business and the economy impacts that business, we track what is going on with foreclosures by senior lenders. In 2010, over one million homes were foreclosed on by the banks, and many more received a foreclosure default notice.
Experts say that the number of foreclosures would have been even higher except for the foreclosure moratoriums imposed by the banks near the end of 2010. So, what is going on in 2011? Here are some things to consider.
Foreclosure lawsuits are slowing the total number of foreclosures. According to Daren Blomquist, a spokesman for RealtyTrac, foreclosure lawsuits slowed the number of foreclosures dramatically. “We hit a 30-month low with the foreclosure numbers in December , mostly due to court cases challenging lenders on whether they have the right to foreclose,” Blomquist said. The number of foreclosure lawsuits is likely to increase this year, while judges begin to grant class action status to cases associated with the mega-banks.
The number of foreclosures will rise in 2011. Although foreclosures slowed at the end of 2010, those homeowners still aren’t paying on their mortgages (or their assessments, for that matter). Lenders will begin to pick up the pace of foreclosure filings as some cases are resolved (even as new ones are filed). These properties still have to go through the foreclosure process, which means 2011 could be a record-high year for foreclosures, according to RealtyTrac Senior Vice President Rick Sharga. Sharga was recently quoted as saying that “more than 5 million Americans are now two months or more behind on their mortgage payments, setting the stage for a record high foreclosure rate this year.”
Foreclosures might not drop to more normal levels until 2014 – or later. National housing economists report that the next few years will be tough for the housing industry, with potentially another 4 million to 12 million foreclosures that haven’t yet gone through the pipeline. Ouch!
Things that many experts say we need to consider:
1. The “walk-away” or “surrender to foreclosure” psychology of homeowners who are (a) upside down, and can’t see their home’s value recovering anytime soon, and/or (b) who have tried – and failed – to work with their bank on a loan modification or short sale;
2. The pent-up foreclosures that were set to happen last year, but didn’t, because of the robo-signing foreclosure freezes imposed last September (most of which have since been lifted) – banks will be repossessing many of these homes in the first quarter of this year;
3. The bulk of the problematic interest-only or negative amortization adjustable rate mortgages (ARMs) taken out at the peak of the market (circa 2005-2006) were fixed for five years, and just started to reset last year, leaving many more homeowners stuck with increasing payments and upside down homes, with no greater chance of selling or refinancing this year than in any of the past few years; and
4. Mortgage lenders are reportedly telling homeowners they won’t be seriously considered for a loan modification until they fall behind on their loans; as a result, lots of people perceive that the first step to getting help is to stop making payments on their loan.
No surprise, unemployment is still too high and is tied directly to foreclosures. When an owner loses their job, that means less cash in the household to pay bills, including the mortgage. Lenders say they are trying to keep homeowners from living rent-free (by not making any mortgage payments) and plan to move forward on foreclosing on delinquent borrowers more quickly. But until the high unemployment rate declines, the number of foreclosures will likely not fall. In 2010, one in 45 U.S. homeowners received a foreclosure default notice signaling a pending foreclosure, and those owners are not paying their assessments.
Foreclosures are everywhere. The states with the highest number of foreclosures include Nevada, Arizona, Florida, California, Utah, Georgia, Michigan, Idaho, Illinois and Colorado. It has been reported that lenders are abandoning properties in some communities.
The big news in 2010 is that the number of completed foreclosures rose significantly, Blomquist said. As the loan modification programs wind down (the Obama administration says most of those who qualify have already gone through the system and the rest are, it seems, out of luck), additional foreclosures will be completed.
So, here is the bottom line: 2011 doesn’t look like it’s going to be a great year for California community associations that will still be struggling with record high bad debt and unpaid assessments.