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Shari Olefson is an attorney-mediator and author of Financial Fresh Start: Your Five-Step Plan for Adapting and Prospering in the New Economy. Her quotes/comments can be found in publications such as the Wall Street Journal, Forbes, and USA Today, and she makes appearances on CNN, CNBC, Fox, PBS, MSNBC, and CBS.
There’s no question that the housing market is well along the road to recovery. Sales are going up, prices are increasing, and that’s good news for all of us. But for some folks, the nightmare is not even close to over yet. Instead, an estimated 2 million homeowners are in the land of the zombie foreclosure.
The foreclosure process varies by state, but inevitably begins with the bank sending the homeowner a Notice of Default. That initial notice is then followed by the balance of the state’s foreclosure process, which is lengthy and can be prolonged by numerous delays.
During that process, the homeowner still owns their home. Zombie foreclosures happen when the homeowner assumes they have lost their home and moves when the bank begins foreclosure, but the foreclosure process is never completed. So both the homeowner and their title are caught in between this world and the next, like a zombie.
The problem is that once the homeowner leaves, there’s an opportunity for real estate taxes to go unpaid and the property to go unmaintained, which often leads to code enforcement violations, vandals, and even squatters. You wind up with a whole slew of new problems—which the homeowner, not the bank, can still be liable for without even knowing it.
Traditionally, the point of foreclosing on a home was to sell it and pay back the loan, but a lot has changed. For example, in areas where property values went down, and costs and delays skyrocketed—like HOA fees or the time it takes to foreclose—it might not make financial sense anymore for the bank to foreclose.
In other words, after they pay off those expenses, there might not be any money left to pay back the loan, so why bother? Another big issue has been all the new regulations. For example, we’ve had a $26 billion settlement in the attorney general robo-signer case, and another $9.3 billion settlement in the case with federal regulators.
Banks can get in big trouble now if there are any errors in the foreclosure process, so in many cases, they’re afraid to move forward with those lawsuits. We’ve also seen some of the biggest foreclosure law firms shut down, and combined with huge backlogs in the courts, it can sometimes take 600 or 700 days to foreclose. These are all reasons behind zombie foreclosures.
Homeowners can take steps though, as well as anyone else adversely impacted by a zombie foreclosure, such as HOAs or municipalities. Your first step when fighting back against a zombie foreclosure is to check the county or tax records. These are online in most areas now and will show you if you’re still on the title.
Anyone who has been foreclosed on might want to do this, if only to be sure. If you see that the bank has started but not finished a foreclosure, contact the bank and try to find out what their plans are.
The good news is that most banks are far more open nowadays to negotiate a short sale, deed in lieu of foreclosure, or agree to a loan modification than they were when most of these foreclosure cases were started.
The next step is to review current records for past due taxes, code violations, or other liens, and check out the property condition. You want to make sure you do what you can to avoid any more damage than what has already occurred and to also secure the home.
Depending on the circumstances, you may be able to rent the home or move back into it—a happier ending than most zombie movies get to see.
The national delinquency rate moved against the seasonal trend and declined from the third to fourth quarter, while foreclosure starts and the foreclosure inventory rate made history with their decreases, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.
In the fourth quarter of 2012, the national delinquency rate fell to 7.09 percent, a quarterly and yearly drop of 31 and 49 basis points, respectively, the MBA reported Thursday.
The delinquency rate is seasonally adjusted and includes one-to-four-unit residential properties. The MBA noted delinquency rates typically display an increase from Q3 to Q4, but even the non-seasonally adjusted rate dropped, falling 13 basis points to 7.51 percent.
The serious delinquency rate, which includes 90-plus delinquencies and loans in foreclosure, stood at 6.78 percent after shedding 25 basis points from Q3 and 95 basis points from the Q4 2011.
Foreclosure starts were down to the lowest level since the second quarter of 2007 after representing just 0.70 percent of loans in Q4, a decrease from 0.90 percent in Q3 and 0.99 in Q4 2011.
The foreclosure inventory rate also shrunk, falling below 4 percent to 3.74 percent. Compared to a year ago, the rate is 64 basis points lower and down 33 basis points from Q3.
“The foreclosure starts rate decreased by the largest amount ever in the MBA survey and now stands at half of its peak in 2009. Similarly, the 33 basis point drop in the foreclosure inventory rate is also the largest in the history of the survey,” said Jay Brinkmann, MBA’s chief economist and SVP of research.
The MBA also reported the combined percentage of loans at least one payment past due or in foreclosure was down to 11.25 percent on a non-seasonally adjusted basis, which is a quarterly and yearly decrease of 46 basis points and 128 basis points, respectively. Amid the positive developments, Brinkmann noted one cause for concern.
“One cautionary note is that the 90+ delinquency rate increased by 8 basis points, reversing a fairly steady pattern of decline and the largest increase in this rate in three years. While we normally see an increase in this rate in individual states when they change their foreclosure laws, 38 states had increases in the percentage of loans three payments or more past due, indicating that we could see a modest increase in foreclosure starts in subsequent quarters,” Brinkmann said.
On a non-seasonally adjusted basis, the 90-plus delinquency rate was 3.04 percent in Q4.
The survey also examined mortgage performance for FHA loans, which were mixed across the board. “While the foreclosure starts and foreclosure inventory percentages both fell, the delinquency percentages generally remained flat or increased slightly, particularly the percentage of loans 90 days or more past due,” Brinkmann said. “However, 44 percent of the FHA loans that are seriously delinquent were made in the years 2008 and 2009, while loans made in those years represent a smaller share of FHA’s overall book of business.”
Brinkmann also noted Florida and the judicial process in some states continued to be problem areas for foreclosure inventory. MBA data shows foreclosure inventory is 6.22 percent in judicial states compared to 2.13 percent in non-judicial states. “In those cases, the ultimate reduction in the number of loans in foreclosure will have less to do with the recovery of the economy and the housing market than with the return to reasonable foreclosure timelines,” Brinkmann explained.
In addition, Florida’s high foreclosure inventory rate of 12 percent is also impacting the national rate, according to the MBA. The next three states with the highest foreclosure inventory rate were also judicial: New Jersey (9 percent), New York (6 percent), and Illinois (6 percent).
With the ongoing housing recovery, the foreclosure market is also stabilizing and foreclosure prices are bottoming out, according to a report from FNC Inc.
Foreclosure price discounts are now at pre-housing crisis levels, averaging 12.2 percent in Q4 2012. In 2004, foreclosure discounts hovered near the same levels, averaging around 12 percent. At the peak of the crisis, discounts for foreclosed homes averaged 25 percent, data from FNC revealed.
Discounts though tend to be more steep for low-tier properties and average 18.4 percent, while high-end properties (more than $500k) have an average discount of 0.4 percent, with many selling above their actual market value.
The technology provider also reported single-family REO and foreclosure sales have been trending downward, accounting for 18.1 percent of sales in Q4 2012, down from 24.2 percent in the same quarter a year ago.
Out of all states, Michigan led with the highest concentration of foreclosure sales, with 56 percent of single-family home sales categorized as foreclosures in Q4 2012.
Rounding out the top five for foreclosure sales were Alabama (31 percent), Georgia (27 percent), Illinois (26 percent), Tennessee (25 percent).
When zooming in on performance in metro areas, FNC found Detroit had the highest percentage of foreclosure sales, 66 percent in Q4. The metro areas that displayed the biggest declines in foreclosure sales over a one-year period ending in Q4 2012 were Las Vegas, Riverside, Sacramento, Phoenix, and Seattle.
In some of those metros—Phoenix, Sacramento, Las Vegas, Riverside, plus San Diego—FNC also noted many buyers bought foreclosures at prices that exceeded market values. On the other hand, FNC found price discounts tended to be higher in metros located in judicial states, such as New York, Boston, and Philadelphia, where price discounts were 30-33 percent.
Although short sales continue to be utilized more and more as an alternative to foreclosure, RealtyTrac suggested the trend may change if the Mortgage Debt Relief Act of 2007 does not get extended.
According to RealtyTrac’s Q3 foreclosure and short sales report, short sales increased quarterly and yearly by 15 percent and 17 percent, respectively. Out of all residential sales, short sales represented about 22 percent of the total in Q3. “However, the scheduled expiration of the Mortgage Forgiveness Debt Relief Act at the end of this year could stifle this trend toward short sales,” said Daren Blomquist, VP of RealtyTrac.
The act, which will expire at the end of this year if not extended, allows borrowers to be excluded from paying taxes on forgiven debt from a short sale, foreclosure, or modification. “The prospect of being taxed on potentially tens or hundreds of thousands of dollars in additional income may motivate more distressed homeowners to forgo a short sale and allow the home to be foreclosed,” Blomquist continued. “Additionally, if the mortgage interest deduction is eliminated due to the fiscal cliff quagmire, it would give many underwater and otherwise distressed homeowners one less reason to hang on to their homes.”
On average, short sales—including non-foreclosure and foreclosure properties—were sold $94,896 below the loan amount. Pre-foreclosure sales—properties in default or scheduled for auction—were also up in Q3 and increased by 22 percent both quarterly and yearly. On average, pre-foreclosure properties sold at a discount of 27 percent compared to non-foreclosures, up from 25 percent in Q2 and 19 percent a year ago, according to RealtyTrac.
As for REO properties, purchases rose 19 percent from the previous quarter, but were down by 20 percent from last year. The foreclosure marketplace found REOs were sold 38 percent below the average price of non-foreclosures, up from 33 percent in Q2 and down from 39 percent a year ago.
RealtyTrac says that unlike the trend seen in recent years, sales of properties in pre-foreclosure outnumbered sales of REOs in the third quarter. Pre-foreclosures totaled 98,125 in Q3 compared to 94,934 for REOs. When combining REOs and pre-foreclosures, a total of 193,059 properties were sold in Q3, representing a 21 percent increase from Q2, but a 3 percent decrease compared to Q3 2011.
As a share, foreclosure-related sales remained relatively flat in Q3 and accounted for 19 percent of all residential sales, down from 20 percent in Q2 and unchanged from a year ago.
The states with the highest share of foreclosure sales out of all residential sales were Georgia (38 percent), California (36 percent), Arizona (34 percent), Nevada (31 percent), and Florida (26 percent).
Among the metro areas, California metros took the lead for having the highest share of foreclosure sales. In Modesto, foreclosure sales represented 54 percent of all sales. Other California metros with a high percentage of foreclosure sales included Stockton (53 percent); Riverside-San Bernardino-Ontario (47 percent), and Sacramento (40 percent). Non-California metros in the top 10 included Atlanta (41 percent) and Tucson (40 percent).
The landscape of homeownership has undergone significant changes in recent years: The homeownership rate has declined, but so has the cost burden of owning a home. Both of these trends are most prevalent among young homeowners, according to a recent report from Fannie Mae.
The national homeownership rate has declined in each of the past four years, according to the most recent Census data, which extends through 2011. The 2011 homeownership rate of 64.6 is 2.6 percentage points lower than the 2007 rate.
The decline among those 25 to 44 years of age is more than twice the overall decline.
This shift, which Fannie Mae attributes to the Great Recession, comes after a decade of steady homeownership increases in which young households played a major role.
Despite the recent declines in homeownership, the cost burden of owning a home decreased in 2011 and has “fallen substantially for young owners during the last four years,” according to Fannie Mae.
When measuring housing cost burden, analysts often look for households paying more than 30 percent of their gross income in housing costs, which analysts define as rental or mortgage payments combined with utility spending.
In 2011, the percentage of homeowners who fell into this category decreased by about one percentage point. In contrast, the number of renters in this category grew.
The percentage of 25 to 44 year-old renters who paid more than 30 percent of their gross incomes on housing costs rose 4 percentage points between 2007 and 2011.
In the same time span, the percentage of homeowners of the same age who paid more than 30 percent of their incomes on housing costs declined by 5.8 percentage points.
Rising affordability among younger homeowners can be attributed to low mortgage rates and perhaps “exits from homeownership by households who had high and unsustainable housing cost burdens,” Fannie Mae stated in its report.
Another factor is tightening mortgage standards, which “may have also helped to create a cohort of young homeowners who have housing costs that are better aligned with incomes,” according to Fannie Mae.
The report also noted growth for the single-family rental industry, which has attracted former homeowners who may be locked out of the market due to a foreclosure.