The mystery: why are foreclosure notices increasing but actual foreclosures decreasing in Santa Clara County?
The above article mentions an interesting phenomenon that occurred last month in Santa Clara County’s foreclosure market. Between August and September of 2009, the actual number of homes being foreclosed (either sold at auction or returned to the bank as REO properties) decreased, while filings of Notices of Default and Notices of Trustee Sale remained consistent.
“Lenders foreclosed on 415 homes last month, down about 5 percent from August.….. Of these, 109 homes were sold at auction to third parties and the remaining 306 were taken back by the lender. …… At the same time, lenders filed 1,257 notices of default, the first step in the foreclosure process, and 1,027 notices of trustee sale, the final step before actual sale of a foreclosed home. The numbers for August were almost the same.”
The author doesn’t really reach a conclusion but leaves us wondering as to why this may be happening.
Well, I will pull data from the MLS in an attempt to interpret what may be happening in our back yard.
But first, it is important to understand the process of foreclosure. Simply put, when a person receives a Notice of Default from the lender, they have 90 days to cure the default, or a Notice of Trustee Sale will follow, scheduling a date and time by when the property will be sold at the County Courthouse. By the Notice of Trustee Sale date, if the delinquent amount, plus penalty and interest is not cured, then it is sold. But there is a wonderful vehicle which by now everyone has heard, which can stop that foreclosure if executed properly: the Short Sale.
If, from the time that the lender issues the Notice of Default and before the auction date, an experienced San Jose Short Sale Agent can bring in a qualified buyer who is willing to take the property off the sellers’ hands and if the lender agrees to the terms of the sale, then that foreclosure process is stopped with the closing of escrow on the property in question.
What the article did not factor into the equation were approved short sales that closed escrow. I pulled data about Short Sales that actually closed during the months of August and September.
For the Month of August 2009, in Santa Clara County 187 properties identified as being short sales (both single family and condo/townhomes) successfully closed escrow (Fig A). But in September 2009, 251 properties identified as short sales closed escrow (Fig B). I’m not a mathematician, but by my estimate, that is an increase of 25% from August to September of short sales approved by lenders. And more than sufficient to explain the disparity as to why the notices are increasing but why the final result is decreasing.
So let’s look at the complete picture in September 2009 in Santa Clara County. Over 2000 notices starting the foreclosure process goes out to homeowners. Of those, approximately 1000 attempt a short sale and 251 of them are successful in preventing a short sale (Campbell Communication conducted a survey in February 2009 of Realtors and concluded only 23% of short sale are successfully completed). Of the 750 who were unsuccessful in their short sales, 415 of them actually get foreclosed (109 of them lose their homes to auction and another 306 of them are evicted and the lender takes over their homes). That leaves 1335 people still stuck in foreclosure limbo — the original 1000 who chose not to do a short sale and the remaining 335 who were unsuccessful with their short sales but have not gotten around to being foreclosed yet — wondering when they will be evicted. And these homes that have not been foreclosed or sold through short sales are often referred to as the shadow inventory of bank properties. Depending on how this inventory will be released, it could have a tremendous impact of flooding the market with cheap, bargain priced bank owned (REO) properties. Let’s hope the lenders will release them gradually, rather than all at once or, even bettter, allow more of them to be sold as short sales so they can stop the influx of undervalued properties from hitting the market place and bringing down home values.
Fig A . August 2009
Fig B. September 2009
thanks for filling in the statistical picture. If we took a snapshot in say, six months, how far do you think short sales will go addressing properties in the foreclosure process?
That’s tough to estimate Eric. Unemployment seems to be the biggest driver of foreclosures right now. Until there is job security, those seeking employment will will continue to miss their mortgage payments and will be pushed into foreclosure, because without employment, you cannot get any loan modification. A Catch 22 situation.
Sun Micro just announced a plan to lay off 3,000 employees. With news like this, things it doesn’t seem like the tide of foreclosures will be reduced anytime soon, say in 6 months.
Here is a problem that is building that people are now starting to talk about: shadow inventory. Typically, the homes that receive NODs (notice of default) will either end up successfully selling short or end up as a foreclosure. But the ones that are sitting in limbo (shadow inventory) is for whatever reason, just sitting there without hitting the market, and once they hit the market, we will have a glut of bank owned inventory diluting home values.
But the good thing is that lenders like Wachovia have determined it is in their best interest to work with Realtors and borrowers to complete short sales and have set up expedited programs to get good offers approved quickly. So as more lenders commit resources to short sales – as they know that houses that are still occupied and lived in will command higher priced offers than vacant bank owned properties – the quicker the inventory of foreclosed and often damaged properties will be depleted and quicker we can get back to a normal market.