San Jose Short Sale Agent: Silicon Valley Foreclosure Prevention Specialists

In less than a week 2009 will leave us behind and we will greet the new decade by welcoming 2010.   In the last 3 years of the past decade, we have seen a dramatic shift in the real estate market place.  A shift that most of us could not fathom in the beginning of the passing decade; yet reality bit us hard and we got to live through an epic correction in the real estate market place.

Are we out of it yet?  Of course not. Have we by-passed the worst of it?  Probably.

However, as long as Silicon Valley’s unemployment rate remains above 11% and the dreaded shadow inventory along with the toxic option ARM fiasco about to recast in the coming couple of years, things will not be back to normal and we will not be completely out of the woods for a few more years until the market fully corrects itself by ridding itself of the excess capacity of distressed properties.

But, I don’t want to imply that there is only gloom in the horizon.  According to newly released sales data from CAR (California Association of Realtors), we here in Santa Clara County did fairly well in the past 12 months: the median price of our homes increased by 17%! I am quite certain that increase was largely fueled by the First Time Home Buyer Tax Credit Incentive program.

We went from $515,000 in November 2008 to $605,000 in November 2009. (Chart A)  That is certainly a step in the right direction towards price stabilization on the one hand, but a bit disconcerting because the affordability index has now fallen for two consecutive quarters and is now on a declining slope.   (Chart B)

I personally don’t believe it is in our best interest to get back to the peak prices of April 2007 when the median home price reached $868,410 (Chart C) and only about 25% of the first time homebuyers in California could afford to buy a median priced home (keep in mind that the median price in California is significantly less than Santa Clara County).  As the data in Chart C demonstrates, the median home price is inversely proportionate to the Affordability Index.   It is better for us to have lower prices so more people can afford to become home owners.  But regardless of what I think, the market will dictate prices.   We will see next year how the market reacts to the changing economic factors.

Here is one of my favorite bloggers who writes often about a topic very close to my heart: the option ARM fiasco brewing in California. He has access to and extrapolates some amazing data.  I wish I had access to such data.   In this particular post, he lays out simply why option ARMs will be the next big wave of foreclosure headache coming down the road.  And the incredible fact is that according to him, 78% of these time bombs have yet to recast. On top of that, the bulk of these (58%) problem loans originated in California.   

Talk about a problem coming down  the  road…..

Read this post.

I have been talking about the problems brewing in the Alt A and more specifically about Option ARM loan markets.  Alt A loans reside between prime and sub-prime loans in terms of credit risk from a lender’s perspective and are characterized by the lack of documentation or proof of assets; they were often called Liar’s loans.   A good explanation of Alt A can be found in this article.

CAR’s data regarding activities in Sub-Prime and Alt-A loans for 2009 revealed some disturbing trends in the coming months.

Look at the numbers of Alt-A loans out in the market: 632,215 or 5% of all loans in California. And of those, 70% are ARMs or adjustable rate mortgages – meaning their teaser rates will reset some time in the future.   The bulk of the Sub prime mess has already reset and in the coming future only a small number is scheduled to reset in the next 24 months (15.6%).  But look at Alt-A by comparison.  Only 46.9% have already reset and look at the bomb that is ready to reset within the next 24 months as of May 2009!  40.4%! Unfortunately, there were no dollar figures associated with this graph. And buried in that number is the truly toxic Option ARM which is almost a guaranteed foreclosure simply waiting to happen. If people think the sub-prime mess is over, they are probably correct.  But look at the beast that  is coming down the road; we may only be half done.

As of Jan. 1, 2010, a mortgage broker will be deemed a fiduciary with a duty to place the borrower’s economic interest above his or her own. The Office of Real Estate Appraisers (OREA) will have regulatory oversight of appraisal management companies and will implement a registration system for appraisal management companies, including fingerprinting and background checks for persons with operational authority, as defined. The new law also clarifies what conduct constitutes improperly influencing the appraisal process by anyone with an interest in a real estate transaction.

Other significant laws also are in place. For detailed information, please visit www.leginfo.ca.gov on car.org.

This is from the CAR legal update informing Realtors  of changes in the law that may affect us.

I did not realize that Mortgage Brokers did not have a fiduciary duty to their clients!  The first document a Realtor signs with his/her client is an Agency Relationship Disclosure which puts into writing the fiduciary obligation to put the client’s interest ahead of our own economic interests.   No wonder some of these unscrupulous brokers were pushing option ARM loans on their clients………..

As a San Jose Short Sale Agent, I wanted to know what percentage of the properties listed in the local MLS represented distressed properties.   Rather than rely on other people’s interpretation of the data, I decided to pull my own directly from the MLS.

I first pulled all of the particular types of property (either Single Family Residences or Condo/Townhomes) which were in active status  today in Santa Clara County.  Then I pulled from all of the same properties the ones that were identified by the listing agents as Short Sale and as REO (bank owned properties) to get the results.

The numbers were significant, but a bit less than I had anticipated.

Single Family Residences – Total Distressed Properties represented 26% of the properties for sale.

Condo/Townhomes - total distressed  properties represented 33% of the properties for sale.

Given the high rate of unemployment in California and the current status of the Alt-A and Option ARM loans resetting in the coming months, I believe, unfortunately,  this number will steadily increase.

Article
I have been of the opinion, that our next wave of problem mortgages will be the option ARMs.  Here is a situation where many homeowners took a chance at a gamble and failed; and the bill is coming due very soon with most being unable to meet their obligations.  If this is not a recipe for disaster, I don’t know what is……..  None of these homeowners will be eligible to re-finance these loans, so their future is laid out for them already.

Finally some hard data for the Bay Area has been revealed.  Between 47,000-57,000 loans with a value of $28 – $31 Billion in option ARMs are located here in the Bay Area.  The bulk of these are set to re-cast between 2010 – 2012.   Here are some additional details.

Article

The above article boldly declares that foreclosure activities have dropped 18% reduction in Notices of Default being issued and 11.5 % reduction in Notices of Trustee Sales last month in Silicon Valley.  On its face, that seems like fantastic news, but we have to now consider something which happened today. How will the law which enacted a moratorium to stop foreclosures ending impact the activities in the coming months?  Of course only time and data will tell…….

However, the above question may be a moot point unless the two root  causes of foreclosure are addressed in California: unemployment and  the looming option ARMs problem.   Unless these powerful forces are somehow resolved or mitigated, we may be looking at years of foreclosures to come.

Please read this Article

As a San Jose Short Sale Agent, I am a firm believer that the second wave of foreclosures will be triggered by multi billion dollars worth of Option ARMs recasting in the next few years. The problem has been brewing quietly and is the big secret in the industry today.   It is the pink elephant that no one has been speaking about, but with the passing of time, it continues to grow and becomes too difficult to ignore.   The above article actually put numbers behind the problem that the country and affected homeowners will be facing in the coming years.  Make no mistake about this, option ARM will be a huge problem affecting the mortgage market and the subsequent impact it will have on foreclosures. Homeowners who own these types of loans will have a huge wake-up call in the coming months and years.

News Article Here

So which group of economists is correct, are foreclosures truly decreasing or are they going to be increasing?  Depends on the data, I say.  As a San Jose Short Sale agent, what concerns me are the two items mentioned in the article.  First, I think everyone will agree that unemployment will be a driving force behind foreclosures in California. Unless we can find jobs for California’s 12% unemployed, even with loan modifications, it’s just a matter of time before these folks will face foreclosure.  The mortgage modifications for most people will simply delay the inevitable by a few more months, unfortunately.

Secondly, there is the issue of the wave of re-setting adjustable mortgages which are scheduled for the next couple of years, chief among them the deadly Option ARMs. Once  these start to re-set (and California has the most Options ARMs of all other states),  in conjunction with high unemployment rates, we are going to see some serious carnage.  I hate to sound so pessimistic, but those are the fact that I see driving foreclosure activity in the coming few  years.

This is the ridiculous mortgage that people were offered during the crazy heydays of “anyone can get a mortgage” era of a few years back.   Simply put, several payments options were given to the borrower, but the one that was selected most often was the low teaser rate option to pay less than the interest payments and have the deficiency tacked on the end mortgage; hence, the principal actually increases with time, rather than decrease!   This was also referred to as the negative equity loan: your equity was actually decreasing rather than increasing.  This was the Option Adjustable Rate Mortgage (ARM).

This was a pure gamble!   You were gambling that the housing prices would continue to increase and you would be able to re-finance your way out of the negative equity situation some time in the future.  Naturally, during 2006 or 2007, everyone was so drunk on the prospect of instant wealth, most of the borrowers who were presented this option took it, so they could buy a little more house than they would otherwise be able to afford. Unfortunately, the gamble did not pay off.

Throw 12% unemployment into the equation in California and see if this will not present itself as a serious crisis coming down the line.    As a San Jose Short Sale Agent and every Certified Short Sale Agent worth his/her designation knows that the re-setting of these option ARMs will be the next wave of foreclosures.