In the midst of the sub-prime mortgage mess, it shouldn’t be a problem finding foreclosed properties to buy—not necessarily on the cheap (this is California, after all) but at least readily available, right?
Not really.
There are plenty of foreclosed properties out there at the moment (the technical
term is REO, or “real estate owned” property). About 100 in Santa Maria over the last three months, according to an REO Database, which Realtors use to get foreclosure listings.
Out of the properties the Sun looked at, slightly more than a quarter of them (26 percent, to be exact) were for sale.
What’s happening with the rest? No one is entirely sure. Local mortgage and lending professionals contacted for this article had a variety of theories: Ideas ranged from Fannie Mae and Freddie Mac ceasing foreclosure sales to banks holding onto properties in order to drive up prices.
Larry Westcott of Westcott Realty said he’s seen his business from REO properties drop dramatically over the last year. In 2008, he had 40 such sales. This year, he’s had 11—all of them before March.
Part of the mystery may be explained by a policy enacted by Fannie Mae and Freddie Mac late last year. From Nov. 26 of 2008 through Jan. 9 of 2009, the lending giants suspended foreclosures of occupied single family and two- to four-unit properties.
After Jan. 9, a new policy called the Streamlined Modification Program was enacted. This, said Rick Luca, a loan consultant with American Mortgage Lenders of Santa Maria, has resulted in fewer foreclosures and more “loan modifications.”
Rather than a re-finance, which can be costly (or completely out of reach for someone facing a financial hardship that led them to default in the first place), Luca said a loan modification does just that: modifies the terms of the existing loan.
“It’s a modification of the original terms, an extension or lowering of the APR,” Luca said. “If they were able to qualify for a re-finance, the banks would say, ‘Fine, we’ll give you that,’ but a modification has significantly less costs involved.”
Local banks—that is, locally owned banks rather than local branches of national banks—are just as stumped as to where the foreclosure sales are. Local banks might broker a mortgage loan, but as a rule don’t finance long-term residential loans, said Community Bank of Santa Maria’s CFO Janet Silveria.
“That’s actually a big complaint directed at community banks and the attitude [of the public] towards banking in general,” she said. “Local banks are being swept up into this market of huge institutions that offer high-risk lending, when in fact we don’t have any mortgage loans on our books.”
To be fair, Silveria said Community Bank does have some REO properties.
“By nature of the lending we do … we offer small business loans,” she said. “The most effective type of collateral is real estate, and we have taken over some properties.”
Just how many?
“We have two,” Silveria said with a chuckle.
And to their credit, Community Bank’s two REO properties are currently up for sale.
Attempts to contact one of the “huge institutions” to see if banks that do underwrite mortgage loans are holding onto REO properties to drive up prices didn’t yield much in the way of answers.
A local Bank of America branch manager said they weren’t able to speak to the media, but did provide the Sun with a Los Angeles area code phone number for Bank of America media contacts. The individual at that number was out of the office, but did leave a Miami, Fla., area code phone number. As of press time, Miami hadn’t called back.
While Fannie Mae and Freddie Mac are pushing for more loan modifications in lieu of foreclosures, people facing foreclosure can find something of a silver lining, however small.
From the time a borrower defaults on a loan—generally after three or four months of non-payment—to the time they vacate the property, they’re living rent-free, said Larry Westcott of Westcott Realty.
In California, that “rent-free” window is generally no less than nine months, and in most cases can last up to a year. Westcott said he even has one case of a property being occupied for two years after the owner had stopped payment—although a scenario running that long is a bit of a stretch.
“I’m almost certain there was an attorney in the background,” Westcott said. “He obviously knew how to play the game.”
Contact Staff Writer Nicholas Walter at nwalter@santamariasun.com.
This article appears in Nov 19-26, 2009.