We've all heard the cliche, "Location, Location, Location". My Uncle Sal, the one who has never owned a thing in his life, would say "It's all about Location". Every buyer knows the phrase. I even know of a real estate agent who has a discreet tattoo proclaiming those three words. How cool is that?
Location #1
Lafayette, CA is an upscale bedroom community of roughly 20,000 upper middle class families. In 2005 the income for Lafayette was around $111,400. This last August showed 38 home sales for an average of $1,212,500. Lafayette has a home town feel to it. Not many first time buyers can afford to buy in Lafayette.
Location #2
Less than 20 miles away you'll find the town of Pittsburg, CA. The raw numbers of Pittsburg paint a different picture. Average income for 2005 was roughly half that of Lafayette. Pittsburg sold 44 properties in August for $406,000. Pittsburg is a blue collar town. If you are a first time buyer, Pittsburg might be your starting location. Looking for investment property - look at Pittsburg.
Two Calls
This week I was contacted by two different homeowners. One from Lafayette, the other from Pittsburg. Both had the very same Lender (a very big lender). Both bought their single family homes just months apart. Both had fallen behind in the mortgage payments and were looking for help. That's about where the similarities end.
Lou in Lafayette
Lou called me because he was behind on his mortgage in Lafayette. He was just over 3 months behind when the Lender filed a Notice of Default. This is the first step in the foreclosure process. In talking to Lou I found out that he had some good equity in his home. He bought this house after selling his prior house in Walnut Creek. He applied the proceeds of the sale to the purchase of the new one. We estimated his position at roughly 65% loan to value.
Peter in Pittsburg
Peter contacted me just days later. He too was behind but was calling to learn more about doing a short sale in Pittsburg. Peter wasn't just behind - he was very behind. Peter hadn't made a single payment in over 7 months! In talking to Peter I found out that he was a first time buyer. He bought using a 80/20 first and second mortgage. His property value had declined so Peter was now upside down in his position. I asked Peter when his Trustee Sale was scheduled. "What Trustee Sale?" was his reply. The one that usually follows the filing of the Notice of Default. "But I don't have a Notice of Default!"
It was true. I looked it up. A Notice of Default had not been filed.
This got me to thinking. Why would a very large lender put one homeowner into foreclosure and not another? Had Peter slipped thru some sort of crack? Perhaps not.
The big picture
From a lenders point of view, every loan on their books is an asset. It may be an under performing asset as it would be in both Lou and Peter's case, but an asset is an asset.
When that loan has gone bad the typical remedy is to send it to foreclosure. The homeowner will either bring the loan current, refinance the loan, or in the worst case scenario the property goes to Trustee Auction and is sold at a loss or becomes a bank owned property.
Equity is the key
If the property has equity, it will sell at auction. If a property has no equity, chances are there will be no bidders and that property ultimately becomes an REO. When a bank becomes the homeowner as it does when the property becomes bank owned, it no longer carries it on their books the same way. Think of it now as a liability. It's very detrimental to their financials to carry REOs.
So here's we have this very big lender. They need to look as solid as possible to their investors. Their livelihood is dependent on their ability to sell loans to the secondary mortgage market now and in the future. Those investors look at financial statements. Remember there is a big difference between how a bad loan is carried on a company's books and how a Bank Owned Property is carried.
Business Decisions
Bad loans are going to happen. But when they do happen does the lender have a choice as to how they treat those borrowers? They do. And furthermore I believe they are making a conscience decision as to which properties to aggressively attack and which properties to temporarily ignore. I believe they are making a business decision in order to manipulate how their financial looks to an outside investor.
They chose to aggressively went after Lou in Lafayette because he has equity. The lender knows Lou can sell the home if he has to. Lou can refinance the loan. In the worst case scenario, the property would go to auction and there would be many bidders. Chances are very slim that Lou's home would ever be bank owned. The lender knows this.
Peter in Pittsburg has been ignored. Yes, the lenders collection department called him repeatedly. So much in fact that Peter changed his phone number. The Lender is trying to collect his arrears. They also know Peter is upside down. They know Peter cannot refinance. They know at the auction the property will not sell and hence become a REO. For that reason they have chosen not to file the Notice of Default on Peter. Instead, they have allowed Peter to stay in the house.
How long will Peter be able to stay? Nobody knows for sure. Eventually the NOD will have to be filed. Eventually peter will have to move. His credit is already trashed. His equity? He never really had any. So Peter keeps on living like he has for the last 7 months.
So sometimes it isn't all about Location. Sometimes it's more about Equity. I'm not going to be the first one to run to my local tattoo artist yelling "Equity, Equity, Equity!"
Not just yet.
Labels: Facing Foreclosure, Fighting Foreclosure, Lenders, loss mitigation, market conditions
Tuesday, August 26, 2008
