Where are all the Foreclosures?
January 25, 2010 by admin · Leave a Comment
There is a serious disconnect going on in the San Diego real estate market, one that is causing many people to wrongly conclude that the San Diego market is at a bottom and ready for a revival in 2010.
The disconnect has to do with foreclosures – or that is, the lack of foreclosures in the San Diego marketplace.
2009 saw four concurrent foreclosure moratoriums in California – this meant that almost none of the homeowners who were in default and threatened with foreclosure could actually got foreclosed on in 2009.
The purpose of these moratoriums was ostensibly to give the banks time to modify borrower’s loans, but the banks have no interest in modifying anyone’s loans, so all the moratoriums did was put off the inevitable and back up the pipeline of homes that will go to foreclosure. That is why we saw so few foreclosures hit the market in 2009.
The reason we have not yet seen many in 2010 is a different one. The last moratorium ended in September 2009. Since then, the banks have been recording Notices of Default (the precursor to foreclosure) and Notices of Trustee Sale (foreclosure auction) at a feverish pace in San Diego County.
As of January of 2010, there are literally hundreds, and sometimes thousands of homes scheduled for foreclosure on a daily basis just in San Diego County alone. So here come the foreclosures, right?
Not so fast. Most of the homes scheduled for foreclosure auction (aka “trustee sale”) are deliberately taken back by the bank. They do this by designating the opening bid price to be above market value, ensuring that no one will bid on it and the property will go back to the bank. This, despite the fact that the bank will almost always net more money by selling the property at auction versus taking them back, processing them, rehabbing them and then putting them on the market as REO’s (“Real Estate Owned” by the bank).
So why would the banks do this? The answer is simple. The banks are cooking their books to boost their reserves (on paper anyway) and make themselves appear more solvent than they actually are.
For example – when a bank takes back 1000 homes they were owed $500,000 on, they can count these homes as $500 million in assets. Now they know that when they actually sell these assets, they will net significantly less (i.e. in San Diego, maybe half of what they were owed, or $250 million), so they would rather hang onto to them in order to boost their bottom line and inflate their reserves (again, on paper anyway).
Some have speculated that this is so they can pay back the government faster and give their executives bonuses sooner.
Regardless of the reason, eventually the banks are going to have to sell these homes. They can’t sit on them forever, not just because they will eventually need the money, but also since while they do, these homes are falling into deeper and deeper disrepair, and the municipal fines for dead lawns, attractive nuisances, unpaid HOA’s etc. are adding up to bigger and bigger numbers.
Yes, eventually, these homes are going to hit the market, and when they do, the San Diego market is going to feel it.
