Prime loan borrowers may be poised to face home foreclosures

Las Vegas real estate agent Frank Nason has read numerous reports about Nevada leading the nation in foreclosures and the “phantom inventory” of foreclosures coming down the pike.

He’s yet to see it. Where are all of these foreclosed properties in Las Vegas?

In analyzing the first six months of Clark County Assessor records, Nason found that banks are shedding single-family properties at a much faster pace than they’ve been acquiring them through foreclosure.

Through June, financial institutions acquired 6,472 real estate-owned properties and sold 11,254, the broker-owner of Residential Resources reported. He defines an REO, or bank-owned property, as any transaction in which the lender acquired the property through a trustee sale.

Las Vegas-based SalesTraq showed REO inventory declining from nearly 16,000 in January to 13,200 in June.

The banks’ voluntary foreclosure moratorium, combined with increased investor activity in Las Vegas, may explain the drop in foreclosure inventory, Nason said.

That’s about to change. After the moratorium was lifted in March, bank-owned acquisitions jumped 55 percent in May and nearly 40 percent in June.

“If this trend continues and the amount of properties disposed of stays relatively constant, then we can expect to see a new glut of REOs on the market in the third quarter and, most likely, continued downward pressure on pricing,” Nason said in a blog posted at residentialresources.com.

He’s heard that Fannie Mae and Freddie Mac foreclosures could increase by 400 percent to 500 percent by the end of the year.

“I don’t see the huge wave, but we hear about the inventory being held back,” said Mercedes Tan, owner of Preservation West, a local business that cleans and maintains foreclosed homes. “It’s a property tax issue. The banks don’t want to take on property tax.”

Tan said she gets about 15 homes a week, primarily from Wells Fargo. She takes over a lot of homes that are facing homeowners’ association fines for dead lawns and health department notices for green water in swimming pools.

Although the first two waves of foreclosure losses came from subprime loans and borrowers who defaulted when their adjustable-rate mortgages reset — many of them speculators — the next wave will be prime loans, said Whitney Tilson, principal of New York-based investment firm T2 Partners.

These defaults will be due to job losses and home price declines that have left one-fourth of homeowners “underwater,” owing more on their mortgage than their house is worth.

“What we’re seeing in housing is prime borrowers and people who weren’t speculating now starting to default,” Tilson told the Review-Journal. “There are sobering implications for expected defaults, foreclosures and auctions in 2009 and beyond, which promise to drive home prices down further.”

Christine McNaught of Windermere Realty said bank-owned properties are still getting multiple offers in Las Vegas, which is exactly what the banks want. She wrote 50 offers in one week and only 10 percent went through. They were cash closings in 10 to 20 days.

Her office is being assigned about five foreclosures a month from Wells Fargo and other banks.

“You’re not getting a huge influx of foreclosures on the market right now,” McNaught said. “I doubt if they’re going to flood the market with 20,000 foreclosures. We haven’t seen it.”

Her data for June showed 12,545 properties for sale in Las Vegas and 12,821 properties in escrow, awaiting closing. Of those for sale, 3,266 are bank-owned and 5,296 are short sales, homes offered at less than the mortgage balance and requiring lender approval.

The actual number of homes available for sale in Las Vegas, including foreclosures and short sales, is much smaller than the 20,613 units reported by the Greater Las Vegas Association of Realtors, industry observers say.

Las Vegas-based business advisory firm Applied Analysis is showing 13,028 properties listed as available for sale, down 9,224 units, or 41.5 percent, from a year ago. About 5,100 units are identified as short sales, which leaves about 7,900 units available for sale in a normal transaction.

The number of units in contracted status — either contingent or pending — has risen dramatically in recent weeks to 13,456, Applied Analysis reported. Contingent sales (9,681) are contingent upon some other action taking place, while pending sales (3,775) are awaiting customary closing procedures.

Las Vegas continues to rank as one of the nation’s most distressed areas for foreclosures.

For the first six months, Clark County foreclosures rose 84.3 percent to 23,588 from 12,800 in the year-ago period, Sacramento, Calif.-based investment advisory firm Foreclosures.com reported. Preforeclosures increased 34.8 percent to 47,467 from 30,922 a year ago.

Estimates for the next wave of foreclosures in Las Vegas range from 20,000 to 30,000 homes, though nobody has been able to verify those numbers, said Richard Lee, public relations director for First American Title Co. of Nevada.

He hasn’t seen much of an increase in foreclosure activity.

“I don’t know, it’s kind of a lull,” Lee said. “Banks are holding back and trickling it into the market a little at a time to sustain value. That is what’s happening.”

Lee said he thinks the foreclosure crisis in Las Vegas will worsen, but he added that nobody can accurately predict where the market is going.

“Anybody who says they have a handle on this is smoking something,” he said.

The Obama administration’s $75 billion Making Homes Affordable Plan and lenders’ commitments to loan modifications have accomplished little to stem the tide of foreclosures, statistics show.

Since 2007, fewer than 500,000 loan modifications have been completed, according to the Center for Responsible Lending. Meanwhile, 60-day mortgage delinquencies surpassed 2.5 million and total foreclosure starts are approaching 3.5 million.

Keith Ernst, the center’s director, in testimony before Congress, said that 1.5 million homes have already been lost to foreclosure, and that’s just the tip of the iceberg. Another 13 million foreclosures are expected over the next five years.

“Many industry interests object to any rules governing lending, threatening that they won’t make loans if the rules are too strong from their perspective,” Ernst said. “Yet it is the absence of substantive and effective regulation that has managed to lock down the flow of credit beyond anyone’s wildest dreams.”

For years, mortgage bankers told Congress that subprime and so-called “exotic” mortgages were not dangerous. Regulators not only turned a blind eye, but aggressively pre-empted state laws that sought to rein in some of the worst subprime lending, Ernst said.

Ernst has a relatively simple idea to get loan servicers to implement the loan modification plans: Create a mediation program that would require servicers to meet with borrowers and evaluate their loan modification eligibility.

Nevada isn’t the only state with a backlog of foreclosures. Egbert Oostburg of San Diego-based Project HomeWatch said banks are also holding back REO inventory in California and Arizona.

“It’s that hidden wave you keep hearing about. When is it coming? That’s the question,” he said. “We’re going to hit bottom eventually, but as long as the state and federal government put in these false bottoms, we’re not going to move forward and reach the true bottom.”

Oostburg said Congress recently passed a plan that allows banks with the Federal Deposit Insurance Corp. to lease foreclosed homes back to former owners for a five-year period, turning a nonperforming asset into cash flow while they ride out the market.

It will amount to a “land grab” by the banks, Oostburg said, when they kick owners out after the value returns and they can sell the home for a profit.

Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.

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