Mortgage Industry Rethinks Expected Onslaught of California Foreclosures

Market status

It's not that foreclosures ever stopped, really. But there hasn't been a massive onslaught like Kern County saw last year when foreclosures nearly doubled between January and August.

Foreclosures in the first nine months of this year are below about 14 percent from the same period last year, from 6,827 to 5,858, according to the Kern County Assessor Recorder's Office.

This, aside several landmines buried in the real estate landscape that could spur another hefty round. This has a large impact on counties effected by in California mortgage lending. There is, of course, Kern County's 14.3 percent unemployment rate, which does not help.

And there's the resetting of option adjustable rate mortgages, one of the more exotic financing models that flowed freely while performing the real estate boom.

Option ARMs, as they're known in the industry, give borrowers a low initial home loan payment that loses ground on the principal balance, however over time the minimum payment increases, sometimes to two or three times its original amount. California carries a uneven share of those loans.

The the previous year discretion ARMs were made in large numbers was 2007, and typically they reset after three or five years, so a bunch of borrowers with such loans might start defaulting next year and continue into 2012, said Dan Granillo, an agent with Grassroots Realty in Bakersfield.

On the other hand, banks may work with those borrowers to avoid another foreclosure flood. "A lot of them seem to be open to short sales," Granillo said, describing agreements with a lender to sell a real estate for less than the current mortgage.

Moratoriums on foreclosures

Another achievable foreclosure trigger is the expiration of some key moratoriums.

A hint of what could be debut occurred seven months ago, when mortgage giants Fannie Mae and Freddie Mac lifted their moratoriums. There were 1,750 defaults filed in Kern County in March, the most on record. Three months later in June, the county had 1,045 foreclosures, another record.

It might have been worse.

Last year, California lawmakers passed SB 1137, which prevents lenders from filing a observe of default on definite loans until 30 days after contacting the borrower to assess their financial case and explore alternatives to home foreclosure. The law applies to loans made from 2003 to 2007, and expires in January 2013.

This year another law added 90 days to the foreclosure process for lenders and servicers that don't have a state-approved loan modification program in place. That law, which applies to loans taken out between 2003 and 2008, will sunset in 2011.

Defaulting with impunity?

Meanwhile, banks seem to be taking their time foreclosing on homeowners who default. Many have remained in their homes aside going months apart from making payments.

"For whatever reason, banks seem awfully reluctant to take that step," said Kern County Assistant Assessor Tony Ansolabehere. "I see them deter the trustee sale over and over again, and I don't understand why they're performing it."

If there's a delay, it's because the industry is trying to work with distraught homeowners to modify their loans, said Beth Mills, a spokeswoman for the California Bankers Association.

"Some lenders are doing loan modifications or imposing voluntary moratoriums to determine if people qualify for any of the programs that are out there," she said.

Either way, the effect is to artificially deject supply and boost sale prices, said appraiser Gary Crabtree, producer of the closely watched monthly Crabtree Report.

"The free market forces that would normally be at work have been stunted by meddling, so this is an eccentric market," he said. "You driveway around and social homes with brown yards are all over the place, however they're not on the market."

Banks are sitting on some 3,000 lender-owned properties in Kern County, according to the Assessor-Recorder's Office.

Bank of America insists banks are not hoarding inventory.

"We do not hold foreclosed properties off the market," said spokeswoman Jumana Bauwens. "The vast majority of mortgages serviced by Bank of America are owned by third-party investors. We have an obligation to them to prepare foreclosed properties for market and sell them as efficiently as possible."

Motivation to move houses

At the same time that lender-owned properties and manufactured homes are piling up, tax incentives and the lowest prices and interest rates in years are driving up demand.

"There's not enough inventory, so you're seeing bidding wars again," said Abel Ramos, an agent with A&A Realty in Bakersfield. "In the last three days, I've submitted a bunch of offers above list price, and still didn't acquire the houses."

Banks surely realize that won't continue if they dump everything at once in a dragon sale, so they'll likely keep on releasing property slowly, Ramos said.

"The strategy is working for them," he said. "Why change it?"

Banks also have an incentive to sit on defaults for a while rather than complete the foreclosure process. When they have foreclosures on their books, regulators insist they bulk up reserve funds to cover toxic assets.

"That's really failing for them, because it takes cash out of operating funds," said John Emery, dean of Cal State Bakersfield's School of Business and Public Administration. "They'd rather just abandon it in a non-performing assets category."

Banks say they're just trying to keep borrowers in their homes.

"Until a foreclosure is completed, Bank of America continues to exhaust every achievable discretion to qualify clients for modification or other solutions," Bauwens said.

In spite of those efforts, the economy and high unemployment dig out additional foreclosures inevitable, but they won't be drastic, said Mills of the California Bankers Association.

"There will be more stunt waves in the future," she said. "But generally banks will try to lucid those as quickly as possible.

"They don't yearn to be in the business of owning homes."