The most common question we’re asked lately is what can we expect for 2012.  While we don’t have a crystal ball, from what we can sense the simple answer is to expect more of the same.

Loan Modifications - Although many web posting talk about increased numbers of people getting loan modifications, we’re not seeing this in California.  If anything, lender willingness to make changes seems to be worsening perhaps forced by large demand and lowered response capacity.  For those who do get modifications, principal reduction remains rare with private modifications exceeding HAMP nearly 2-1.  Don’t look for any help from Washington.  The Treasury Dept. will not enforce any strong procedures recommended by their own Inspector General.  Treasury says that “participation is voluntary” so there’s nothing they can do.  Even the much advertised HARP2 program which was to take effect on December 1st, is now pushed back to at least March 2012. Real help would take an act of Congress but they’ve shown no real willingness to compel the lenders to be more responsive.  With an election year coming up and the Republicans and Democrats drawing battle lines, helping upside down property owners is not on their agenda.

Short Sales - This remains the safety valve for upside down owners who can’t hang on. Between SB458 in July and the Debt Forgiveness Relief Act which expires at the end of 2012, Short Sales remain the best means that owners have to avoid deficiency judgment liability and resulting taxes.  The real challenge is getting lenders to respond, especially Bank of America. In November, Treasury rules went into effect requiring lenders to designate a “single point of contact”, a person who will act as the relationship manager for everything. This sounds good in theory but only if the designated person really exists.  Already we’re hearing repeated horror stories of the BofA point of contact not responding to e-mails, phone calls, or any other attempt to get the system to work. So short sales die because of lack of response.  And with BofA planning to slash another 30,000 jobs, it is reasonable to worry that this will only get worse. Beyond BofA, the short sale market appears to be finding an understanding of how to respond to SB458 requirements which bar recourse for any deficiencies following a 1-4 unit residential short sale.  Junior lenders will remain in the driver’s seat… at least when they believe there may be post-foreclosure recourse that is collectible.  As always, the key to short sales is having an experienced, skilled, and aggressive Realtor pushing the lenders to get the deal done. Short sales is not a place for the meak.

Foreclosures - With the lack of modifications and confusion in the short sale market, foreclosures are on the rise everywhere. As of August, BofA increased their foreclosure rate 200% and said they want to double that!  In part, the foreclosure increases reflect a year-to-date change from the moratoriums that took effect after the robo-signer scandal in the Fall of 2010. Foreclosure rates are highest in States like California where there is no judicial supervision of the foreclosure process.  Increased foreclosures are scaring buyers who fear further price drops and with good reason.  Prices are down over 30% from their 2006 highs and market watcher, Core Logic, reports continuing prices declines of 1% per month. FNMA reports that 4.5 million homes are now delinquent.  The high levels of foreclosures is also resulting in record numbers of Real Estate Owned (REO) properties which lenders take back, particularly in the inner-city, lower-income areas.  But rather than resell to individual homeowners, lenders have been selling these in large blocks to investors who will then rent the homes out.  As has been observed, this process is quickly unwinding the long history of neighborhood and urban stability brought about through the Community Reinvestment Act of the 1970’s and subsequent efforts to bring home ownership within the reach of blue-collar workers.

When will Recovery Start? - At the beginning of 2011, we thought that we’d work our way through the residential default backlog by this time.  That certainly was not the case.  Based in part of economic stress in Europe, the U.S., and here in California, the unemployment rate remains around 9% nationally and almost 12% in California.  Unless people gain stability in their paychecks, they cannot qualify for the loans needed to buy all the “shadow inventory” of foreclosed homes which is holding back lender capacity to make new loans.  Similarly, loans to new, job-creating businesses have been hard to get. Although recovery will vary by location, both FNMA and the Center for Responsible Lending agree that we’re about halfway through a 10 year process… look to 2016 for price increases to start in.  The most visible evidence of this will come in 2012-13 as all of the interest-only loans made in 2007-08 start to re-set as fully amortized loans, possibly with dramatic interest rate bumps as well.  Less visible but potentially even more serious will be the likely increase in commercial foreclosures as shopping center and office building owners run out of capacity to wait out the recession.  With those foreclosures, a great many small and large employers may get put out of business.

What Should You Do Now? - 10 years from now, people will say “why didn’t I buy in 2012″.  Interest rates are at an all-time low;  home prices are at or near the floor; and rents are not falling with the prices. There is a reason why investors are buying properties in bulk and grabbing whatever they can at foreclosure auctions. According to the Economist Magazine that recently surveyed real property values worldwide, U.S. property is 8% under-valued for the rent it generates and 22% under-valued relative to income. Don’t be surprised if foreign money starts buying up more and more property here… if they can get their money out of their own country.

For Real Estate Agents - If you don’t like the hassle of short sales, get over it.  We have a long way to go and short sales as well as REO’s will continue to define where you must look for business.  For short sales, stay in close contact to your farm areas and go knocking on doors and look for those people who purchased in 2007-08.  They need you.  The strongest agents will also build relationships with investors.  Remember, a reduced commission is not bad when the purchase price is $10 million or more.

BPE Law is here to be a part of your real estate team.  We’re experienced in all parts of transactions from acquisition to short sales to foreclosures and we work directly with you and your Realtor to help upside-down owners and anyone interested in real estate achieve their objectives. To learn more, contact me at sjbeede@bpelaw.com or even better, call us at 916 966-2260 for our $200 Attorney Consult to learn the strategies you need to move forward.

The information presented in this Article is not to be taken as legal advice. Every persons situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advice in your State immediately so that you can determine your best options.