The Many Facets of Foreclosure

As the housing crisis grips the country, local families, governments and opportunists all seek a successful strategy.

There are no cars are parked in the driveways ofn many new subdivision cul-de-sacs. “For Sale” signs litter the yards in outlying areas of Fairfax and Prince William County. Some new developments appear to be ghost towns. No children ride their bikes down the sidewalks — instead there are moving trucks loading up personal belongings as families wipe away tears and kiss their dream homes good-bye. The foreclosure epidemic has struck and its effects ripple across the area.

A new report released by the Fairfax County Government on February 25 reveals that declining property values will deal the 2009 Fiscal Year budget a $17 million blow. Declining revenues will greatly impact the county's school system, with the initial budget falling $64 million short of the school board's requested sum. Residential property values have fallen 3 percent and the average homeowner will pay $163 less in taxes next year. Though the board is considering adjusting the tax rate, a $200 million deficit is predicted by 2010.

Foreclosures have a huge impact locally since 59.9 percent of the overall revenue of Fairfax County comes from real estate taxes, says Merni Fitzgerald, spokesperson for Fairfax County. Fitzgerald noted that 35 percent of homes sold in Fairfax County during 2007's third quarter were sold due to foreclosure.

Virginia Governor Tim Kaine has stepped in to try and rescue troubled Virginia homeowners with new proposed legislation, announced February 27. The proposed bill is aimed at protecting and preserving homeownership by providing access to financial counseling prior to default notice, and grants the option of pausing foreclosure for 30 days while finances are put in order. It is hoped that the General Assembly will approve the bill before adjournment March 8.

However, the foreclosure dilemma is a far-reaching one that shakes individual families, local government and the national economy. On each level, people are attempting to come to terms with the crisis, assess how they should proceed and, in some cases, even turn the situation to their advantage.

'Why Not Just Walk Away?'

The foreclosure epidemic hit the U.S. hard in 2007, with a 75-percent increase in foreclosure filings from 2006, and a 149-percent increase from 2005, according to RealtyTrac Inc., an on-line real estate tracking company based in Irvine, Calif. Virginia ranks 24th in the nation in rate of foreclosure. In Northern Virginia, hardest hit areas include Prince William County, where some newly built neighborhoods are mostly made up of foreclosure homes.

Development has decreased as empty homes saturate the area, producing a domino effect.

“There is a gradually slowing economy because the housing market has slowed down because new home construction slowed down,” says Stephen Fuller, professor of public policy and director of the Center for Regional Analysis at George Mason University, and member of the Governor’s Advisory Board of Economists.

The cause of foreclosures can be attributed to more than one factor, he says.

“Foreclosures are caused by a combination of several things,” says Fuller. “Liberal lending policies, people thought they would enjoy price appreciation in ’03 and ’05 and later refinance. The market cooled off in ’06, housing prices decreased and the mortgage was more than the house was valued. They couldn’t refinance because their income hadn’t changed. In some cases, the rates tripled. People had no money in the house, so why not just walk away?”

Fuller says that some people were not in the right financial position to be purchasing a home.

“The American dream is to own a home, but in reality, some people should just have been renters,” Fuller explains. 

He says that there was probably some fraud involved on behalf of the loan officers in misleading people.  Others agree.

“I wouldn’t put my clients into those adjustable rate loans that they should not be in,” says JD Callander of the Old Dominion Office of Weichert Realtors. Another reason for failure to make payments is that people were not required to show proof of income or W-2’s, Callander says.

“People only had to declare ‘stated income’ — now they must have documentation,” Callander says.

Foreclosures can also occur because life circumstances change.

“A lot of foreclosures happen because there is a change in situation,” says Brian Block, a realtor and attorney with ReMax Allegiance of Alexandria. “Oftentimes they occur because of a medical condition where there are outstanding bills, or a divorce, in addition to the cases where the type of loan is to blame.”

Forestalling Foreclosure and Repairing Credit

Once a homeowner has missed a few payments, the property goes into pre-foreclosure, also called ‘default’ status, says Darren Blomquist, Marketing Communications Manager at RealtyTrac.

“The owner has a chance to stop foreclosure by paying off what is delinquent,” says Blomquist. “The owner can come up with the cash, or if they do nothing, the bank proceeds with the foreclosure process.

“Before this happens, you should call the bank and try to work something out,” says Blomquist. “In most cases, banks are willing to work with homeowners,” he adds.

Blomquist says that if nothing is done and payments are not being made, the property goes to an auction. If the property doesn’t sell, it then goes back to the bank who can sell it or list it with a realtor. Those properties are sold at a different type of auction, called a REO (Real Estate Owned by Lender) Auction. Often times held in convention centers or hotel ballrooms with hired auctioneers, this is where most deals are made.

“Banks want to get as much money as they can for the property,” says Blomquist. “Although, sometimes purchases can be made for 50 percent of the appraised value.”

When asked what was the best deal that he had heard about, Blomquist said there were some record bargains in Detroit on slightly damaged properties in need of repair.

“I’ve heard about some $10,000 ‘scratch and dent’ properties in some distressed areas of Detroit where you could buy a house cheaper than a car,” he says. 

If people are going through financial difficulties, free help is out there.

Bruce McClarey is a certified financial specialist with ClearPoint Financial Solutions, a non-profit, free credit counseling business based in Richmond, Va., with offices in Fredericksburg, Va. and Landham, Md.

“We try to reach people before they have to go through foreclosure,” says McClarey. “We want to help people avoid it. We have housing counselors available. The earlier people call, the better. There are more options available for people who are one payment behind than five payments behind.”

In October, the Bush administration created “Hope Now,” a group of lenders, investors and non-profit groups pulled together to assist homeowners in financial distress in the hopes of preventing foreclosure. The Homeowner HOPE hotline is available 24 hours a day, seven days a week by calling 1-888-995-HOPE (4673). Online counseling sessions are also available.

“Project Lifeline” was also created this month by Bank of America, Citigroup, Countrywide, J.P. Morgan, Washington Mutual and Wells Fargo — a group that accounts for 50 percent of mortgage companies — with the goal of giving homeowners time to work with lenders to avoid foreclosure.

If your home has gone into foreclosure, you will have to rebuild your credit to be able to eventually buy a home again.

“It’s not that you won’t be able to buy another home ever,” says McClarey. “You should build up your credit by paying bills on time. The longer you wait to purchase a new home, the better your chance of getting a good interest rate on your future loan.”

He says that you might be approved for a new loan after one year following foreclosure, but the rate would be high. Waiting four to five years would bring a much better rate.

The 'Flip' Side

RealtyTrac shows there are currently 24,199 Virginia properties in foreclosure, 403 in Falls Church, including those in pre-foreclosure status with default payments on record. These listings are available for consumers with a seven day free trial, then for $49.95 per month by subscribing to the service, or they are available through county records filed under “default homes.”

Recently, numerous ads and seminars have touted foreclosed homes as a solid-gold investment opportunity that will allow buyers to acquire properties on the cheap and then flip the houses for millions in profit. While such investment potential exists, the process is not a simple one, and ReMax's Block cautions against getting caught up in these “get rich quick” schemes.

“The seminar people make money by selling their tapes, CDs, books, manuals, additional courses, etc., not by doing real estate deals,” Block says. “They typically draw people in with a free seminar, which is used to get people excited and then up sell them these other items.”           

Those interested in attending and bidding at a home auction need to prepare themselves accordingly. Bidders should bring an approval letter from a lender to the auction, along with a certified check, advises Block.

“Usually a certified check for $10,000 payable to themselves is required to place a deposit on a home at the auction,” says Block. He says to take advantage of the open houses of the auction homes, bring along a contractor to assess the condition.

RealtyTrac's Bloomquist likewise advises due diligence before attending an auction.

“Look for a good property in a good neighborhood,” says Blomquist. “You could buy a property for 35 percent below the market and be fine, but it would be better to aim for 40-50 percent lower. That would be a great deal. The property you buy could lose value after you own it. Buy it at 50 percent lower in case it goes lower in value.”

If possible, talk to the neighbors to get more information about the house.

“There could have been a crime or drug dealer living in the house,” says Leslie Hutchison of ReMax Distinctive in McLean. She says that in California, where she previously worked, she had talked to neighbors for her clients and saved them from purchasing a mistake.

“There had been a crystal methamphetamine lab in the basement of a foreclosure home in California. People were coming to buy drugs all night long,” says Hutchison.

A downside of buying at auction is that you may not have had a chance to see the home ahead of time, and there is a possibility that the lender will not accept the home inspection. By law, homeowners are required to disclose a flooded basement, banks are not. 

“Banks are not governed by the same laws as homeowners,” says Blomquist. “They are not obligated to full disclosure.”

“The bank is not obligated to tell you there was a triple murder in the basement,” says Hutchison. “It’s a gamble. A lot of people make good money — a lot of people get burned. If your dad is a contractor and could walk the house with you ahead of time, then it’s not such a risk.”

Hutchison says that many times previous owners take the stove, kitchen faucets, light fixtures, even new carpeting or light bulbs in an attempt to garner what they can from the house.

Another caution is that banks can have their own addendum to the contract. Sometimes there can be additional closing costs or fees.

“The title company will search the title to see if there are mechanical leans or additional money owed by past owners,” says Block. “Tax leans could have been incurred. You should have an attorney take a look at the contract before closing. You can usually get out of a foreclosure purchase with an attorney.”

If a foreclosure home does not sell at the auction, it will go back on the market.

Block says that about 10-15 percent of his clients want foreclosure properties.

“A lot of times the foreclosure idea will bring them in the door,” he says. “You have to have a flexible closing date and be willing to wait weeks.”

There is also extra paperwork, which takes time.

“Foreclosure purchasing is not for the faint of heart,” Block says.

An option with possible less hassle is a “short sale” during pre-foreclosure. 

“A good deal is a short sale,” says Blomquist. “The owner wants to sell the property. He owes more than the property can sell for — you both go to the lender and ask them to do a short sale. This cleans out the mortgage for the full amount of the loan.  In many cases, the lender will agree because it will cost them less in the long run. You may offer $70,000 when $100,000 is owed. It’s a good opportunity.” Realtors can find out if the property is in this stage for their clients.

A Road to Recovery

Fuller says that the number of foreclosures will increase before it starts to get better.

“The subprime loans from ’05 and ’06 haven’t reset yet,” Fuller explains. “Before anything happens, we’ll see it get worse for six months … Banks and government are helping to freeze foreclosures by changing them over to conventional loans.

“In 2009, things will start to get better. Even Prince William County where it is very bad will get better in 2010.”

Fuller also notes another challenge. After facing foreclosure, some former home owners may require social services, further straining government coffers. In the long run, however, he is not worried about the area's ability to recover.

“Fairfax County has one of the healthiest housing markets in the region,” he adds. “The economy will get stronger within three months. Fairfax has a only 2.2 percent unemployment rate. The economy will start growing and 2009 will be much better.”