Many people are asking how to fix the housing market. The issue is debated and argued but nothing seems to get done. Big surprise right? What all the bigwigs are missing is the old saying that the definition of insanity is doing the same thing over and over and expecting a different result. What needs to be done is simple. They need to stop the insanity. They need to stop focusing on the banks and focus on the people. Common sense needs to be injected into the situation. The banks should not be bailed out or given incentives. They need to stop rewarding the banks for making ridiculous decisions. The finger pointing when things don’t work needs to stop. The focus needs to be put back on the people. It is the people that will fix the housing market, not the banks.
The banks and housing market reflect the fear of the shadow inventory. The houses that have been foreclosed on but have not yet hit the market and the homes that are soon to be foreclosed on. This shadow inventory has everyone running scared and fuels the doom and gloom attitude that does nothing to instill confidence in the market that home buyers need to confidently get off the fence. The solution is really quite simple. Quit worrying about it and do something.
The REO properties need to be handled in an intelligent manner. Right now the banks use REO agents to sell their properties. Many of these agents have so many REO listings they cannot possibly market the property in a way that would solicit the highest offer. Many times it is nothing more than putting up a sign and putting it in the MLS at a drastically low price. The property is sold to the highest bidder within 7 days. What does this do to the local market? It is drives the prices even lower. This hurts local homeowners and the banks as well. The next time the bank lists a property for sale in the same neighborhood they will need to sell it for even less. The banks are shooting themselves in the foot simply because once it hits the market they want it sold and sold quickly.
The other part of the shadow inventory are the homes that are in foreclosure but have not been taken back by the bank as of yet. This is where common sense definitely needs to be injected. Time and time again I have seen banks make decisions that actually increase their REO holdings. Here are some examples. The home seller puts their home on the market and it is going to be a short sale. An offer comes in and is submitted to the lender for approval. The first mistake the bank makes is that it will take months for the bank to make a decision on whether or not to accept the short sale. All the while the market is declining, prices are dropping. By the time the lender makes a decision to accept the short sale, the buyer has changed their minds since the property is no longer worth what it was when they submitted the offer. At this point rather than keeping the file open so the property can be remarketed the banks will close the file so when another offer comes in the whole long process starts over again leading to a vicious circle.
Sometimes, the buyer stays strong and wants to proceed with the purchase once the bank has accepted, so what does the bank do? They create yet another hurdle for the buyer. They shorten the time the buyer has to close escrow. They make it very clear that if the property doesn’t close in say 20 days the deal is off. I have seen deals where Bank of America was the lien holder and demanded escrow close in 25 days from acceptance. The buyer was getting a loan and because of all the underwriting requirements it did not get done. The bank refused to extend the escrow and the deal was lost. The bank took the home back through foreclosure. Oh and the ironic part was that the buyer was getting his loan with, you guessed it, Bank of America.
The third example is probably the most insane. The short sale has been approved. Escrow is proceeding and the buyer’s loan is on track. While this is all going on the bank continues with the foreclosure process and is now to the point where the trust sale date has been set. The obvious course of action would be for the bank to postpone the foreclosure date. But again with the lack of common sense they are known for, they refuse to postpone or cancel the foreclosure date. They are less than 5 days away from closing in escrow and the property going to the new buyer but they foreclose and take the property back. Congratulations, they just got themselves another REO holding. Why?
We have been focusing on the insane, greedy banks. Bailing them out and offering incentives to do what they were already suppose to be doing. This is not the answer. The banks are not going to fix the housing market, the people are. It will be the regular home buyers and sellers who have always been the foundation of the real estate market who turn this market around. We need to focus on the people and offer them the bailouts and incentives. And I do not mean just the people on the verge of losing their home. In order to stimulate the market you need to empower the masses.
Right now many homeowners are trying to do what is right and short sale their property rather than simply walking away and letting it go to foreclosure. As described above the banks are doing nothing to simplify the process. There needs to be new rules put into effect to protect both the seller and the potential buyers. Once a short sale is initiated by the seller, it should be like it is with a bankruptcy. The foreclosure process stops. Period. No trustee sales date can be set. The banks should also be forced to accept the short sale at the appraised value within a 30 day timeframe. If they do not there should be serious financial consequences to the bank. Priority of purchase should be given to owner occupied buyers. Rather than how it is now where the banks would rather go with an investor/cash buyer. It is kind of funny that the banks would prefer not to go into escrow with a buyer who is getting a loan. I guess they understand how difficult lenders are to work with. Even they do not want to do business with themselves.
Right now one of the biggest problems in the real estate market is that people do not have equity in their homes. They cannot sell their current home. I talk to people all the time that would love to buy a new home but they can’t. They are prisoners of their house. They are upside down. This needs to be fixed if we are going to see any significant increase in market activity. The best way to accomplish this would be to offer these people an incentive, a bailout of sorts. Allow them to sell their current home at current market value and buy a new home. Force the banks accept the proceeds from this sale as payment in full for their current mortgage. But the sellers must agree to get the new mortgage with their current lender. It is kind of like trading a mortgage. The one thing that would also have to be considered is that the new mortgage would have to be at the going interest rate. I can see it already, if the lender knew they were going to get the loan they would jack up the rate. We have to watch those darn greedy banks. This would definitely stimulate the housing market by allowing people to buy new homes and sell their current one. With this incentive to sellers, the number of short sales would decline but more importantly the REO inventory would not continue to grow at the current rate. The market would become stimulated with buyers and sellers. People who are simply looking for lower mortgage rates would now be potential buyers. Can you imagine the number of people who would hit the housing market running to take advantage of something like this? This would help the millions of people who are trapped in their mortgage. It would help the people that want to refinance but can’t because they have no equity. It would help the people who want to do a short sale but can’t because they are current on their payments or they do not want their credit hurt. It would help the people who are current on their mortgage but want to make a move. Finally it would help the masses, the people.
