Real Estate

July 9, 2009

Hatteras Island Real Estate: The consequences of foreclosure

By TOM HRANICKA

Governmental and private initiatives to stem the tide of foreclosures are not working, and it looks like the situation can be expected to get worse for the near future.

According to the first quarter statistics recently released by the Mortgage Bankers Association, more than 12 percent of all mortgages across the nation were either in the process of foreclosure or were more than 30 days late on payments. The data for sub-prime mortgages is even more disturbing. Almost 40 percent of the riskiest loans were in foreclosure or were headed in that direction.

When examined in greater detail, the data reveal that the number of foreclosure filings that are being reported is only the tip of the iceberg. For example, of the 12 percent of all mortgages that were in distress during the first quarter, about 4 percent were actually in the process of foreclosure, and the other 8 percent were in default. Experts who monitor these statistics say that the magnitude of foreclosures is being artificially suppressed by government and lender efforts to delay foreclosure sales as long as possible. In simple terms, the properties in default are, in many cases, foreclosures waiting to happen.

As a point of information, most statistics report foreclosure filings rather than foreclosure sales because it is often difficult to determine the actual number of properties that go through the full foreclosure process and are ultimately sold.

Another leading indicator of future foreclosure levels is the properties that are being marketed as “short sales.” A short sale is the name given to the situation in which a property is being offered for sale at a price that is less than the outstanding balance of the seller’s mortgage. Once a contract is established between the buyer and the seller, the owner then asks the lender for forgiveness of all or a portion of the mortgage indebtedness. The number of short sales is reportedly increasing. A short sale is an option that is sometimes, but not always, preferable to foreclosure.

While the absolute number of foreclosure filings on Hatteras Island might seem relatively small, the trend is definitely increasing. When you consider the fact that there were 24 residential foreclosure actions filed during June vs.17 properties sold on the island, it is easy to see why there is reason for concern. This pattern is mirrored at the national level where the forecast for the total number of distressed properties (in foreclosure or in default) for 2009 is nearly double the number of projected sales. In addition, foreclosure filings on the island during the first half of this year were almost 36 percent higher than during the same period in 2008.

The following graph shows several patterns:

•    The monthly level of foreclosure filings was reasonably consistent for most of 2008.

•    Foreclosure filings decreased between October and February when moratorium programs were in effect.

•    The moratoriums appear to have delayed, but not solved, the foreclosure challenge. As soon as the moratoriums were lifted, foreclosure filings bounced back to levels that exceeded those that had previously been recorded.

The anguish and dislocation that foreclosures are producing across the country is absolutely heart-wrenching. Whether individuals made mistakes in managing their personal finances or whether they were caught up in economic circumstances beyond their control, the outcome of people losing their homes has a profound impact on all of us. The unfortunate fact is that sale of a home on the courthouse steps is only the beginning of a fairly broad series of consequences associated with foreclosure.

Recognizing that there are some situations in which foreclosure is the best option for a homeowner in distress and that there are exceptions to every rule, the following summaries are provided with the goal of fostering a better understanding of the short term and long term effects that foreclosure can have on property owners.

•    Future Fannie Mae loans (primary residence) – a homeowner who loses a home to foreclosure is generally ineligible for a Fannie Mae backed mortgage for a period of five years. The time frame might be less if there are qualified extenuating circumstances.

•    Future Fannie Mae loans (second home or investment property) – an investor is ineligible for a new Fannie Mae backed investment loan for seven years.

•    Future loans with any mortgage company – a foreclosure within the past seven years will most likely have an adverse effect on mortgage interest rates that the homeowner can obtain on future loans.

•    Credit score – foreclosure, and the payments missed prior to foreclosure, can affect a person’s credit score for up to three years or more, and the individual’s score may be lowered by 200 to 300 points.

•    Credit history – a foreclosure can remain on a person’s credit history for 10 years or more.

•    Security clearance – if a person holds a position that requires a security clearance, a foreclosure may cause the clearance to be revoked and the position might be terminated.

•    Current employment – employers have the right to check the credit of employees in sensitive positions. A foreclosure can be grounds for reassignment or termination.

•    Future employment – some employers are running credit checks on job applicants. A foreclosure is a damaging credit item and may influence an employer’s hiring decision.

•    Deficiency judgment – in addition to the owner’s loss of the home, lenders have the right to pursue a deficiency judgment from the borrower for the difference between the foreclosure sale price and the outstanding balance of the mortgage. This is an important aspect of the foreclosure process that is widely misunderstood and that requires professional legal advice to prevent any unpleasant and unanticipated surprises.

As you can see, foreclosure is a very serious event with a very long tail. When discussing foreclosures, some use the expression, “foreclosure is forever,” which is probably only a slight exaggeration. One thing is quite clear – foreclosure should not be taken lightly, and it is definitely not a “get out of my mortgage free” card. If you or someone you know is facing or contemplating foreclosure, it is absolutely essential to talk with a North Carolina real estate attorney and an accountant at the earliest possible time.

The good news is that the present foreclosure “crisis” will pass, and market forces will most certainly regain some semblance of normalcy in the future. In the meantime, the presence of foreclosures in the marketplace is just one of many factors moving the island’s real estate market back to a point of equilibrium, setting the stage for the next cycle of growth.

NOTE: This article is for informational purposes only. It is not intended to give legal advice which should be obtained from a North Carolina real estate attorney. Portions of this article were adapted from materials produced by the Distressed Property Institute, LLC.

(Tom Hranicka is an associate broker with Outer Beaches Realty. Questions, comments, or suggestions for future articles may be sent to Tom Hranicka at P.O. Box 237, Avon, NC 27915, or e-mail to hranicka@hatterasisland.com )

Copyright©2009 Tom & Louise Hranicka. All rights reserved.