"You may ask yourself, well, how did I get here?"
– Lyrics from Talking Heads' "Once In a Lifetime"
Dear Friends, Clients and Colleagues,
How do we explain the foreclosure fiasco and overall real estate debacle? To begin, I borrowed another musical phrase as noted above from "Once In a Lifetime," a song released almost three decades ago by Talking Heads. "You may ask yourself, well, how did I get here?"
The news coverage is practically constant, overwhelming and very disheartening. While realizing there is no quick fix or clear roadmap on the horizon, perhaps we can find some solace in reviewing a combination of recent news highlights regarding where we are now together with some historical perspective and anecdotal observations on current challenges. Lastly, a few coping strategies are presented for consideration.
Recent News Highlights
"The average sale of a foreclosed home in the third quarter  recouped only 57% of the money left unpaid by the original borrower." (New York Times, Business Section, 11/6/10).
The shadow inventory of delinquent loans, foreclosures, and REOs stands at 7 million homes, which would take the market more than 40 months to clear, more than three years, according to Fitch Ratings. (HousingWire, 11/1/10)
Fannie Mae and Freddie Mac combined currently own over 240,000 houses nationwide. (New York Times, 11/6/10)
Every further 1% decline in home prices today lowers household wealth by approximately $170 billion, according to Goldman Sachs. For each dollar lost in housing wealth, Goldman Sachs estimates that consumption is lowered by 5 cents. Add to this the fact that we are building a million-plus fewer homes on an annual basis from the peak years of the housing boom. With five people or more working on each new home, we have permanently lost over five million jobs in residential construction. (Mortimer Zuckerman, Wall Street Journal, 9/21/10)
And from the local perspective:
"New Jersey's foreclosure rate looks bad: 6.28 percent of [all New Jersey homeowners] as of the second quarter of this year. But as bad as that is, it does not include homeowners at least 90 days behind on mortgage payments ("seriously delinquent") . . . [There are an] additional 4.26 percent of New Jersey homeowners who were at least 90 days behind on payments but not yet in foreclosure, according to the Mortgage Bankers Association. Together, the figures make up the state's rate of "serious delinquency" and provide perspective on just how distressed homeowners are: 10.54 percent of all New Jersey homeowners, in the second quarter, the sixth-highest rate in the country." (Philadelphia Inquirer, 10/24/10)
The causes of the housing implosion include relaxed regulation, financial innovation gone awry, excessive debt and raw greed. The players are also varied: bankers, borrowers, developers, politicians, bureaucrats and the public. The chronology that precipitated the debacle dates back at least to the mid 1990s when mortgage restrictions were loosened so first-time buyers could qualify for loans they could never get before.
The Clinton administration's top housing official in the mid-1990s, U.S. Representative and Secretary of HUD Henry G. Cisneros, was determined to increase a homeownership ratethat had been stagnant for nearly three decades. Thus was born the National Homeownership Strategy, which promoted ownership as patriotic and an easy win for all. Families no longer had to prove they had five years of stable income; three years sufficed. And in another change championed by the mortgage industry, lenders were allowed to hire their own appraisers rather than rely on a government-selected panel. This saved borrowers money but opened the door for inflated appraisals. A later HUD inquiry uncovered appraisal fraud that imperiled the federal mortgage insurance fund. (New York Times, 10/19/08)
The Financial Services Modernization Act of 1999 (the Gramm-Leach-Bliley Act) fully legitimized the mergers between commercial banks, investment banks, securities firms, and insurance companies, by repealing the barrier that had previously restricted the rise and reach of financial conglomerates, namely the repeal of the Glass-Steagall Act. (New York Times, 11/17/08)
These derivatives are the root of the credit crunch. Unlike all other property paper, derivatives are not required by law to be recorded, continually tracked and tied to the assets they represent. Nobody knows precisely how many there are, where they are, and who is finally accountable for them. Thus, there is widespread fear that potential borrowers and recipients of capital with too many nonperforming derivatives will be unable to repay their loans. As trust in property paper breaks down it sets off a chain reaction, paralyzing credit and investment, which shrinks transactions and leads to a catastrophic drop in employment and in the value of everyone's property." (Hernando De Soto, the Peruvian economist, author of The Mystery of Capital, as well as founder and President of Institute for Liberty and Democracy. Wall Street Journal, 3/25/09)
"Former U.S. Federal Reserve chairman Alan Greenspan has admitted that he was blindsided by the 'once-in-a-[lifetime] credit tsunami' that has wreaked havoc on the world's economies. 'Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment,' Mr. Greenspan told congressional lawmakers. 'Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity.'" (Alan Greenspan's testimony before the House of Representatives Oversight Committee, October 2008, from The Daily Mail (UK) 10/24/08)
I have done title searches for several real estate investors who cannot make contact with the apparently present owner of the foreclosed property because the owner of the property is some form of bundled trust with no apparent head because the individual mortgage, and now the individual parcel, is undocumented, buried inside an impenetrable and unregulated CDO (collateralized debt obligation) with no apparent spokesperson. Can you comprehend: "U.S. Bank, National Association as Trustee for the Specialty Underwriting and Residential Finance Trust Mortgage Loan Asset-Backed Certificates Series 2006-BC1?"
Note: The Township gets its real estate tax payment from a batched check coming from the successor of a large defunct investment house's accounts payable department. So they are satisfied and will not offer any help.
A possible solution to this dilemma is to think of this property less as a parcel of real estate and more like a security obligation. After "googling" the entire name of the of Grantee from the Sherriff's Deed, my client was able to obtain the security instrument's 10-K, the SEC filing document that states at least who owns the debt obligation, along with contact information, which my client is attempting to use to penetrate the CDO behemoth, to allow him to shave off a piece to the collateral – the house – to make it a viable property to put back on the market . . .
Is there a roadmap to help cope with this new normal environment? Perhaps a couple reminders focused on judgment calls can be considered.
1. Qualify the Seller. You know that the borrower is going through a more extensive qualification process. It may sound strange, but I have been hearing more and more stories about participants in real estate transactions (and I am not even talking about short sales) discovering late in transactions that there are previously undisclosed impediments (liens) that render titles more difficult to transfer.
2. Plan to do further homework on the property. Determine if there are unpaid taxes on the property; run a present owner county land records search – all liens affecting real property have to be recorded at the county clerk's office, including judgment searches. They are easily run and take very little time to render results. The earlier the better, it will aid you in your approach to the transaction.
Things are different. Yes we are paying for the sins of easy credit, lax oversight, greed and lack of attention to detail. So counter this by tightening your credit belt (hooray for refinancing), read all the paper work and ask questions . . . then ask more questions. "Same as it ever was . . ." (from Talking Heads' "Once In a Lifetime") isn't any longer. Cue the band . . .
Richard L. Eland
President, Title Village
100 Overlook Center, 2nd Floor
Princeton, NJ 08540