On the cold, bright morning of Friday, March 13, Glen Hayton stepped outside the King County Administration building in Seattle. Normally, he might auction dozens of houses seized in foreclosure.
But instead the auctioneer spent the first half hour announcing scores of sales that had been canceled or postponed.
Welcome to the new foreclosure market.
Out of 172 homes tracked by the Puget Sound Business Journal since December, only five sold at auction on the appointed day. The homes, a week’s worth of foreclosures in King County, show how drastically the housing market has changed.
Repossessed homes used to be easy to unload. During the housing boom, banks could take homes back and sell them at auction at a reasonable discount. Seasoned buyers with pockets full of six-figure cashiers’ checks bumped elbows with young couples and newbies looking to get a deal on a starter home.
Now, with prices falling, buyers are wary and few homes are selling at auction. Instead, they’re piling up on lenders’ books, costing hundreds of dollars a month in carrying costs and exposing lenders to the risk of further price declines.
Sales also are stalling as the troubled owners try to work out deals with their lenders. They’re finding lenders are much more willing to negotiate.
The growing number of foreclosed homes in limbo shows a new dimension of the historic foreclosure crisis. It is slowing the housing market’s recovery and undermining house values. The median price of a single-family home in King County has fallen about 13 percent in the past year.
The situation could get worse. More mortgages are due to reset in the next two years, potentially at higher rates. Unemployment, now 8.4 percent in Washington, is expected to continue rising, threatening the ability of more homeowners to keep up with their mortgage payments.
Some lenders fear homeowners who are underwater on their mortgages will just walk away from homes that now are worth less than what’s owed on them.
“We have cases where people are tapped out,” said Ron McKenzie, a vice president at Seattle-based Washington Federal Savings. “They’ll call us one day and say, ‘I can’t make any more payments. Where do I leave my keys?’”
The property is perfect: a five-bedroom house on nearly two acres of land, tucked away in the country surrounding Covington.
Charlene Binfet is ecstatic.
It’s a sunny Saturday at the end of February, only three weeks before the family’s five-bedroom house in Auburn is due to be sold at King County’s foreclosure auction.
Like thousands of others around the country, Charlene and Joseph Binfet can no longer make payments on their $303,000 mortgage. They’ve considered their options: a short sale, potential government rescue or working out new loan terms. They’re not sure how it’s going to work out.
Charlene and one of her three teenage sons have driven out on a whim to see a rental property, listed for only $1,500 a month on a real estate website.
At first, Charlene thinks it’s too good to be true.
How can such a spacious property — with a house that’s 900 square feet larger than their current home — cost less than half their monthly mortgage payment?
She and her son get a tour from the caretaker of the land. It includes a 60-year-old farm house, and it needs some work.
But the Binfets are willing to put in the sweat equity, if it means establishing another home. They are trying to separate themselves from their five-bedroom Auburn home, in foreclosure after Joe Binfet’s salary as a lumber salesman took a hit following the housing market downturn.
They’ve lived there for six years and owned it for four. It was their first foray into homeownership.
Charlene and her son are falling in love with the new house already when they spy the real prize: a 1,500-sqaure-foot tool shop, complete with a hydraulic lift.
Perfect for Joe Binfet, who has had a harder time letting go of the family’s Auburn house.
Charlene’s son keeps nudging her. “You have to call Dad, you have to call Dad,” he says.
She catches Joe at work on a house remodel. “I have a bomb to drop on you,” Charlene says. “I just happened to come across this property and you have to come look at it today.”
Days later, the family has put the first month’s rent down.
They start collecting moving boxes. For the first time since December, when they received notice that their house would be sold in foreclosure auction, they have a plan.
Charlene is relieved. The struggle is nearly over.
Foreclosures are on the rise, but most homes aren’t reaching the auction block any more. The number of properties that were scheduled to go to King County’s foreclosure auctions nearly doubled last year from 2007, climbing to 4,492.
But at the same time, the number that actually got to auction and sold fell by 40 percent. Now, just under one in 10 properties actually changes hands at an auction, according to a tally by ForeclosurePoint, a national property tracking service.
About half of the sales are called off or postponed. The remaining third go back to the bank — more than twice as many as the year before.
The trend is accelerating. In the foreclosures the Business Journal tracked from the week of Dec. 8, sales of 66 percent of the homes were postponed, either because the delinquent homeowners were working out new payment plans with their lenders or had filed for bankruptcy.
Sales were canceled for another 21 percent of the houses, likely because the owners had negotiated a loan modification or managed to sell their houses ahead of the auction.
Ten percent went back to the bank.
Just five houses, less than 3 percent of the total, actually sold.
Of those, only two attracted much bidding.
“There are more foreclosures, but there are less people at auction because nobody’s really secure about the market,” said Dean Street, a longtime local foreclosure broker representing real estate investors.
The voice of auction crier Hayton announcing property sales on the steps of the King County Administration Building is barely audible over the wailing of ambulances and roar of buses.
About 20 investors, real estate agents and foreclosure specialists are huddling around, thumbing through thick packets of property listings.
It’s a week after a moratorium on foreclosures under federal lending programs has ended. They are expecting a big day of sales. But as they strain to hear about the properties they’re interested in, auction after auction is called off. The crier rattles off names and addresses in a clipped monotone.
“Binfet,” he calls as he reaches the family’s five-bedroom home in Auburn. The family isn’t there.
“This sale is canceled.”
A few minutes later, he starts to auction the first home. He asks for bidders. No one in the crowd responds. The same thing happens for the first half-dozen properties that Hayton tries to sell. No bidders, no sale. Finally, he comes to one where the starting price is low enough that buyers step up.
Four years ago, lenders would see multiple bidders on a foreclosed property and investors would typically pay 82 cents on the dollar for homes being auctioned, said Christopher Hall of Vestus Foreclosure Group in Kirkland. With home prices climbing each year, they could expect to unload the home later at a profit.
Now there may be only one or two bidders on a property — and they typically pay only 65 cents to 75 cents on the dollar, Hall said. Paying more is just too risky.
Partly it’s because housing prices are sliding. Partly, it’s because it’s harder to get financing. In the past, speculators at an auction would tap their line of credit or turn to hard-money lenders for a bridge loan. At worst, the hard-money loan would cover the purchase price of the house for up to six months with an interest rate of up to 12 percent and a cash down payment of up to 20 percent. Fees range from 3 to 5 percent of the value of the house.
Investors could always refinance into a traditional mortgage later on.
“You could go down there with a little bit of money, flip it and make 30 grand in sixty days,” said Chris Matty, chief marketing officer at Bellevue-based DepotPoint, the owner of the ForeclosurePoint service.
With fewer investors now to snap up the properties, banks are forced to take them back.
That puts them in the position of playing property manager and real estate agent, and often selling the home at a discount anyway. It also stresses banks at a time when most also are struggling with steep losses on commercial real estate loans.
When a bank takes back a house and can’t sell it, the carrying costs can run to about 10 percent of the value of the home, or between $40,000 to $50,000 for a typical Puget Sound area property, according to several foreclosure experts. Those costs include taxes, insurance and fixing up and maintaining the property.
Washington Federal Savings, one of the few local banks with mortgage loans on its books, has found that the cost of carrying a house also depends on the condition of the property and the neighborhood. Some homeowners clean up before they leave, others aren’t so gracious.
“We had a property in Seattle where we had to go do an eviction with the sheriff recently and it probably cost us between $2,000 and $4,000 to haul all the garbage away,” said McKenzie of Washington Federal.
Those costs mount over time, particularly in more distressed areas of the country. “We may be holding that property for six to nine months before we make a sale,” said McKenzie, who manages the bank’s special credit group. The bank’s goal is to offload all Real Estate Owned, or REO, properties within a year.
Washington Federal has seen a sharp pickup in REOs. At the end of 2008, it had $61.9 million in inventory, up from $37 million on Sept. 30, as foreclosures rose among developers and homeowners in the eight states it serves. Home mortgage foreclosures represent less than half the total.
“We’re losing money the minute we stop getting payments from people,” said a Washington Federal spokeswoman.
Mounting losses are making banks more willing to deal.
“Foreclosures really are our last choice,” said Susan Greenwald, a senior vice president and director of family lending operations at HomeStreet Bank. The Seattle-based bank services 42,000 mortgage loans backed by Fannie Mae, Freddie Mac, Federal Housing Administration and Veterans Administration lending programs, along with a small portfolio of its own home loans.
Greenwald estimates the bank is able to work out new payment programs about 90 percent of the time. As a result, the bank only has one foreclosure in Seattle, Greenwald said.
It helps that the housing market here isn’t as bad as other parts of the country. She points out that just over two dozen Fannie Mae loans are in foreclosure in Seattle, compared with more than 900 in Phoenix.
But there are limits to what banks are putting on the table. Even the Obama administration’s new homeowner affordability plan requires loan modifications to cost less than foreclosure, she said.
“At the end of the day, it is still a business,” Greenwald said. “We still have to look out for the financial interests of the lenders in servicing the loans.”
For consumers, this means there’s wiggle room with banks that wasn’t available even six months ago.
“They absolutely will reduce the principal owed,” said Hall of Vestus Foreclosure Group. “They would much rather take the discount now than take it later. In a normal market a bank may not care if it gets the house back — it can sell it for close to the debt owed. Now that is not the case.”
Who eats the loss when a house sells for less than the loan?
In Washington and other Western states, lenders traditionally have chosen to settle foreclosures out of court, rather than have terms dictated by a judge. That means lenders have to absorb the loss. But they save the time and cost of going to court. They can still go after the debtors with a lawsuit, but few bother.
“People who lose their homes do not have much anyway — why waste your time,” said attorney Danial Pharris, a principal at the Seattle law firm of Lasher Holzapfel Sperry & Ebberson PLLC.
In the middle of February 2009, Charlene and Joe file for Chapter 13 bankruptcy.
The filing effectively postpones their foreclosure sale for several months, a tactic used by some families to delay losing their homes. That’s why their March 13 sale was canceled. They are now part of the backlog of unsold homes.
It is the family’s third bankruptcy since 1993. They bought their Auburn house in late 2004, after only recently emerging from their second Chapter 7 bankruptcy filing.
The Binfets see this most recent bankruptcy as the only logical way out of their growing pile of debt.
In their filing in U.S. Bankruptcy Court for the Western District of Washington, the couple lists assets of $329,397 and liabilities of $468,349.
Their assets range from their Chrysler van worth $15,150 and their 401(k) worth $6,797. Their biggest asset is their house, worth $301,000.
Because the Binfets file a Chapter 13 bankruptcy — “the good kind,” says Charlene — they are required to pay off their debts through a payment plan. Previously, when they filed Chapter 7s, their debt was wiped out.
Now the court has ordered them to make monthly payments of $600 for five years to clear their debt. Coupled with their new rent of $1,500, they’ll pay $2,100 a month, or about $1,000 less than their old mortgage payment.
They will not keep their home. They are working with Litton Loan of Texas and HomeEq of California, the servicers of their first and second mortgages, Charlene says, to sell the Auburn house in a short sale. They are done trying to save it.
But they are not done with homeownership. They plan to spend the next several years renting until their youngest child — now a freshman in high school — has graduated.
Then they will buy again, likely the house that Charlene says they’ll retire in eventually. By the time they enter the housing market once more, the family expects their credit will be repaired. And so, hopefully, will be the wreckage of the recession and the housing market’s downturn.
“We have enjoyed owning our own home,” Charlene says recently. “This is just Plan B".
Puget Sound Business Journal (Seattle) - by Jeanne Lang Jones & Kirsten Grind Staff Writers