I’m not sure what the feeling is around the rest of the country but here in the greater Los Angeles area things in the foreclosure market have come to a painfully slow pace. Not that I wish for people to lose their homes or end up in the difficult situation of having to relocate their families but at the same time we all know that things are not good and people are being foreclosed on at an alarming clip. We know this from both market data and by personally seeing it right in our backyard on an almost daily basis. In 2009 I had REO listings coming out of my ears, the market was active and entry level homes buyers were jumping over each other to purchase them. Now of course there was some artifical demand created by tax incentives, affordability programs and higher FHA loan limits. However I would argue that there is just as much incentive to buy today as then. Historically low interest rates and even deeper price adjustments would suggest that now is a wonderful time to buy. The problem for these buyers and the difference versus 2009? There is no more inventory!

Which brings me to my central question. Why are the banks not letting the foreclosures out? Is it a question of accounting? Would the books show insolvent banks that are not able to meet their reserve levels? Or is there a more grand plan going on behind the scenes in some cooperative effort by the major lending institutions and the federal government? I do not claim to know and this blog is simpy here to ask other real estate professions the same question. Maybe one of has the answer that so many have been looking for. I additionally do not claim to be an expert but what appears to be happening is that banks are building a huge backlog of distressed properties that at some point have to be unloaded. As anyone with a basic understanding of supply and demand can tell you, this could create a tidal wave of depreciation if not handled properly. I am concerned that the same people who allowed buyers with no assets, little income verification and marginal credit to get home loans during the “boom” years are now also handling this potentially disastrous state of events. I am generally an optomistic person and I do not believe in the “doomsday” theory that the U.S. or world economy will come to a grinding hault in either the real estate, currency or equity markets. With that said though the future is largely unknown and for the past 2 years I have been trying to wrap my head around this issue. Clients ask me this all the time and all that I can honestly tell them is that their guess is as good as mine.

There will be those (usually not a Realtor) that say banks are trying to keep home owners in their homes and that loan modifications and other programs are working to “fix” the problem, hence the lack of inventory. In my opinion this is just simply not true, it’s really not even a matter of opinion but rather of fact. I do not have the stats nor the hard numbers on these programs but we know that these have largely failed to help most homeowners. Furthermore only those that do not honor their obligations can qualify for these programs. Are you kidding me?? Who makes these qualification standards?? They only help those that are almost destined to fail anyways…even after they have had the assistance of the program. Others will say that short sales are addressing the foreclosure problem before the the home goes to the court house steps. That the process has been streamlined and that the banks are processing the disteressed properties. Maybe, but not in my experience. My guess is that a short sale has a 60/40 shot of going through the lengthy approval process, having the buyer “stay in the game” for the entire process and then not have an issue with obtaining their loan or finding a major physical flaw in the property. Then if you’re lucky the lender won’t put a gun to your head at the 11th hour and ask you to kick in some of your commission to close the deal. Oh yeah you can forget about a condo with 18 months of HOA dues in arrears, they ususally want the broke home owner to pay for that. I will finish with this….if short sales are the answer then why does it take so long to process them? If this answers the banks “accounting” issue with a foreclosure why are they not more motivated to get them sold quickly? After all the investors money is tied up in a house with a borrower who does not pay, wouldn’t the loss of income on the money everday alone make youy want to cut your loses?? The whole thing boggles my mind, I look forward to hear what others around the country and here in California have to say on the matter…