The Shocking Reason Why The Foreclosure Near You Won't Go Away

posted on 06-07-2019

Ever wonder why that house on your street is just sitting there, making the neighborhood look crummy? You're not alone.

Every month, there are hundreds of thousands of home foreclosures across the country. They're wreaking havoc on property values -- and our psyche.

It's hard to miss these uncared-for homes with their overgrown lawns and wild-looking bushes. The solution seems simple: Stick a for-sale sign in the yard and get that eyesore sold. But that isn't what's happening.

The numbers are alarming. How much time does it take to settle a typical foreclosure? Try 370 days -- and then add another 180 days before it's actually sold.

That's more than a year and a half to get a blighted property into the hands of a responsible homeowner. To gain perspective on how bad things are, the average foreclosure in 2007 took just 150 days to close. Oh, to have those days back.

But why doesn't that cruddy house down the street sell? The answer may surprise you: There was the possibility that banks were holding back on listing foreclosures because they didn't want to flood the market and cause prices to tank again.

Daren Blomquist, vice president of the foreclosure listing website RealtyTrac, said banks are slammed by high foreclosure volume and the additional scrutiny resulting from improper foreclosures of the past. Some wondered aloud if banks were concerned about a flood, Blomquist said.

In April, the banks reached a $25 billion foreclosure abuse (robo-signing) settlement, and, bam, second-quarter filings shot up 9% from the first quarter. It seems the banks are more comfortable with foreclosing again. (The five major banks are paying for their robo-signing practices, in which employees signed off on foreclosures without properly reviewing their cases. One bank reportedly approved nearly 10,000 documents in one month's time.)

That's not the only reason foreclosures languish. David Le, a Redfin real estate agent in Northern Virginia, noted that in one of his recent deals, it took nine months before the tenant of a Fannie Mae-owned property was evicted. Next came a flurry of activity with inspections and appraisals that lasted about three months until the house was listed.

Also, rules and regulations can be tough, depending on the state. Fannie Mae deals, for example, adhere to strict guidelines. Once the price is set, it can't be reduced in the first 30 days, but few buyers are willing to pay full asking price for distressed homes. After a month, the price is lowered incrementally by 5% or 10%. Because Fannie Mae and Freddie Mac focus on the bottom line -- and not how a property looks -- this leaves little room for negotiation.

It might seem that nobody cares about moving these properties quickly. Since 2007, more than 8 million foreclosure starts have been filed. But real estate agents in many parts of the country are seeing an uptick in demand and lack the inventory to meet it.

"In some areas, foreclosures are selling like hotcakes," Blomquist said. "Buyers see foreclosures as great deals, and agents want to have more of that to sell. In some of the harder-hit markets, foreclosure inventory has dwindled down to a smaller amount, and the demand is there from the buyers."

The good news is we should see home sales speed up in the near future. In the first quarter of 2012, a 25% increase in pre-foreclosure sales signaled the tide is turning for how banks deal with distressed homes. Banks are becoming more open to pre-foreclosures because they minimize losses. With pre-foreclosure sales, a property is sold by short sale or auction before the foreclosure process is complete. In the first quarter, the average price of a pre-foreclosure home was $27,000 higher than a foreclosure sale, according to RealtyTrac.com.

While it might take a few years for the housing market to ramp back up, it's nice to know our neighborhoods won't always look like a Tim Burton comedy.

The Investing Answer: Don't freak out if the foreclosures on your street are bringing down the neighborhood. Talk with neighbors about taking turns mowing the blighted yards. Make sure your home is fairly appraised to ensure a premium offer. Talk to real estate agents and watch the market as it moves toward a recovery.

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