Foreclosure Update

June, 2006

Even in the best of times in the real estate market property owners encounter unfortunate circumstances and fall behind on their mortgage payments. In the state of California the foreclosure timeline, including the two months the owner must be behind before the notice of default can be filed, is nearly 180 days. In most cases, enough time to cure the loan default or sell the property.

Over the next several months it appears likely that many owners who have fallen behind on their mortgages may not find it easy, or even possible to cure the default and avoid foreclosure. Home prices in the Sacramento region have leveled off and in some cases have trended down. Because of the aggressive loan origination practices of the past few years, many borrowers have put little or no money down when purchasing. Any disruption in the property owner’s income puts the mortgage at risk.

As the chart below indicates, the number of homes going through the entire foreclosure process is increasing, particularly in Sacramento County. We will closely monitor this situation and provide regular updates to keep you informed.

For those looking for buying opportunities, it seems likely that we will begin seeing many more bank owned properties (REO’s) available for sales. While we may be months away from a time when these properties can be bought at a deep discount, that time is coming. In the meantime, it is highly likely that many mortgage lenders will look to limit their losses on delinquent loans. It was very common in the mid-90’s for lenders to negotiate a discounted mortgage payoff (a Short Sale) with borrower’s who fell behind on their mortgage and were forced by circumstances to sell. Short Sales tend to push home prices down, but not nearly as much as would be the case if the properties were taken through foreclosure.

The graphs below indicate how many homes in Sacramento and Placer Counties are either in the initial stages of foreclosure or have gone through the entire process and sold at a Trustee’s Sale.