Foreclosure Backlog — Future Liability

In my “State of the Real Estate Market --- Venice --- June 19, 2011”, I said, “... If banks continue to release Distressed Properties in Venice at the current pace, it should not significantly reduce prices or increase inventory.”  Well, David Streitfeld, writing for the New York Times, “Backlog of Cases gives a Reprieve on Foreclosures” http://www.nytimes.com/2011/06/19/business/19foreclosure.html reports: According to calculations by LPS Applied Analytics, a prominent real estate data firm, it would take lenders a decade to repossess the houses now in severe default or foreclosure in Florida.  The foreclosure system is simply bogged down by the sheer volume of cases, and lenders are in no hurry to add repossessed houses to their books. Two comments:

1. This reinforces what I said.  Banks, for a multitude of reasons, not the least of which is undertaking logistical control of so many properties, and recording losses on their books and a set off against their reserves, are likely to foreclose on properties and release them for sale at a pace consistent with existing trends.  If so, the impact of foreclosed properties coming to market should not materially cause prices to fall or inventory to increase; rather, its single greatest impact is likely to be a long and extended period of prices staying at current or near current levels.
2. Banks would rather sell a distressed property at short sale than repossess it and foreclose.  One of the benefits of a short sale, as distinguished from a foreclosure, is that the seller/borrower has the opportunity to negotiate a release of the deficiency (the difference between the amount owed to the bank and the net proceeds received from the closing).  This is critically important for second homes and investment properties.  If the borrower/seller is not completely released from any further liability, then the bank can seek payment, in Florida, for the next 20 years.  I suspect that for the vast number of short sales this is not appreciated, understood or simply ignored.  The importance of hiring a knowledgeable and experienced REALTOR® and Attorney cannot be overstated.  Although successfully negotiating a full and complete release of any and all obligations under the promissory note cannot be guaranteed; at a minimum, fully advised, the borrower/seller can make an informed decision when agreeing to the short sale, with knowledge of all of the possible risks, liabilities and continuing exposure.

Reference is also made to the story by Michael Pollick, writing in the Sunday, June 19, 2011 issue of the Herald-Tribune “In Foreclosure, Fees That Haunt”.  http://www.heraldtribune.com/article/20110618/ARTICLE/306189990.