11/17/2009 9:59:00 AM Wave of luxury foreclosures may be coming
By David Schueller
The Lake Minnetonka housing market hasn't suffered as much from foreclosures or short sales as the rest of the metro area.
But even though the market seems to be improving, things could get worse before they get better for many in the upper price brackets around the lake.
"People think, we're not in Minneapolis, we're fine. That's not the truth," said Nancy Arneson, a Wayzata-based real estate agent with Edina Realty. She predicts that a second wave of foreclosures is coming to the area.
While the market is complex, the problems mostly stem from the fact that property values are down. Way down.
That's left many owing more than their houses are worth.
Being upside-down on mortgages is an across the board problem, but it's created unique challenges for those with hard-to-move jumbo mortgages, those with two mortgages that make it even harder to accomplish a short sale, and those with adjustable-rate mortgages (ARMs) that are soon going to reset.
Plus, the effects of the recession can take longer to push high earners over the edge.
"These people had more staying power. This isn't the first-time home buyer who if he loses his job he's done," Arneson said.
The ARMs could create more uncertainty for those who bought and expected to sell houses before the loans reset, not predicting the market collapse.
John Skoglund, loan officer with PHH Home Loans, said loans that reset after seven years were prevalent early this decade when the average stay in a home was only about five years.
"They were depending on the appreciation of the house," Skoglund said.
Now they can't sell or refinance without a significant amount of cash.
If they're stuck with ARMs, that means mortgage bills could dramatically increase when they reset, for two reasons. For one, the fixed rate will become adjustable and could increase. Secondly, payments that were once interest only will start to include principle.
But interest rates are low, one might say. Still, some think interest rates will not stay low because of the federal deficit and the temporary subsidies on the financial markets.
Skoglund said clients in the western suburbs are concerned.
"Their concern is these rates are going to shoot up," Skoglund said. "They're concerned they're going to have 9-10 percent on a jumbo mortgage. Their payments are going to double."
Many of these same people have been trying to refinance, but don't have the cash to close.
Suppose someone bought a $700,000 house with a $560,000 mortgage, Skoglund said. If the house appraised at $500,000, a mortgage would only cover some $400,000 of that, leaving a $100,000 down payment for the refinance.
"I took a number of applications in this last year, say 20 to 30, where we started the process and we didn't finish the process," Skoglund said.
Jumbo mortgages are defined as those for more than $417,000 and can be difficult to move.
"The mortgage-backed security market does not have as big an appetite for the jumbo mortgages," Skoglund said.
Given the difficulty of refinancing or selling in the top price brackets, doing anything quickly can be more difficult for those in financial trouble.
Training for distress
Real estate agents are trying to help by becoming certified in how to work with distressed properties.
The gist of the training is teaching real estate agents how to better accomplish short sales.
A short sale is when a mortgage company accepts less than the full balance of the loan at closing.
Woody Love, a Shorewood-based real estate agent with Coldwell Banker Burnet, is one of more than 40 agents in the Lake Minnetonka area certified by the Distressed Property Institute.
Realty companies have also been doing their own training on how to adapt.
"The reality is in this market, if you look at states and nationally, one out of every nine homes is behind on a payment or in trouble," Love said. "In a down economy it doesn't take much of an additional hit to a family - a loss of a job, a death, any number of issues, divorce - to put them into a position where needing to sell a home or move a home becomes fairly difficult."
He said short sales are better than foreclosures for both banks and the sellers.
The problem is short sales are known to be notoriously difficult and time consuming, in a large part because banks haven't had the staff to deal with them.
"Probably every horror story you've ever heard about short sales is accurate," Love said.
But he said banks typically rescue 70 percent of the investment in a short sale compared with only 40 percent from a foreclosure.
Real estate agents trained to deal with short sales are taught what banks want to see to get them done.
Love said the information can be some 25 pages thick in addition to the usual purchase agreement and can include proof of what the house is worth, documents proving attempts to get a value that would've satisfied the loan, that proper marketing was done, as well as a description of hardship and profuse financial disclosures.
"I think one of the things I did learn is this is a problem where we need to leave our prejudices at the door ... people and banks are in trouble," Love said. "We have to figure out a way to facilitate these things without any kind of judgment [on] whether it's a good deal or bad deal."
Another short sale challenge
Some think that the worst is behind us.
But Arneson said there's a snag for those in the upper price brackets. They often have two mortgages, which can make short sales even more daunting to accomplish.
That's one of the reasons she thinks another wave of foreclosures is headed to the Lake Minnetonka area.
Also, these same people often can't afford to wait for a short sale offer to be considered because they aren't investors. They have families.
"It's no fun to be a realtor these days. You see so much pain," Arneson said.
One of her clients had two mortgages for about $930,000 and $500,000, but because of a low offer on the house he could only get an agreement from a bank on one of the mortgages.
Last week, Arneson said, he was in the house stripping out the plumbing, sinks, refrigerator and other appliances.
"He's taking it all and stripping it out and handing it back to the bank," Arneson said.
Yet Arneson, who's also received distressed property certification, said short sales are far and away better than foreclosures, because a foreclosure not only wounds one's financial health in the long term, it can have other effects like the loss of security clearance at a job.
"Because of who these people are this is a big deal," she said.
Arneson said it's important to seek out knowledgeable advice from the appropriate financial, legal or real estate professionals rather than burying one's head in the sand.
Slowly, it seems, real estate agents and banks are adjusting to the new reality.
"This spring I was very depressed with the market. Because it hurts people," Arneson said. "But now, I think, I can help people."
