Foreclosures take toll in Lincoln, nation

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BY MATT OLBERDING / Lincoln Journal Star

Gary Thompson recalls a recent trip to check on a foreclosed home east of Lincoln.

As he left the house, a neighbor approached.

“Are you going to start cutting the grass now?” the man asked.

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Gary Thompson has offices in Lincoln and Omaha for his company BRA Realty Center Midwest that handles repossessed houses. "I've seen things that break my heart," Thompson says of some of the families he's evicted. Often a house, like this one, is left trashed and he never meets the former occupants. (William Lauer)

Gary Thompson has offices in Lincoln and Omaha for his company BRA Realty Center Midwest that handles repossessed houses. "I've seen things that break my heart," Thompson says of some of the families he's evicted. Often a house, like this one, is left trashed and he never meets the former occupants. (William Lauer)

Advisors: Those in trouble need to talk

The best way to avoid a foreclosure, experts say, is to not let the process begin.

If paying your mortgage is becoming a problem or if you are in an adjustable rate mortgage that is about to reset at an unaffordable rate, talk to your lender before that delinquency notice shows up in the mail.

“The No. 1 thing people can do is talk to their lender,” said Michael Snodgrass, executive director of NeighborWorks Lincoln, a non-profit housing group.

When doing so, he said, “let them know the challenges upfront.”

As the foreclosure crisis has grown, lenders have become more receptive to working with borrowers, said Ken Killman, a counselor with Consumer Credit Counseling Services of Nebraska.

“They understand they have a problem and they have to deal with it,” he said.

Killman and Snodgrass both said many people are having trouble with adjustable-rate mortgages resetting to higher payments.

The best thing to do in that situation, they said, is to try to refinance into a fixed-rate loan.

If that’s not possible, talk to your lender about modifying the terms.

Killman said it’s also important to get your entire financial house in order.

Cut down on other spending if possible and don’t take on any unnecessary new spending.

Also important is to determine whether you can, or even want to, stay in the house.

“The assumption is that people want to stay in their house,” Killman said. “But that’s not always true.”

Snodgrass agreed.

“There are some people who bought too much house,” he said.

If you no longer want or can afford to own the house, try to sell it.

Even though homes are taking longer to sell and are selling for less than in the past, a sale is preferable to a foreclosure, for both the owner and the lender.

“Foreclosure is an expensive proposition for lenders,” Killman said.

According to the Mortgage Bankers Association, banks can spend as much as $40,000 to $50,000 foreclosing on, repossessing and selling a house.

That’s why more are becoming receptive to what’s called a “short sale,” in which the home sells for less than is owed on the mortgage and the lender agrees to write off the rest, Killman said.

Newsday recently reported that calls to an Arizona company that negotiates short sales have increased sixfold in the past six months.

In Nebraska, a December news story in Omaha said Realtors there are seeing more short sales than ever.

Gary Thompson, who specializes in selling foreclosed homes in Lincoln and Omaha for ERA Realty Center Midwest, said he hasn’t seen a huge increase in short sales, but he expects to start seeing more of them.

“It’s the best way to mitigate (lenders’) damages,” he said.

For example, Thompson offered up the recent sale of a northwest Lincoln home.

Several months ago, the owners tried to sell the home on their own and had two offers, one for $115,000 and one for $113,000.

Thompson asked the lender if it would accept the higher offer, which was the amount the homeowners owed on their mortgage.

The lender, a national company, said it would consider it, but it would take up to two months to process because of a backlog of foreclosed homes.

Because of the delay, the offers were withdrawn and the lender foreclosed on the home and eventually sold it -- for $91,000.

While short sales can be a better deal for a lender than foreclosure, a recent tax law change makes them more attractive to homeowners as well.

Before adjourning for the year in December, Congress approved a tax-relief bill that eliminates taxes on forgiven mortgage debt through 2009.

In the past, such debt was treated as taxable income, meaning someone selling his or her house for less than it was worth would have had to pay taxes on the difference.

-- Matt Olberding



Tell us your story

If you are going through the foreclosure process or if you have already lost your home to a foreclosure, the Journal Star would like to hear your story. Please contact Assistant Business Editor Matt Olberding at 473-2647 or molberding@journalstar.com.

Thompson, who specializes in selling foreclosed homes for ERA Realty Center Midwest, says he told the man yes, even though it looked like someone had been cutting it regularly.

Turns out he was right.

The neighbor he talked to and another one on the other side of the house had been taking turns mowing the lawn, trying to keep the abandoned property from falling into disrepair.

Stories like this one are becoming more common as lax lending standards, bad financial decisions and overall economic woes have combined to send the foreclosure rate sharply higher locally and nationally.

There are no exact data on the number of foreclosures in this area, but nearly everyone agrees they are on the rise.

RealtyTrac, which tracks foreclosure rates nationwide, listed 683 properties in Lincoln that as of Wednesday were either in the foreclosure process or already had been foreclosed upon. But the company does not give corresponding historical totals, making a comparison with previous years impossible.

Thompson, who sells foreclosed homes in both Lincoln and Omaha, says he saw about a 20 percent increase in foreclosures in those markets in 2007.

Statistics suggest a larger increase. RealtyTrac said foreclosures were up 84 percent in Nebraska through the first six months of last year.

“In my 22 years of doing foreclosures, I would say this is the peak of foreclosure activity,” said Eric Lindquist, an Omaha attorney who represents lenders in foreclosure cases.

Lindquist says about half of the cases he works on don’t end in a foreclosure sale, because people are able to renegotiate terms, get caught up on payments or sell their homes on their own and pay off their debts.

Still, he said, the problem in Nebraska is “nowhere near” what it is in other states.

Nebraska’s overall foreclosure rate of 1.33 percent of all mortgage loans in the third quarter was well below the national average of 1.69 percent, according to the Mortgage Bankers Association. In RealtyTrac’s third-quarter foreclosure report, the state’s rate of one foreclosure filing for every 770 households made it 34th of the 50 states.

Michael Snodgrass, executive director of nonprofit housing organization NeighborWorks Lincoln, agreed that Lincoln is in much better shape than most of the rest of the country.

 But that means little to those whose homes are in foreclosure.

“If it’s your home and you lose it, it’s a problem,” he said.

‘Pretty much beaten down’

Contrary to popular belief, most foreclosures don’t end up with forced eviction.

It actually costs lenders more to go through all the legal hoops to evict someone, so in many cases, Thompson said, the banks will pay defaulting borrowers from $500 to $2,000 in exchange for promises to leave by a certain date, to not damage anything and to take their belongings.

A few refuse the offer,  wanting to stay in their homes as long as possible.

But most people are happy to take the money and run, he said.

Thompson said he has seen a change in attitudes about homeownership: Owning a house has become less of a badge of honor than it was five or 10 years ago.

In the past, people facing foreclosure would do everything possible to keep their homes, he said.

Not anymore.

“For the first time ever, people are turning houses back to the bank who could afford to keep them,” Thompson said.

Ken Killman, a counselor with Consumer Credit Counseling Services of Nebraska, said the assumption that everyone facing foreclosure wants to stay in his or her home is not always true.

Some people bought more house than they can afford and just need to get out and start over.

Thompson said he thinks non-traditional mortgages are a big culprit.

The No. 1 reason for foreclosures  used to be divorce, Thompson said, with medical bills coming in second.

Now about half of the foreclosures he sees are because of variable rate mortgages adjusting up.

According to the Mortgage Bankers Association, nearly 3 percent of all prime adjustable-rate mortgages in Nebraska were in foreclosure in the third quarter of 2007, more than double the overall foreclosure rate and five times the foreclosure rate for prime fixed-rate loans. If those adjustable-rate mortgages were of the subprime variety, meaning they were issued to people with spotty credit records, the foreclosure rate jumps to more than 10 percent.

Most adjustable rate mortgages adjust once or twice a year after their fixed-rate period expires, but some can adjust as often as monthly.

“I’ve worked with people whose payments have increased $300-$400 a month,” Thompson said.

Combine that with flat or negative appreciation of the home’s value and little home equity, and people are just ready to give up.

“By the time I get to the property, they’ve been pretty much beaten down,” he said.

Left holding the bag

When a homeowner walks away, lenders are left to deal with the homes.

Although several people who work in the local housing market have suggested that one of the reasons for Lincoln’s relatively low foreclosure rate is conservative lending, Thompson thinks that’s only true to a point.

Many local banks originate  home loans and then sell them to other banks or the giant mortgage finance companies Fannie Mae and Freddie Mac. Most local banks also don’t purchase loans that were originated by another lender.

So when the loan becomes delinquent or hits the foreclosure stage, those banks are no longer on the hook for it. Instead, the companies that bought the loans — mostly large national and international banking conglomerates — are left holding the bag.

That point is borne out in statistics from the Lancaster County Assessor/Register of Deeds Office.

As of Dec. 28, Wells Fargo had sold 63 houses in Lancaster County. That’s up from eight in 2004. Deutsche Bank had sold 58, up from six in 2004. Bank of New York sold six houses in the county from 2004-2006. Last year, it  sold 21. JPMorgan Chase had sold 12 as of Dec. 28, up from four in 2004.

Of those banks, only Wells Fargo has an actual brick-and-mortar presence here.

By contrast, U.S. Bank, TierOne, West Gate Bank, Union Bank and First National combined sold 10 houses in Lancaster County in 2007.

That doesn’t mean the local banks did anything unethical in their lending, but it does show how the sale of loans on the secondary loan market affects foreclosures.

Since those large national and international banks now own thousands of homes all over the country through defaults, their objective is to sell them as quickly as possible, even if they have to take a loss on the loan.

That leads to a “fairly aggressive price,” Thompson said.

Most of the lenders with whom he works will take a loss of from 7 percent to 10 percent on their investment, but he has heard of banks willing to take a hit of as much as 40 percent to get a home sold quickly.

Foreclosed homes do become a good bargain for buyers, who are mostly investors and first-time home buyers, according to Thompson, and they usually sell pretty quickly.

The downside is that the cheaper prices can make it difficult for others trying to sell their homes to compete, leading to lower prices and long times on the market.

Although the number of homes for sale locally has come down some from a record high set in September, there were still almost 2,200 homes for sale at the end of November.

That amount of inventory has given buyers plenty of choices and helped lead to a 4 percent drop in the average price of homes in 2007 compared with 2006.

Some local real estate professionals have said they see foreclosures having little effect on local home prices. Thompson disagrees.

 Foreclosed homes have “no bottom” when it comes to price, as lenders will continue to drop the price until the home sells.

A company such as Countrywide is not going to take the house off the market because it’s not fetching a certain price, he said.

A foreclosed home quickly becomes the cheapest one on the block,  according to Thompson.

“And that value will then affect that neighborhood,” he said.

Other effects

Whether a neighborhood suffers other effects from a foreclosure depends on the house and the neighborhood, Thompson said.

When he shows up at a house that has been repossessed, it’s a crap shoot as to what he might find.

Although most people don’t intentionally damage their homes, Thompson said, homes being foreclosed upon often have had little maintenance or upkeep.

Some people also leave behind personal property and trash.

People who are unable to make their house payments also may be having trouble paying their other bills, including utility payments.

“We’ve noticed it on our end,” said Doug Luedtke, assistant business manager for Lincoln’s Public Works/Utilities Department.

Luedtke said forced water shutoffs, which don’t occur until customers are four months behind on their bills, increased 11 percent from fiscal year 2006 to fiscal year 2007. The number of delinquent accounts increased 13 percent in the same period, he said.

Lincoln Electric System officials said they had not seen a similar spike in service disconnections, and Aquila said it does not track numbers in such a way as to be able to distinguish reasons for service shutoffs.

Windstream spokesman Chris Hunt checked numbers for October, the most recent monthly totals available to him. Those numbers showed there were more shutoffs in October 2006 than in the same month in 2007.

But Hunt noted that phone service often is one of the first to go when people are struggling financially, and he speculated that perhaps the effects of foreclosures hit Windstream earlier than others.

What’s to come

Thompson doesn’t see the local foreclosure situation easing until at least 2009.

“There are still too many coming down the pike,” he said.

Snodgrass, the NeighborWorks Lincoln chief, agreed, saying this could be a bad year for resets on adjustable rate mortgages.

“It’s going to get worse before it gets better,” he said.

As of Dec. 28, the number of delinquency notices filed with the Lancaster County Assessor/Register of Deeds — considered the first harbinger of foreclosure — stood at 996, passing last year’s total of 967. In 2005, there were 656 notices of default filed locally.

Thompson also thinks foreclosures are beginning to cut a wider swath across the economic spectrum.

In the past, he said, the majority of foreclosures he worked on were entry-level homes, many valued below $100,000.

Now, he said, he’s seeing homes worth as much as $500,000 being foreclosed upon locally.

According to Register of Deeds records, Bank of New York sold a foreclosed home in August for $500,000, and both Deutsche Bank and Wells Fargo sold foreclosed homes in 2007 for more than $300,000.

“We’re seeing this economy and the foreclosures affecting a larger cross-section than we ever have, and that’s not good,” Thompson said.

But the burden of foreclosure still falls predominantly on the lower and middle classes.

That has prompted Neighborworks, which usually works on the front end with education programs for first-time home buyers, to begin the process of starting a foreclosure counseling program.

Snodgrass said full details will be released later this month, but the program will include a 24-hour national hotline.

“We know it’s a service that’s needed immediately,” he said.

Despite all the dire statistics and his feeling that a recession may be on the horizon,  Thompson doesn’t think the sky will fall.

“We are not in a crisis situation,” he said, “but we are in an adjustment, certainly.”

Reach Matt Olberding at 473-2647 or molberding@journalstar.com.