By on 15 October, 2010 in Real Estate, Sandra Nickel with 1 Comment

Will The Foreclosure Freeze Chill Montgomery Real Estate?

You have no doubt read that many major banks and mortgage companies have declared at least a partial freeze on mortgage loan foreclosures. As of today (Friday, October 15th), only Bank of America has halted foreclosures in all 50 states. Most other larger lenders have suspended foreclosure action only in the 23 states that employ judicial foreclosure.

What is judicial foreclosure and why should I care?

In 27 states across the nation, if a homeowner defaults on their payments, their lender must actually file a lawsuit and prove before a judge in a court of law that they (lender) have the right to foreclose and “repossess” the house. As a part of the legal action, the lender must produce “a mountain of paperwork” and it is this paperwork that lenders are sometime finding flawed. Judicial foreclosure can take anywhere from 6 months to a year or more.

But Alabama law requires only that—once a borrower is late on their mortgage payments–the lender send a “demand letter” (a document that in essence says “pay the entire amount of your mortgage NOW!”) then advertise the pending foreclosure action in some local paper for 3 consecutive weeks. If the debt is not paid in full or some satisfactory arrangement made to catch up on the payments, the attorney representing the lender actually goes to the courthouse, announces the sale, and “auctions” the property off. If there are not other bidders, the attorney usually is empowered to bid the amount owed on behalf of the mortgage company.

This non-judicial process (my real estate attorney friend Charles Edmondson calls it “self-help” foreclosure) really presents few opportunities for error when compared to the paperwork-intensive judicial foreclosure process. And that is why most lenders will continue to process foreclosures in Alabama and other non-judicial states.

Why is Alabama a non-judicial foreclosure state? I could not find a definitive answer to that question, and it appears to be in line with our generally conservative outlook on things like regulation. We are, for example, still a right-to-work state where union membership cannot automatically be required as a condition of employment. I will continue to research this topic with the help from a friend at Landrum HR, I really need to get to the bottom of this.

Should the government step in and require a nationwide moratorium?

What I have written so far is based on fact. Now I’m going to opinions. There seems to be no clear consensus as to whether a nationwide foreclosure freeze would do awful damage to real estate and financial markets.

It’s a fact that there are thousands upon thousands of delinquent mortgages right here in Alabama. Many of those thousands are in the Montgomery area. A freeze on foreclosures would, in many cases, just delay the inevitable. It might allow more homeowners to negotiate mortgage modifications, but I understand that most folks are behind on their payments because their financial circumstances have changed tremendously and modifications just don’t seem to be viable solutions.

Home sales would clearly be affected, at least in the short term. Last month, for example, 9.4% of the homes on the market in the Montgomery MLS were foreclosures. But 28.6% of the homes sold in September were foreclosures.  Our already troublingly low sales volume—only 252 houses sold throughout the River Region last month when 350-400 would be the norm—would probably slow to a snail’s pace if there were no foreclosures to be bought by investors and bargain-hunting homeowners.

So…at the risk of sounding like an Adam Smith laissez faire economist, I find myself believing that the best course would be for the government to keep its nose out of this mess and let the market run its course.

Sandra Nickel has been listing and selling residential real estate for over 29 years, most with an intense focus on Montgomery’s Midtown neighborhoods. Sandra serves on the Mid-Alabama Coalition for the Homeless, the Cloverdale Business Coalition, Historic Southview, the Volunteer and Information Center, Landmarks Foundation and her own neighborhood Garden District Preservation Association.

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