Nearly four years after the collapse of the real estate market, Nevada remains the foreclosure capital of the nation. But here comes the government to the rescue!
The Nevada Legislature may have unwittingly found a way to reduce foreclosures by over 99%. Though it may come at the cost of driving a stake through the barely-beating heart of the state’s real estate industry, what’s a little collateral damage?
During its last session the Legislature passed a bill, AB284, that is designed to combat what some people had claimed were abuses by banks in foreclosure proceedings, such as “robo-signing”. But it is a classic example of legislative action having serious unintended consequences.
The law requires a bank to submit an affidavit proving it has the right to foreclose when it files the Notice of Default and Election to Sell (NOD), which is required to begin a non-judicial foreclosure (a foreclosure that does not proceed through the courts).
In the first month the law was in effect, the number of these notices filed with the Clark County Recorder’s office plunged by over 99%. The number of NOD filings averaged 1,956 per month from October 2010 to September 2011 and totaled 2,724 in August 2011 and 2,297 in September.
After the law took effect on October 1, 2011, there were a total of 13 NOD filed in the next month. That’s not a typo and there are no digits missing. Thirteen were filed in the entire month of October 2011.
Under normal circumstances a drop in NOD filings might be a sign of recovery. But in the wake of AB284, this is not an indication of such good news but that the law has rendered lenders unable to pursue non-judicial foreclosures, which could have a devastating effect on real estate, banking, title and other companies related to the real estate industry.
The reason it presents such a roadblock to pursuing foreclosures is the nature of the affidavit, which is required to verify the lender has the right to foreclose on the property. The lender must prove the owner is delinquent in payment and the lender owns the right to foreclose.
The person signing the affidavit must swear to “personal knowledge” of various characteristics and history of the property and the mortgage; merely possessing documentary evidence – paper trail or electronic trail of transactions – is not enough. In many cases this is impossible to do.
For example, one portion requires the person have “personal knowledge” of “all prior beneficiaries of the deed of trust.” If a mortgage was initiated by Bank A, then sold to Bank B, then to Bank C, then Bank D, there is NO WAY an employee or agent of Bank D can have personal knowledge of the prior transactions. Yet the affidavit requires her, under penalty of perjury, to swear that she does. No sane person would take the risk of signing such a document.
In the current market, no foreclosures means no home sales. About 2/3 of real estate sales in Las Vegas currently are foreclosure auction sales, real estate owned (REO) sales or short sales. REO’s are those in which a lending institution has taken possession of a property after foreclosing on the previous owner and failing to sell it at the foreclosure auction.
Short sales are those in which the homeowner sells the home for less than is owed on the mortgage. This transaction requires approval from the bank as it has to take a loss on the sale. Most short sales are a result of a homeowner in default or at risk of default attempting to avoid foreclosure.
If there is no risk of foreclosure these homeowners will not choose to short sell their homes. Most will likely choose to live in their homes without making mortgage payments. With the lenders unable to foreclose they can do this indefinitely.
Although no one knows for sure how many homes banks are currently holding onto, estimates vary from about 4 to 6 months worth at current sales volume. So if there are no more foreclosures there will be significantly fewer homes to sell after the first couple months of next year. This artificial shortage could inflate yet another housing bubble that would have a disastrous burst.
Realtors and others involved in home sales are extremely worried about the impact AB284 may have on the real estate market in Las Vegas. Tracy Bouchard has owned National Title of Nevada since 1983 and has rebuilt his company back up to 50 employees after it had fallen to 20 after the bubble popped. He says the effect of AB284 could be “a lack of Notices of Default, a lack of product to sell” and warns “that really is checkmate” for his firm and others in the industry. He adds, “I don’t know what’s going to happen in April.”
Bouchard notes the residual economic boost that these sales can have. “Investors are a very important part of this market,” he says. “When the investors buy these properties at the auctions, they are buying properties and fixing them up, bringing the HOA current – a homeowner who’s not paying his mortgage probably isn’t paying his HOA dues, either – and selling them to a vested owner. When they do this, they’re hiring contractors, buying materials – such as flooring, granite, paint. They have a huge positive effect on the economy. If these investors go away it’s going to hurt a lot more than just real estate.”
But there could be other unintended consequences of AB284. A bank that can’t foreclose on a delinquent buyer is not going to offer home loans. There’s a reason interest rates on home loans and other secured loans are less than those on credit cards – collateral, the lender can take something of value if the buyer doesn’t pay the loan back. Remove the ability to repossess that collateral and the price to borrow goes way up, if they will lend at all.
Banks could also rely exclusively on judicial foreclosures. But clogging the courts with an additional 2,000 cases per month would put a tremendous strain on an already bursting court system. More than likely banks will choose to tighten their restrictions for obtaining home loans in Nevada, making it even more difficult to obtain a home loan.
AB284 is a prime example of unintended consequences. The legislation could allow many people to live in their homes indefinitely without making a mortgage payment, courtesy of the Nevada Legislature. But that could have catastrophic effects on the local real estate market and the wider economy.