Why Are the Number of Foreclosures Plummeting?

There’s no doubt that the number of properties being advertised for foreclosure has been plummeting for the past year and a half. The question is, why?

In 2009, when foreclosure numbers began to skyrocket, the only way a bank could deal with borrowers who were behind on their mortgages was to foreclose. The fact that banks – actually it was loan servicers like the infamous MERS – didn’t have possession of the borrower’s note, nor the legal right to foreclose on the property, is a topic for judges and attorneys.

At the same time, you had thousands of borrowers who, because they couldn’t/wouldn’t make their mortgage payments, simply “gave the house back” and walked away. (It didn’t matter to the borrowers that the bank didn’t give them a house; it gave them money…and the bank – rightfully so – wanted their money back, not a house.) A bank’s only tool to deal with this situation was to foreclose on the property, and then sell it in hopes of recouping some of their loss.

Fast-forward five years. These days, lenders have many more tools to use to help homeowners avoid foreclosure. Two examples are: 1) The Cash-for-keys program, and 2) A wide variety of government-backed loan modification programs, like HARP.

Another tool that realtors and lenders have gotten much better at using is short sales. In 2008, almost no one knew what a short sale was. These days, you regularly hear the term “short sale” on the nightly newscast. We all know that doing a short sale is a better, faster, cheaper way to deal with a troubled property than is a foreclosure.

In addition, back in 2009, we didn’t have these gigantic real estate buy-up-everything vacuum machines called hedge funds, whose pockets are stuffed with Wall Street money. Hedge funds are primarily responsible for the rapid increase in real estate values, as well as the huge decrease in the number of homes being sold at the foreclosure auction.

The last reason the number of foreclosures has plummeted is due to sales. Because values have increased, some homeowners who had been upside-down on their mortgages can now sell their homes without doing a short sale or going through foreclosure.

Here’s something interesting: Kim and I are beginning to see a byproduct happening at the foreclosure auction that is a direct result of the huge drop in the number of homes being cried on the steps: we’re seeing dejection – lots and lots of dejection. From whom? Real estate investors!

From 2009 through 2012, the foreclosure auction was THE PLACE to buy real estate – lots of low-hanging fruit. Now that the low-hanging fruit is gone, investors who don’t know how to get face-to-face with sellers are packing their bags and going home. To them, real estate investing is dead. But the truth is, real estate investing has always been a you-gotta-get-face-to-face-with-sellers business!