Shadow market tsunami!- It will take 4 years to sell all of these foreclosed homes! Good time to file bankruptcy.

(For an update on the curent state of foreclosures see this blog:  http://bit.ly/JGU1dZ ).

According to an article in the Daily Real Estate News it will take 4 years to clear the backlog of real estate “shadow inventory”.  The banks don’t admit that they have this inventory but they do.  Now we find out that there is indeed a four-year supply of these homes and the supply appears to be growing.

This is why home prices should remain depressed for some time.  Even if the overall economy turns around the housing market still operates on a supply and demand basis.  If there is this huge inventory of foreclosed homes that the banks are holding off the market then it will take some time before it is moved through the system.  We now get the word that there is this four-year supply of these shadow homes out there waiting to be sold.  I look for housing prices to be depressed for at least that long.

Scarier still is the statistic that this shadow market is up 11% in the fourth quarter of 2010 and up 40% from a year ago and the number of homes that are actually part of this shadow inventory appear to be growing.  According to the article Standard & Poors defines shadow inventory as properties with borrowers who are 90 days or more delinquent on their mortgage payments, properties currently or recently in foreclosure, or properties that are real estate owned (REOs). 

They point out that shadow inventory peaked in 2008 but that is probably because banks are currently waiting longer to foreclose on properties.  I have clients who have homes that they have stopped paying for and that they have moved out of a year or two ago and no foreclosure has been started.  It seems that banks are slowing down their rate of foreclosure processing.  This inaction creates more shadow inventory because there are now more homes that don’t show up on anyone’s radar.  These homes that don’t get moved through the system are in limbo and whether occupied or unoccupied realtors cannot list them for sale.   The number of homes like this are growing.

The article prints a chart where they show the number of months that it will take to clear these shadow homes.  It ranges from a high of 130 months in New York to a low of 25 months in Phoenix.  The other cities are Atlanta 49, Boston 71, Charlotte 65, Chicago 59, Cleveland 57, Dallas 56, Denver 38, Detroit 31, Las Vegas 33, Los Angeles 50, Miami 60, Minneapolis, 38, Portland 51, San Diego 39, San Francisco 42, Seattle 59 Tampa 57, Wash. D.C. 50.  It is clear from this chart that this is a nationwide problem of a shadow inventory of unsold and unlisted homes.

New York alone has $116.7 billion in shadow inventory according to Standard & Poors and because of the slower liquidation rate there New York will take 2.7 times longer to clear this inventory.  Los Angeles has a larger volume of shadow mortgages, $173.1 billion, which amounts to 31.5% of all outstanding mortgages.  L.A. has a faster rate of liquidating distressed properties.  My own city of San Diego has a 39 month backlog of shadow homes.

Default of home mortgage modifications remains high also.  80% of people have defaulted on their modified loans in the past and though the default rate is declining they say it still remains high.  My clients report extreme difficulty in getting their banks to agree to modifications of their mortgages.  It’s discouraging that such a high percentage of modifications go into default if people do in fact manage to get through the very difficult modification process.

The funny part is that the banks repeatedly deny that there is a shadow market or shadow inventory of unsold homes.  Realtors know that there is such a market as they can’t get listings for many of these homes that banks are holding off the market.  If banks now slow down or stall the foreclosure process then it will only increase this shadow inventory and increase the amount of time necessary to clear it before housing prices can rebound.

Don’t be surprised if the real estate market lags well behind any other economic recovery that happens in the country.  It is also possible that this huge inventory will act as a drag on the overall economy and prevent a recovery.  It could become what some have labeled as a “shadow tsunami”.

It is obviously a good time to buy a house though if you are going to keep the home for a while and its a good time to stay in your home longer if you are currently in a foreclosure.  It is also a good time to file for bankruptcy as prices will still be low in two years.  It takes two years to elapse after a bankruptcy before you can get a FHA loan approved.  Don’t allow your home to be sold at a foreclosure sale though as then you will have to wait five to seven years to buy a home.  Better to do a short sale and save your credit.

I am a bankruptcy attorney practicing in San Diego.  Please visit my website at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation at (619) 702-5015.  Call now for free credit report and analysis! 

For a free e-book: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” please send a request by e-mail to: farquharesq@yahoo.com.

Advertisements

Will Detroit be the first major US city to file for Chapter 9 municipal bankruptcy? Bankruptcy will eliminate the pension obligations but guess who will stand in the way!

Some city in America needs to be the first to demonstrate that its okay for a city to declare bankruptcy so it can get out of debt.  A city needs to get the message out that any city who does go bankrupt will emerge from bankruptcy with not only all of its assets intact but the city will be stronger, more free from debt burdens, and more able to pay its ongoing bills for services like police, fire, schools, and sanitation.

Detroit is indicating that they may have to close half of their schools to pay for the pensions that the government has promised its public employees according to an article posted in The Blaze.  Apparently the schools are already so bad that only 25% of people graduate from high school in Detroit.  Closing up to half of these schools is going to make the situation far worse.  Detroit has also announced that there is going to be an increase in class size to over 60 kids per class.

Detroit officials have also stated that they will have to cut off  a variety of city services like  police patrols, road repairs, garbage collection, and street lights according to an article posted in Business Insider and on The Blaze.  As the author points out, this amounts to abandoning these parts of the city to drug dealers, gangs, and homeless.   The article describes the abandoned buildings that are cordoned off with barbed wire as people prowl the grounds to collect scrap metal.  The city is starting to sound like something out of an apocalyptic movie or an extremely poor third world country.  It’s certainly not now the shining city on the hill.

This is obviously an unacceptable situation for America and its time we began to look at bankruptcy for these financially hardest hit cities.  Cities like Detroit cannot pay for their unfunded pension liabilities or for any of their debts at this point.  The unfunded pension liability problem has reached a crisis level in America.  In better economic times many towns, cities, and states had signed agreements with public employee unions to provide very generous public pension benefits.  Some employees work extra hard their last year to increase their pensions even more.  Some retire with 80% to 90% of their inflated last year salary and they get this for life.  These are “defined benefit” plans.  Some public pension plans allow a divorcing spouse to also get a separate pension that springs out of the other spouse’s pension.  Needless to say these benefits don’t exist in the private sector any longer because the private sector can’t afford them.  Neither can these cities.

The costs of these pensions can amount to billions of dollars over and above what the city has to pay for them.  That is why they are unfunded.  Now is it fair that residents of these cities get their taxes raised significantly to pay public employees for pensions that the residents of the city don’t have?  Chicago did just that and its residents woke up to find that their taxes were raised 60% overnight.

As a bankruptcy attorney I help people and businesses file for bankruptcy all the time.  I see what it does for them.  It sets them free from their horrible debt load and allows them to move on with a fresh start.  A city can also file for bankruptcy under chapter 9 of the bankruptcy code.  The legal right for cities to file bankruptcy was created about 60 years ago during our last great depression.   There have been almost 600 municipal bankruptcy filings in the last 60 years including Orange County here in California along with the city of Vallejo.

A chapter 9 bankruptcy operates like a chapter 11 reorganization bankruptcy.  That means that there is no liquidation of assets or shutting down of operations like in a Chapter 7 but there is instead a reorganization of finances and a re-negotiation of existing contracts.  The re-writing of contracts is just what these cities need.

The big advantage to a Chapter 9 bankruptcy reorganization (over a chapter 11 for businesses) for a city like Detroit is that the collective bargaining agreements can be re-written or thrown out altogether in the bankruptcy.  Collective bargaining is the process whereby unions representatives and representatives of a city sit down and negotiate labor conditions like pay and pensions.  When the two sides reach an agreement a binding contract is formed between the two parties.  Cities can break these contracts in bankruptcy.

A Wall Street Journal article talks about the financial crisis in Harrisburg Penn.  The city cannot afford to pay its bills just like Detroit and those in power are considering bankruptcy.  Some legislators are resisting though and some are calling for selling city assets.  I often tell my clients not to do anything with their assets until they look at bankruptcy.  City assets are exempt in a Chapter 9 bankruptcy which means that the city can keep them and no bankruptcy judge can force the city to sell its city property like buildings or land.

This is important for Harrisburg politicians to understand before they begin to sell city assets merely to avoid the stigma of a bankruptcy.  The city may need and want to keep those assets going forward into the future.  A city official, I believe, is obligated to do what is in the best interest of the city and it seems that if a city can keep assets by filing bankruptcy then that avenue needs to be considered.  If some city officials resist even considering bankruptcy protection then I would ask who are they working for?

Could it be that they are working on behalf of public unions who contribute to their campaigns?  These unions will be the big losers in the bankruptcy as they will be forced to settle for smaller pay and pension contracts.  They stand to lose the most if cities file for bankruptcy.

On the US Courts website there is a page describing chapter 9 bankruptcies.  In this section the Court goes to great lengths to emphasize that the Court’s powers are limited in a Chapter 9 bankruptcy.  The Court’s powers are limited in their ability to interfere in any way with a city which chooses to file for bankruptcy.  This is because a city is a public entity and thus a city not like a private business or individual who may go bankrupt.  There are constitutional considerations here relating to issues like separation of powers that restrict a bankruptcy court from interfering with a bankrupt city’s daily functioning in any way.

The bankruptcy court cannot do certain things in a municipal bankruptcy such as they “cannot interfere with any political or governmental powers of the debtor”, or “any property or revenues of the debtor” or “the debtor’s use and enjoyment of any income producing property of the debtor”.  They go on to say that the day-to-day activities of the debtor are not subject to court approval and the debtor may even borrow money while in bankruptcy and that the court cannot appoint a trustee or move for liquidation.

As the Court says “the municipal debtor has broad powers to use its property, raise taxes, and make expenditures as it sees fit”.  Also they point out that the debtor (the city) can “reject collective bargaining agreements and retirement benefit plans” and the city can do this without going through any of the usual procedures of a chapter 11.  In short the can eliminate these collective bargaining agreements quickly and efficiently and free the city from these unpayable burdens without disrupting city services, assets, or activities at all.  The way seems clear for any city who can’t pay for these pensions to get out of them now and cities don’t need to sell any assets in a bankruptcy and no court can force them to.

What this means is that the city/municipality has far more rights in a chapter 9 than you or your business would in a chapter 7 or 13 bankruptcy.  The city can continue to operate as before with no interference from the court and they can borrow money and not be forced to sell assets.  You and I would have our assets sold in a personal bankruptcy if they exceeded the allowable exemptions but the Court has limited powers over a city in a chapter 9 because of the constitutional protections cities enjoy.  This amounts to an extreme advantage to a city in a chapter 9 bankruptcy.  The ball is really in their court.  So much so that I wonder why there are not more of them filing as it is a clear way out of the unfunded pension liability predicament.

There will be losers though and there is the problem.  The public service unions and their employees will lose their cushy contracts with these guaranteed pensions.  They are not going to like this at all and they will undoubtably flex their political muscle.  The city official in the Harrisburg Penn. case has probably already heard from his union backers who have probably told him to resist bankruptcy and sell assets instead so the unions can get their member’s pensions.

I would ask though if the city officials work for the people of the city or for the unions.  I think it’s the residents of these broke cities that need to demand that their politicians save their basic city services and their city property by filing bankruptcy and getting rid of these unpayable obligations.  What they will get is freedom, a fresh start, and a functioning city.

Detroit can show the rest of America the way home.  They should not shut their schools or discontinue police or fire protection to their residents.  Nor should they sell any city assets because they can keep them in a bankruptcy.  They should file for chapter 9 bankruptcy and eliminate their employee union benefits and save the city.  They can be the first one out of the gate and show others that it can work.  I expect number of cities will follow Detroit once bankruptcy has worked give freedom to the residents of Detroit.

I am a San Diego bankruptcy attorney.  Please visit my website at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation at (619) 702-5015.  Call now for free credit report and analysis! 

For a free e-book: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” please send a request by e-mail to: farquharesq@yahoo.com.