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VOL. 124 | NO. 100 | Friday, May 22, 2009

Foreclosures Slow After Subprime Spigot Begins to Trickle

By Eric Smith

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FIGHTING FORECLOSURES: Although the real estate market has a ways to go before reaching a full rebound, Shelby County numbers show local foreclosures have fallen 7.9 percent in the past 12 months. -- PHOTO BY AMY SMITH/SHUTTERSTOCK

In the fight against foreclosure, even the smallest victories should be celebrated, from a family staying in its home to a predatory lender going out of business.

Go ahead and count the latest figures as another reason to cheer.

While they weren’t stellar – and while they certainly don’t portend the end of this crisis – the most recent numbers show foreclosures in Shelby County declined 7.9 percent over the past year.

Shelby County saw 5,670 residential foreclosures during the past 12 months (May 2008 through April 2009), down from 6,154 the previous period, according to data from real estate information company Chandler Reports, www.chandlerreports.com.

Based on the yearly totals, the monthly average of foreclosed homes for that period was 473, down 7.8 percent from a monthly average of 513 the previous year.

John Gnuschke, director of the Sparks Bureau of Business and Economic Research at the University of Memphis, attributed the drop to the simple fact that bad loans – those of the adjustable-rate and subprime nature – haven’t been issued for a while. Therefore, it was only a matter of time until mortgage defaults began to taper.

“The heart of the issue is a lot of people who would have gone into foreclosure have already had it happen to them,” he said. “The initial round of foreclosures was primarily related to subprime loans, and that happened early on. That’s pretty much over.”

Most, but not all

But, Gnuschke warned, the subprime fallout isn’t completely over. He said the current foreclosure situation revolves partially around subprime loans, but mostly around the sour economy.

“The job losses we have sustained have been important,” he said. “Clearly, they’ve had a tremendously negative impact on families throughout the community.”

Simply put, job loss equals income loss equals inability to pay a monthly house note. One of the people who sees this scenario play out every day is Rhonda Rucker, housing counselor at The Works Inc.

Rucker has worked with families where parents lost their jobs or their hours have been cut back so much that it’s like they are getting just one paycheck every two weeks.

“The two-income families are almost not existing anymore,” Rucker said.

The foreclosure outreach at community development corporations like The Works has been effective, with counselors helping borrowers obtain loan modifications from their lenders. But the issue hasn’t entirely dissipated, with new waves of problems rearing their heads daily – such as skyrocketing unemployment.

“It’s never ending,” Rucker said.

Rucker said the traffic at her office has been busy but manageable thanks to community development counselors calling each other to offer help. Now, most of Rucker’s time is being spent repairing the credit of people who want to buy a home – many of them looking for a foreclosure that costs less than a market home.

“I’m seeing more of that trend happening right now,” she said.

Pressure tests

Emily Trenholm, executive director of the Community Development Council of Greater Memphis, said the CDCs in town are frequently at capacity.

She said the need for credit repair has increased while the need for foreclosure counseling has lessened, but it hasn’t gone away as adjustable rate loans continue to reset – albeit at a slower clip – causing problems for the remaining ARM borrowers as they struggle with increased payments.

Trenholm agreed the biggest problem is increasing unemployment rates. Those numbers might be skewing the most recent foreclosure numbers.

“We don’t know yet if the (foreclosure) dip is really a trend, or if it’s going to go back up as unemployment continues to rise,” she said.

If it does rise, help could be on the way now that the Helping Families Save Their Homes Act has passed the U.S. Senate and House. The bill was crafted to help homeowners stave off foreclosure, and Trenholm said there has been a rise in calls about the “Obama Plan.”

She said she hopes Memphis neighborhoods will reap the benefits of it. The Hope for Homeowners Act of 2008 – which this new act amends – didn’t reach the communities that Trenholm’s organizations are helping at the ground level.

“The things that were done in 2008 helped almost nobody,” she said. “But it seems like there’s more pressure on the servicers to work with borrowers. That’s our goal, for people to stay in their homes and be able to keep their homes.”

A story all their own

Some of the most eye-opening trends can be found by looking deeper into the numbers, especially at the county’s ZIP codes. The top five areas for foreclosure aren’t surprising: Frayser’s 38127 was tops with 524 foreclosures last year, followed by Raleigh’s 38128 (440), Oakhaven/Parkway Village’s 38118 (356), Southeast Shelby County’s 38125 (351) and Westwood’s 38109 (345).

But each one of those ZIPs saw declines from the previous year. At the same time, the most populous eastern suburbs – Cordova, Collierville, Arlington/Lakeland and Germantown – all saw increases from the year before.

Moreover, foreclosures have taken a bite out of the residential sales totals, accounting for a much larger percentage of monthly sales than they did a few years ago. For example, in April there were 557 bank sales out of 1,290 home sales, representing 43.2 percent of the total volume.

In April 2008, the county’s 520 bank sales were 34.7 percent of the total volume of 1,498, and in April 2005, the county’s 335 bank sales were just 16.5 percent of the total volume of 2,030.

Also, the rate at which adjustable-rate mortgages are contributing to foreclosure is declining. Conventional ARMs accounted for 1,028 of all foreclosures from the past year, a 32.5 percent decrease from the previous year. And conventional fixed-rate mortgages accounted for 1,180 of all foreclosures from the past year, a 7.5 percent increase.

Of the county’s 5,670 residential foreclosures during the past 12 months, 5,142 were on single-family homes. That category was followed by planned unit development – detached (180); condominium units (117); zero-lot line (91); and planned unit development–attached (52).

Larger ailment

Not surprisingly, commercial real estate has been hit hard by foreclosures, although that sector also has seen a slight decline. There have been 109 commercial foreclosures in the past 12 months, an 11.4 percent dropoff from 123 during the previous period.

However, the past year – especially the past few months – has seen a rise of high-profile properties face financial trouble. Nowhere was foreclosure’s impact on the commercial market more evident than the Downtown skyline. The One Commerce Square tower last month was sent into foreclosure, sending shockwaves through the community.

Commercial foreclosures are taking an even bigger toll on the multifamily industry. Of the 15 apartment complex sales from the past year valued at $1 million or more, only seven have been conventional transactions. The others were sold by a bank, a trustee or the health board, all the result of a strapped owner.

Blake Pera, senior vice president for CB Richard Ellis Memphis’ multifamily division, said the rise of foreclosures in the apartment sector is a national trend.

“The number of foreclosures we are experiencing in Memphis is pretty much in line with what most markets are experiencing today,” Pera said earlier this month. “Some of the foreclosures were driven by the economy, but most were caused by aggressive leverage assumptions from the last several years.”

Chandler Reports is a division of The Daily News Publishing Co.

PROPERTY SALES 83 405 4,276
MORTGAGES 104 424 4,814
BUILDING PERMITS 148 883 10,151
BANKRUPTCIES 53 264 3,149