RealtyTrac figures show that 23 percent fewer area homes were in the foreclosure process in October than the previous month. But that still left 1,234 homes in the foreclosure process, and Housingtracker.net reported that the median value of homes sold in October — $182,966 — was down from September.

Jack Shelton, owner of Overland Park-based Shelton and Associates, said the high number of foreclosures has business booming for his appraisal service.

“Despite the numbers, the market is still very poor,” Shelton said. “One of the numbers you really need to look at is oversupply.”

Shelton said anything more than a six-month inventory is considered oversupply. He said central Kansas City south to 75th Street has an 11.9-month inventory. Just south of there, where homes have a higher value, inventory stands at 7.5 months. He said Raytown has a 9.9-month inventory and also suffers from an 18 percent decline in average sales price.

He said some submarkets are holding their own, such as Prairie Village and Shawnee, where home values flattened out and there’s less than a six-month inventory.

“But those are getting fewer and fewer,” Shelton said. “If we don’t see some change in the next three months, we’re going to see a slide in things.”

So far, the federal government has focused on creating that change by pumping billions of tax dollars into large financial institutions.

“The goal was not for institutions to take the cash and hoard it,” said Kelly Edmiston, senior economist for the Federal Reserve Bank of Kansas City. “The idea was for them to lend it. When lending starts up again, it will grease the skids for the whole economy.”

However, Shelton said his experience is that many banks remain extremely risk-averse, with underwriting guidelines so high that few qualify for mortgage loans.

“I’m telling you that the banks are sitting on the dough, and as a result, you’re seeing more auctions,” Shelton said. “Whenever you see an auction sign, you’re looking at a sale 20 to 25 percent below the typical market price for the area.”

Michael Duffy, a lawyer with Legal Aid of Western Missouri, said companies like Deutsche Bank, the largest single holder of foreclosed properties in the Kansas City area, often can’t find local buyers for foreclosed properties. So the homes are packaged and dumped at auction for pennies on the dollar, with devastating effects on neighborhood appraisals.

Ted Meyer, a spokesman for Deutsche Bank, said that although the bank’s name is on the properties, it is a trustee for the investors who own securities made up of pooled mortgages. He said outside servicing companies are responsible for foreclosures and selling foreclosed properties.

Duffy said servicers have no interest in the health of the mortgages or the securities because their main job is to collect payments and forward them to the trustee for a fee.

“They get fees for everything they do, including conducting a foreclosure,” Duffy said. “So it really doesn’t matter economically to a servicer if there is a foreclosure because they get fees either way.”

Duffy said that is why he thinks bankruptcy judges should be allowed to do cramdowns, or adjustments of principal and interest to make loans more affordable.

Shelton said that is one of the last things lenders want to see because it creates a level of uncertainty in the mortgage market.

“Over the long haul, investors will say they will never buy those things again because they just got burned big time,” he said.

Michael Krimminger, special policy adviser at the Federal Deposit Insurance Corp., said the organization is sharing techniques for handling foreclosures gleaned from its handling of the failed IndyMac Bank.

Krimminger said the FDIC sent out conditional offers showing what new payments could be if borrowers cooperated. It garnered a response rate of more than 70 percent. He said the FDIC then verifies income and modifies loans only when doing so makes more sense economically than foreclosure.

Servicers have a contractual obligation to maximize value for investors, Krimminger said, so they can be forced by investors to renegotiate mortgages. But for a renegotiated mortgage to be successful, servicers need to make sure payments are affordable to the borrower.

“If a person is behind on their payments, it doesn’t make sense to increase their payments right now to get them caught up,” Krimminger said. “We’ve been adding that balance to the principal and adjusting the loans in ways that make sure the new payments are affordable.”

 SOURCE: Business Journal