The Sacramento-Stockton area, since it was an epicenter of foreclosure activity, has more recently begun to demonstrate the ways local real estate markets can emerge creatively from the depths of the economic crunch.

The community of Elk Grove, for example, has 967 bank-owned properties, most of them boarded and silent, waiting to go on to the market at an undetermined future date. Recently, though, fifteen of the homes have been purchased by a municipal organization, improved, and sold at a low enough price to qualify as a great opportunity for low-end buyers.

The money for this comes from the federal Neighborhood Stabilization Program and the improvements are guided locally by NeighborWorks. The amount of money allocated is determined by how bad the foreclosure situation is and has been in an area. Elk Grove has receive $2.4 million. The city suffered 2,657 foreclosures between January 2007 and June 2008—which should qualify it for great sympathy, at the least.

There are currently about six homes on the market (check egplanning.org/housing). It’s limited to first-time buyers within certain income ranges. And it’s working.

Now, the sale of fifteen homes to qualified low-income buyers is hardly going to make the foreclosure problem disappear. But within the modest parameters of its goal and expectations, it’s working. When a home goes from empty and boarded to attractive and occupied by people with pride of ownership, the whole neighborhood begins to improve. Lenders get REOs off their books. Local builders get work. And any profit generated by the project goes back into the program to help bankroll the next home improvements. (The program also includes assistance with down payment.)

Such things need to be done on a small scale, it seems; otherwise, they stop working very well. “Baby steps,” as the old film, “What About Bob?” asserted.

I confess I am astonished that we are still seeing so few effective programs dealing with foreclosed properties, homeowners who are underwater, and neighborhoods in decline. Perhaps most people look at the magnitude of the remaining problems and assuming it’s all too much and there is no way to whittle it down to the size that allows us to make genuine progress toward solutions.

Beside, if we want something big and terrifying, we can always look at the sovereign debt problems in Europe and elsewhere, and we can get lost in the seemingly unsolvable problem of our national indebtedness. Problems like this inspire many of us to hide our heads, instead of sparking creative, workable solutions.

We—myself included—follow the uncertain mess in Greece as if it were a sport. We watch the score rise and fall. We predict that a default is nearly inevitable. We wait.

And yet, even in the midst of such uncertain markets, there is an amazing amount to be done, and there are good profit possibilities everywhere we look. People need guidance, they need support, the need a helping hand—and in return, they will bless the reasonable profit we make as we provide meaningful help.

There are hundreds, if not thousands, of markets out there—ranging from small towns to developments in cities to consultation and sales services, to assistance with financing. The federal government is amenable, but it can’t do a great deal. Same with state and municipal governments. What we need is the people with the know-how…builders, lenders, salespeople, community development officials.

Probably, we’re going to have to rebuild our communities from the ground up. But here’s the thing: We know how. We’ve done it before.

Instead of waiting for the market to recover and/or improve, perhaps it’s time to create the markets we’ve been waiting for.

There is enough available information out there for buyers to be informed on all the negative aspects that could be involved in a foreclosure deal, but sometimes they buyers need to be reminded that this information is out there. Home buyers need to be well informed in order to take advantage of the positive aspects that some foreclosure deals do offer.
 
Among the issues that buyers need to deal with is title work. Buyers of a foreclosure home should get a title check even if the foreclosure buying process doesn’t account for one. Buyers need to be away that additional liens such as second mortgages and tax liens may still be attached to the property and passed on to the new buyer.

Furthermore, inspections are a great way of finding out the accurate condition of foreclosed homes. Some foreclosure properties are open to inspections, but others are not. Buyers need to be aware that many foreclose properties are not in the best condition, and most of them are sold “as is.” Since foreclosed homes often remained abandoned for long periods of times before they get sold, some may be victims of pest infestation, mold growth, and vandalism. Therefore, it is highly recommended that you always get an inspection done on any property you plan to purchase.

Another thing to consider is that a property disclosure statement is not always required, it all depends upon the state the foreclosure property is in; this in another reason why an inspection is even more necessary. It is recommended that buyers check everything from plumbing, electric wiring, foundation, etc.

These are just a few of the issues that buyers of foreclosed homes have to deal with. There are others to consider, and buyers need to do their homework in researching as much as possible before they make an offer on a foreclosed home. They must realize that foreclosed homes are not always great deals, and often times, they come accompanied by a set of problems.

But how disruptive the crisis ultimately becomes—for homeowners,  the housing market and the broader economy—depends on how quickly a number of technical problems and legal challenges are resolved in the months ahead.

In essence, fast-paced modern finance is colliding with the much slower machinery of the U.S. legal system. While finance aims for efficiency and maximized profits, the courts demand due process. And that’s becoming a growing issue as lenders come under attack for taking short cuts to oust homeowners who haven’t mailed in a mortgage check for months.

BofA and J.P. Morgan said they temporarily suspended foreclosure sales as they review procedures, while other big banks have said they are reviewing files but haven’t promised to freeze foreclosures. But even here, bankers are having trouble slamming on the brakes

Banks still are referring some loans to foreclosure in states where they issued suspensions, despite the moratoria. This week in Illinois, Florida and Ohio, Bank of America and J.P. Morgan Chase continued proceedings that allow them to sell foreclosed homes at public auction, according to court clerks.
A J.P. Morgan spokesman said Friday that “we have asked our local foreclosure attorneys not to seek judgments.” Bank of America said on Oct. 8 that it would “stop foreclosure sales until our assessment has been satisfactorily completed.” On Friday, a bank spokesman said that its cancellations only cover foreclosure sales scheduled between Oct. 9 and Oct. 31 because it doesn’t expect the review to take longer. BofA’s moratorium includes all 50 states, while J.P. Morgan’s covers 41 states.

The financial system and legal system have been on a collision course for some time in residential real estate. Both the lower standards for loans and the lax controls involving foreclosures were based on the premise that home prices would never fall, making it unlikely that many loans would go bad at once. Once that premise fell apart, the flaws in the system became obvious, and the long-term challenge now facing lenders is to rebuild the mortgage system on more solid footing.

Banks argue that these problems will be repaired swiftly, and they’ll soon be running the foreclosure machinery at full speed again. But analysts say the problems could expand into a legal crisis if banks can’t prove that they are following standard property-law procedures.

Lawyers, politicians and consumer advocates, meanwhile, are using the legal problems to stop foreclosures and extract settlements for troubled borrowers that lower their mortgage debt.

Industry executives note that few, if any, borrowers in the foreclosure process dispute the fact that they’re not paying their mortgages. “We’re not evicting people who deserve to stay in their house,” James Dimon, J.P. Morgan chief executive, told analysts Wednesday.

There are two different problems. The first resulted after lawyers for troubled borrowers discovered that banks were using “robo-signers,” or back-office employees who approved hundreds of foreclosure documents daily without reviewing them, in states where repossessions must be approved in court.

Banks had no choice but to suspend foreclosures in those states because submitting false witness testimony meant they hadn’t properly proved ownership of the loans in foreclosure.

The second, and perhaps thornier, issue is that banks could have trouble proving they have standing to foreclose as they go back to correct errors. That problem stems largely from mortgages that were bundled into pools and sold to investors as securities. This process, known as securitization, became the preferred method of financing U.S. home loans over the past 30 years.

Real-estate law requires the physical transfer of paperwork whenever mortgages trade hands, and analysts are raising questions about how often that happened during the housing boom. One concern is that banks may have lost, or didn’t ever have, mortgage certificates. If that happened, banks will have to pause foreclosures for months as they track down certificates and refile paperwork.

“The best case is this is going to slow the process considerably but not change the outcome,” says Joshua Rosner, managing director at investment-research firm Graham Fisher & Co.

Under a far gloomier scenario, the problems created by using robo-signers may be irrelevant if, instead of being lost, mortgage documents weren’t ever properly transferred during each step of the securitization process, says Adam Levitin, a professor of law at Georgetown University. If that happens, “the whole system comes to a halt,” he says. Investors could argue in court that they never owned the mortgages backing their money-losing securities.

For now, the foreclosure machinery operates in fits and starts. For instance, Bank of America said it had suspended foreclosures in Ohio while it reviews procedures there.  Still, attorneys for Bank of America moved to take back three homes through foreclosure on Oct. 12 in Franklin County, Ohio, according to a court clerk.

Justified or bogus?  Your call, either way, this will probably have significant trickle effect on the housing market and availability of homes.

“Buy and bail” is a phrase often used by real estate professionals to refer to the process in which a buyer attempts to buy a new property before they walk away from an old one and default on their previous loan. Often, the property they walk away from is an “underwater” property that is worth less than its mortgage, and therefore it is no longer desirable for the owner, the new property will most likely be a lower priced property with a more affordable loan. With house prices falling in many areas of the U.S, this is often a very appealing option for buyers.

 Although this practice is considered a fraud if borrowers lie on the loan application, and many attempts have been made to stop this practice, the buyer is often driven by greed or desperation and finds no other solution but to “buy and bail”.  If the buyer is able to get a new financing for the new house,  he or she is taking a step to save his or her credit rating which can be greatly ruined by walking away from their previous loan.
 
Many attempts have been made by the two biggest U.S mortgage companies Freddie Mac and Fannie Mae to stop this practice. They have banned in most cases the use of rental income from an existing property to qualify for a new mortgage unless the first property has at least 30 percent equity. Additionally, they usually require reserves equal to six months of loan payments for both homes. Pete Bakel, a spokesman for Washington-based Fannie Mae said these measures have been helpful in blocking almost all buyers who attempt to buy and bail. However, the desperation of the buyers sometimes is stronger than the attempt to stop them from executing their “buy and bail” plans. Savvy buyers are sometimes able to cheat the system and find enough loopholes to get away with this.

“Making it possible to pursue people who do this particular kind of default would go a long way to addressing the buy-and-bail problem,” said Jay Brinkmann, chief economist for the Mortgage Bankers Association in Washington.  To this date, only two-thirds of U.S states allow lenders to pursue a borrower after foreclosure by seeking a deficiency judgment allowing a lien on the new property for the amount owed on the previous mortgage. Furthermore, Mortgage lenders are also partly responsible for the “buy and bail” dilemma. Although some of them are responsible and try to get the complete truth from the prospective buyer, others simply do not try and all they care about is that there is enough income for the buyer to pay both mortgages.

According to brokers such as Collier and Meg Burns, senior associate director for congressional affairs and communications at the Federal Housing Finance Agency “People were holding on, hoping the market would turn around,” Collier, who won’t work with applicants who intend to go into foreclosure, said in a telephone interview. “But now they’re giving up because there’s no light at the end of the tunnel in places like Florida.”

Another raising concern reported by the New York-based Morgan Stanley in an April 29 report, is that about 12 percent of residential-loan defaults in February 2010 were the responsibility of homeowners deciding not to make payments even though they could afford to.  Brent White, a law professor at the University of Arizona in Tucson said that people who choose to default typically have lost $100,000 or more in property value.

With this information – how would you view a strategic default?  If a borrower can afford the payments, but opts not to pay because they are $100k, $200k or more underwater…is that right or OK?  Would your answer be the same if the property was an investment (rental) property vs. a primary?