The Effect of Bill 284
In a recent article from Wall Street Journal, the effect of bill 284 is discussed.
LAS VEGAS—In a city dotted with tens of thousands of vacant houses, Jericho Guarin figured it would be easy to buy his first home. But nearly a year after beginning a search late last summer, he has come up dry.
“It has been a nightmare,” says the 37-year-old U.S. Air Force officer. “There are plenty of empty houses, but they’re just not for sale.”
Alex Federowicz for The Wall Street Journal Houses are going up in a southwest Las Vegas development. Some builders have waiting lists of buyers locked out of the existing-home market.
Indeed, it is a lopsided equation. The number of available homes has plunged here after a sweeping state law subjected lenders to stiff new foreclosure rules and penalties. With banks exercising caution, many homeowners—including those seriously delinquent on their loans—have been allowed to remain in place. As a result, there is little on the market at a time when first-time buyers and real-estate speculators are anxious to tap both cheap prices and low-interest mortgages.
Many real-estate agents, home builders and consumer advocates argue that the law, intended to remedy foreclosure-processing abuses, has backfired. Some owners who are behind on payments aren’t maintaining their homes as banks refrain from eviction proceedings. The perverse outcome: Inventory shortages have spurred new developments despite a glut of properties stuck in foreclosure limbo.
“The people hurt most by this law are the middle class,” says Steve Hawks, a real-estate agent in Henderson, Nev. He refers to the phenomenon wrought by the foreclosure measure, Assembly Bill 284, as the “A.B. 284 bubble.”
Until last decade’s housing boom, prices didn’t rise much here, making it possible for casino dealers or cocktail waitresses to buy into the American dream. Now, a tight market is pushing up values and making it harder for buyers to find homes to purchase.
Mr. Guarin, the Air Force Captain, is preapproved for a mortgage backed by the Veterans Administration for up to $185,000. But like many buyers who need financing, he is at a severe disadvantage because sellers often prefer all-cash deals that won’t be tied up by a low appraisal or other red tape. “There’s no way I can match the cash offers,” says Mr. Guarin.
With investors in the game, more properties are commanding prices above asking—a phenomenon real-estate agent Bryan Lebo knows all too well. Recently, he listed a bank-owned property for $86,000. The home, which he said needed around $20,000 in repairs, drew 41 offers—39 of them all-cash—and sold to an investor for $135,000. “If you’re an honest working person, you pretty much don’t have a chance,” says Mr. Lebo of current market conditions. All cash transactions accounted for nearly 60% of sales in May, according to DataQuick. Nationally, all cash transactions accounted for roughly a third of sales in the month, according to the National Association of Realtors.
The inventory shortages, meanwhile, have been a boon for some—especially builders. “A.B. 284 has been great for us. It darn near eliminated the constant inflow of foreclosures on the resale market,” says Robert Beville, president of Harmony Homes, a local home builder. Mr. Beville says Harmony has sold 57 homes this year to cash buyers, compared to 70 in all of 2012. Realtors say investors are planning to flip the homes to a new buyer on the bet that prices will have jumped even more by the time the homes are built.
The real-estate boom and bust hit few places as hard as Las Vegas, where home prices doubled from 2002 to 2006 before falling by 62% through early last year. Fed up with piecemeal efforts by the federal government to create voluntary foreclosure-relief programs, a number of states and local governments proposed measures to raise the costs associated with foreclosure.
In Nevada, the measures were particularly tough. A.B. 284 threatened criminal penalties for bank officials who didn’t follow new rules to certify that foreclosures were being processed properly—a reaction to the “robo-signing” scandal of late 2010, when employees at some of the nation’s largest banks allegedly forged foreclosure paperwork as a routine practice.
Among other changes, the Nevada law made it a felony for anyone making false representations concerning real-estate title. Large lenders grew reluctant to foreclose on properties due to ambiguous language in the law, says Bill Uffelman, president of the Nevada Bankers Association.
The Nevada law “just stopped foreclosures cold,” says local developer Tom McCormick. In October 2011, the first month after the law took effect, lenders filed just 600 notices of default, an 88% drop from the previous month, according to PropertyRadar. Banks’ inventories of foreclosed properties subsequently plunged. In May, foreclosed homes, which accounted for half of all homes sold here in recent years, represented just 11% of home sales.
Economists fear that some states like Nevada run the risk of overreaching with laws that create as many problems as they solve. Studies by researchers at the Federal Reserve Bank of Boston show that “delaying the foreclosure process does not in the end lead to fewer foreclosures,” said Paul Willen, a senior economist at the Boston Fed. “If they’re delaying a foreclosure that is going to happen eventually, what we’re really concerned about is that they’re reducing the quality of life for the neighborhood.”
Backers of the foreclosure bill say the law has been unfairly cited as the cause for the drop-off in distressed-property listings that has fueled the market rebound. “It is not all 284,” said Catherine Cortez Masto, the Nevada attorney general who was an early sponsor of the measure. “Do I think it had an impact and slowed down foreclosures? Absolutely.”
In some ways, the real-estate narrative here reflects a tale of two cities. That is because, in basic economic terms, the trends haven’t been all bad for the city or its residents. The foreclosure delays have helped distressed homeowners like Scott Chatley, who went 54 months without making a mortgage payment. That gave him enough time to pay off debts, repair his credit, and begin saving for a down payment on his next home. Mr. Chatley, who bought a home here in 2005 for $495,000 with no money down, stopped making his $4,000 monthly mortgage payments in mid-2008 when he lost his job as a software engineer.
Mr. Chatley says he delayed foreclosure first by seeking loan modifications and then by filing for bankruptcy. His mortgage company, Bank of America Corp., last fall approved a short sale of his home for $169,000 to an investor. Though he moved out in September, Mr. Chatley says he probably could have stayed longer because the bank hadn’t been actively moving along the foreclosure.
Recently, he was prequalified by a credit union for a new mortgage and hopes to buy a new place later this year or early next. “If I see a rule that exists to help me recover without having to do anything illegal, why would I not use that?” says Mr. Chatley.
A Bank of America spokesman said it isn’t able to tell how much, if any, effect the state law had on Mr. Chatley’s foreclosure delay.
The inventory situation has also allowed more builders to get back into the game. According to the most recent available statistics, Las Vegas had just 4,300 previously owned homes listed for sale in April, down 70% from two years ago. New home sales, meanwhile, are up by 87% so far this year. Overall home prices have risen by 22% in the year ending in April—more than double the growth for the U.S. as a whole, according to the S&P/Case-Shiller home-price index. So far this year, the number of new building permits issued for new home construction is up 52% from the year-ago period—one of the largest jumps in the nation.
Regulators, meanwhile, have raised concerns about the unintended consequences of stalled foreclosures. In some states, “much of the supply of homes that should be available for sale is locked up,” says Edward DeMarco, the acting director of the agency that controls mortgage-finance giants Fannie Mae and Freddie Mac, in a March speech to economists. “We have seen the somewhat perverse result of home-building activity expanding while a considerable backlog of homes languished in the foreclosure pipeline.”
A lack of affordable homes for resale prompted buyers like Dennis Jordan to turn to the new-home market. “We figured that would be a cut-and-dry deal, but it turns out it’s not,” says the 66-year-old retired construction manager, who lives in Greenwood, Ind., and wants to move with his wife to Las Vegas.
Mr. Jordan spent six months looking for an existing home and another three months looking for new properties before he signed a contract to pay $362,500 on a four-bedroom house that broke ground last month. The home, which was about 10% above his initial budget, should be completed by September.
Many builders are raising prices for homes on their existing lots. Increasingly, buyers must join wait lists or enter lotteries for the chance to bid on new homes. At a development called Villa Trieste, Pulte Homes is selling new Tuscan-style two-bedrooms starting at $261,000. A year ago, comparable newly built homes sold for $190,000 and previously owned homes sold for around $160,000. A spokeswoman for Pulte says it has been able to raise prices due to less competition from foreclosures and low interest rates.
Not all developers are so optimistic. Some worry that there is still a sizable inventory of distressed homes that could hit the market, leading prices of all homes to soften. Mr. McCormick, chief executive of Astoria Homes, stopped building homes five years ago and said he hopes to break ground on his first project this summer. But he is in no hurry to dive in headlong. “I’m still very worried about the foreclosures—the same way people said we didn’t have a bubble and then we did,” he says.
Among the nation’s 30 largest metro areas, Las Vegas had the highest share of loans that were 90 days or more past due but not yet referred to foreclosure as of April, according to the most recent data from Lender Processing Services.
Nearly 45,000 loans are either 90 days or more past due or in foreclosure. Local electric-utility data showed nearly 64,000 vacant homes at the end of last September, according to a tally by analysts at the University of Nevada-Las Vegas. Fewer than 8,000 of those units were listed for sale.
A lag in foreclosures has had other deleterious effects. Homeowners’ associations aren’t collecting dues from borrowers who are behind on their mortgages. Some associations have begun taking advantage of their rights to file liens ahead of the bank—and then sell the liens to investors, who pay a few thousand dollars for the right to take control of the home until the bank forecloses.
Investors buy the liens “in the hopes that the mortgage is going to be lost in la-la-land, and the bank won’t foreclose for six months or two years,” says Richard Weiss, a real-estate investor who said he has taken ownership of around seven properties. While waiting for the bank to get its act together and foreclose, “you can do whatever you want—put a tenant in there and collect the rent,” says Mr. Weiss.
Investors “know they can rent out these properties and get a cash flow without having to spend much money,” says Xenophon Peters, an attorney who represents clients facing foreclosure at the law firm Peters & Associates LLP. He says a few large investors have been buying up hundreds of the liens. The practice is “terrible” but legal, he said. “They’re just taking advantage of the law.”
Mr. Weiss argues that renting out the houses is better for the communities than leaving them vacant. “You had vandals coming in and destroying these homes,” he says. “These were eyesores on the community.”
A.B. 284’s supporters maintain that the law was never a “borrower-protection bill” intended to prevent foreclosures. Instead, they say it was designed to safeguard buyers of foreclosed properties from having title problems associated with defective repossessions.
Still, concerns raised by the real-estate industry earlier this year prompted Ms. Cortez Masto, a Democrat, to convene a working group that proposed a series of technical revisions. The amendments, signed into law last month, require that officials certify to having “business knowledge” of loan ownership from written corporate records, as opposed to the more open-ended “personal knowledge” requirement.
Meanwhile, Mr. Peters sees little to celebrate. Even though A.B. 284 has benefited his clients, “there has to be turnover in the housing market for it to recover,” he says. “It’s caused another bubble to erupt. We saw the same thing eight years ago. We know it’s unsustainable.”