Foreclosure can become home for first-time buyer

The recent debacle in the subprime lending market has left banks and mortgage lenders across the county with not only a cache of loans in default, but also a hefty inventory of foreclosed-upon homes.

In one neighborhood after another in Northern Colorado, foreclosures are advertised for sale at prices well below their value. For the buyer, it almost seems too good to be true.

“For first-time homebuyers, there has never been a better time than now,´ said Kathi Williams, executive director of the Colorado Division of Housing, who added that about 25 percent of foreclosed homes are being sold to first-time buyers.

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However, mortgage loans for those homes are not as easy to come by these days, said Chris Hardy, managing broker at Coldwell Banker Residential Brokerage in Fort Collins.

Because the recent onslaught of foreclosures was caused in large part by adjustable rate loans to borrowers who couldn’t make the adjusted payments, incoming home loan applications are more carefully scrutinized.

“Prior to the demise of subprime lending, there was lots of 100 percent financing. People who were credit-rich and cash-poor could still get into a house,” Hardy said. “Now, you have to have both. They’re looking at (credit scores) over 700 now.”

Assuming a purchaser has some ready cash and a healthy credit score, there are several ways to buy a foreclosed home, from dealing with the owner directly, bidding at a public trustee’s auction, to purchasing from a bank. Each has its pros and cons.

Where to buy

Buying before a foreclosure takes place involves negotiating with the homeowner directly, and can often lead to discounts below market value, Hardy said. He cautioned that it is the buyer’s responsibility to check with the county assessor to make sure no other liens are attached to the property before closing the deal.

Once the foreclosure process begins, Colorado law provides 45 to 60 days for owners whose mortgages are in default to cure back payments and any associated fees. If a loan is not brought current by the end of this time, the lender puts the home into the hands of the public trustee.

“Colorado is unique in that all real property that is held by a deed of trust or mortgage is held by the public trustee,” Hardy said. “If a bank decides to foreclose they go to the public trustee. The trustee is legally given permission to sell the property to cover the foreclosing lien holder.”

The trustee offers the home at a public auction, where anyone can bid but buyers must pay in cash. After the auction, the homeowner still has a 75-day redemption period to sell the house.

This timetable is changing. On Jan. 1, the 75-day period moves to the beginning of the process, to give the owner a longer time to put a home on the market. When a property is sold, there will only be 10 to 15 days for lien-holders to claim their stake before the property transfers hands.

This legislation was originally signed to curb some predatory lenders who were taking advantage of owners of foreclosed homes, Hardy said.

However, if auction bids do not exceed the loan debt, the lender often purchases the house from the trustee. In that case, the home becomes the sole property of the lender, and must be purchased from the bank directly.

By the time a bank is selling a property the foreclosure process is over and the owners have been removed, Hardy said. And, because banks have so many properties to get rid of right now, they have been willing to sell at low prices.

Obstacles abound

Even after a purchase is initiated, the sheer number of foreclosed properties being dealt with is so high that it can often take several weeks to respond to a bid, Williams said. And there is not always a guarantee on what the property will look like on move-in day.

“Many of the houses end up being stripped,” Williams said. “A lot of people have left the house in the middle of the night.”

The worst case Williams said she has seen included plumbing, appliances and carpet all being removed from the house, presumably to sell the materials as scrap.

These cases are most common in condos and town homes, she said, where the associations are often run and owned by the homeowners. The more owners that go into foreclosure, the less money there is to pay for upkeep.

Buying from a lender doesn’t necessarily improve these odds.

“Lenders at this point are so deluged with foreclosures on the books, they’re just not in a position to do maintenance,” Williams said. “Often a house is sitting vacant six to eight months.”

Marco Begovich, regional senior vice president with Countrywide Loans, said his company usually works with area real estate agents, who are responsible for selling houses, and thus dealing with damage.

Homeownership goal

Despite the crisis in mortgage lending, homeownership remains a goal supported by Northern Colorado communities. Several local government agencies offer educational classes and economic incentives specifically geared for the first-time homebuyer. (See sidebar.)

These programs have also been affected by the avalanche of foreclosures.

Out of the 34 loans the Fort Collins down payment assistance program closed in 2006, eight ended in foreclosure, and seven were sales that didn’t have enough funds to pay the loan back entirely, said Julie Smith, administrator of funding for the city’s community development department.

Some of these foreclosures were based on the loan recipients not being able to sell the homes in the current market, Smith said. Just about all of them were because of adjustable rate loans.

“In Fort Collins, that’s one of the things we’ve seen over the years: cost of housing has increased, cost of living has increased, but the average rate of income has not increased at the same rate.”

Educational assistance

Amy Irvin, with the Larimer County Homeownership program, also sees a link between foreclosures and adjustable loans. In fact, her program rarely approves these types of loans anymore.

Aside from adjustable rates, part of the reason for the recent foreclosures has been a lack of knowledge on the part of the buyer, Irvin said.

That’s where programs like Neighbor to Neighbor come in. Approved by the Colorado Housing and Finance Authority, these classes are often required by down payment assistance programs to reduce defaulted loans.

During the eight-hour class, professional real estate agents and lenders explain everything from how to assess credit and improve it, how to handle an inspection process, and how to budget a new home. One-on-one follow-ups are also available.

The classes are free, along with any personal counseling, all funded through CHAFA. Attendees do have to pay $5 for materials for the class.

“People who have education are 30 percent less likely to foreclose,´ said Tracy Schwartz, resource development director for Neighbor to Neighbor. “We help them learn about what it takes to buy a home, learn to be a savvy consumer.”