Local foreclosures on record pace; However, numbers still small proportion of property total

by Jacob Barker

November 28,2008

Tom Schauwecker, Boone County’s assessor since 1989, and Greg Harmon, a veteran real estate agent, are both authorities on the subject of foreclosures. Both say they’ve never experienced anything like the current market, which is forcing a record number of people to lose homes and land.

For Tom Schauwecker and his staff, the downturn is giving them some down time for the first time in years. For Harmon the slowdown has swamped his Web site, which tracks and lists foreclosures in Boone County.

Schauwecker said for the past 19 years, “we’ve been so busy appraising and photographing new construction, that the decline in building permits has allowed us to step back and do a little analysis.”

Tom Schauwecker

Greg Harmon

His staff was able to compile a detailed list of property foreclosures in Boone County-expected to reach 300 this year-and develop a map showing their location. There’s been a lot of inquiry on the subject, he said, primarily from the media.

Rob Wolverton, president of R. Anthony Development, cautions that the local foreclosure rate should be put in perspective: it’s high for Boone County, but low relative to total property and to the national rates.

“For those 300 people, this is a catastrophe,” Wolverton said. “But there are more than 40,000 housing units in Boone County. It’s an issue, but it’s less than 1 percent of the market.”

An estimate from the Secretary of State’s office at the beginning of October put the total number of foreclosed homes in Missouri at 27,000. Nationally, for all FDIC insured institutions, the ratio of non-current loans and leases to total loans and leases in the second quarter more than doubled, to 2.04 percent.

Locally, the Boone County Recorder’s office recorded 253 foreclosures through October. That’s more than was recorded in any full year for the past 22 years. In all of 2007, 231 foreclosure deeds were recorded. This year has already surpassed that, and more than 10 foreclosures were recorded through the first half of November.

Local foreclosures on record pace

Schauwecker has never seen anything quite like it. Rising land and home values have long been a sure bet in Boone County, usually doubling every 17 or 18 years, he said. But now, it’s flat. He hasn’t seen the market hiccup like this since the 1980s, when land values declined due to income tax reform and interest rates were in the double digits. Now, banks have slowed their lending to developers, and land values have ceased their rise. On top of that, the record number of foreclosures illustrates the difficulties faced by homeowners.

Harmon, a broker with Gaslight Properties and developer of a foreclosure-tracking business, REO Investor Network (www.REOInvestorNetwork.com.), said there has been a sea change in the real estate market this year. Not only has he seen selling prices for homes decline this year, he’s had trouble keeping his Web site up to date with all the new foreclosures.

“Inventories have just absolutely exploded,” Harmon said. “When we put the site up in 2006, I’m guessing we would add about 3 or 4 properties a week. In 2007, we bumped up to five or six or seven through the first eight months. Now, we’re adding 30 properties every 10 days.”

In addition, it’s important to note the tabulations only take into account land that goes through the normal foreclosure process. Banks dealing with borrowers unable to continue regular loan payments often try to work out some arrangement to avoid the worst case scenario for both parties-foreclosure.

“No one wants to be standing on the courthouse steps,” said Mary Wilkerson, director of marketing at Boone County National Bank. “That’s not a happy experience for anyone, so if we can avoid that we do.”

Missouri Banking Commissioner Eric McClure stressed that communication is important between lenders and borrowers in order to avoid foreclosure.

“It’s important for everyone to know: local banks don’t want a house,” he said. “The best thing is for borrowers to work with their bank for some type of plan. People are reluctant to talk to lenders before it’s too late. Our advice is to talk sooner rather than later.”

If loan modification is not an option, sometimes banks will accept a deed-in-lieu of foreclosure. While the bank still takes a loss, it is able to negotiate with the borrower and take back the land directly, avoiding the contentious foreclosure process.

“It’s not as time consuming,” McClure said of deeds-in-lieu of foreclosure. “Sometimes the bank will just cut a deal with the borrower and get the house or land.”

But in order to take back land directly, the land can’t have other liens or obligations on it. If it does, the benefit of a normal foreclosure is that it can usually absolve those other liens.

The top five banks in the Columbia market with regard to deposit market share - Boone County National Bank, First National Bank, Commerce Bank, Bank of America and Premier Bank-have seen substantial increases in non-current loans and leases since Sept. 30, 2006. And they all reported large increases in the amount of real estate they’ve taken back from delinquent borrowers through this September compared to Sept. 30, 2006, according to banking reports filed with federal regulators.

First National Bank, for instance, went from reporting no foreclosed real estate owned in the Sept. 30 reports of 2005 and 2006, to over $1.6 million worth in September 2008. But First National is well off compared to the value of unwanted land owned by the other institutions.

Commerce Bank saw the value of unwanted real estate it owned increase by more than 10 times from Sept. 30 2006 to Sept. 30 2007. But it has since reduced that amount significantly. BCNB went from only $247,000 of unwanted real estate owned in September 2006 to more than $4 million this September.

While people are more cautious, and BCNB is spending extra time with customers dealing with credit problems, home loan foreclosures are a minute sliver of the bank’s portfolio.

“What we’re dealing with now is cash flow issues,” Wilkerson said. “Businesses that were making normal payments, those folks that easily could have made payments a year ago, are having a little bit more trouble than usual.”

First National Bank President Sabrina McDonnell said, thankfully, her bank has experienced a very low number of credit problems. She said “keeping it simple” and sticking to traditional loan techniques has kept the bank in good stead.

Developers have been particularly hard hit as some banks are more reluctant to lend and development has slowed. Many lots slated for commercial or residential development have remained empty, and in some cases, have been acquired by the lender.

“In general, houses have sold better than land or lots,” said Steve Smith, president of Premier Bank’s Columbia market. “Income producing properties have sold better than land or lots. Everything has slowed, both locally and nationally, but our local economy is still much better than the national economy.”

As the economy has slowed, banks and their subsidiaries have had to take back land that isn’t selling as developers struggle to find interested buyers.

In the past, a speculative developer could take out a large loan on a parcel of land, use the loan to meet payments while marketing the land, and all the while know that the land value would go up, Schauwecker said. But no more. Now, building has slowed to a trickle around Columbia, and some banks have taken back huge chunks of undeveloped land.

“Speculation was rampant in our market,” Schauwecker said. “Really, there wasn’t a hotter commodity (than real estate). Past tense.”

Harmon said while development has slowed, houses are still selling. However, it takes more time now than it used to, and prices are down. Unless someone needs to sell a house right now, Harmon said, there’s no use worrying about the current market conditions.

“Boone County has proven itself for 50 years straight that our real estate is in good working order,” he said. “It’s a good investment.”

While the market may be slower than many people have ever experienced, and land values are no longer climbing, Schauwecker still thinks real estate values and the economy in general will turn around eventually.

“Historically, real estate has been more than just shelter; it’s been a wonderful investment,” he said. “Over the long haul, I’m confident it will remain that way. In the short term, I don’t know if we’ve seen the worst of it. But that’s just one man’s opinion.”