Missing mortgage payments and going into foreclosure was once considered a worst-case scenario for homeowners. They could lose accumulated home equity and have their credit scores wrecked for years as a result.
But since the real estate bubble burst three years ago, some homeowners going into default find it to be a first step toward renegotiating loan terms with banks. Others could be making "strategic defaults" in order to set the process in motion.
Defaults can lead to better payment terms or a bank-approved short sale. They can also lead to outright foreclosure and eviction. But with real estate values dropping and jobs scarce, some homeowners have nothing left to lose.
Foreclosures and short sales mount
Daryl Fauth, an employee at Blaine County Title Co., said that over the past year there has been an average of one mortgage default per day in Blaine County.
Out of those 365 defaults, 180 properties have become bank-owned through foreclosure and put back on the market, usually at a lower price.
The rest, 185 owners, found a way out of distress by completing short sales, providing deeds in lieu of foreclosure, or by getting current on payments.
"Once you are in foreclosure, its like blood in the water," Fauth said.
He said foreclosures and bank-owned home sales are driving the market down in some neighborhoods, because these distressed sales are resetting market values.
"It's a vicious spiral," he said.
Debra Hall, president of the Sawtooth Board of Realtors, said, "We have so many unemployed people around here in the construction industry that the market keeps sliding."
"I tell people that banks are just collection agencies. My experience has been that they won't help you as long as you are making your payments."
Hall has specialized in negotiating "short sales" to stay busy in the down market, talking with banks to allow the sale of homes at less than what is owed on them.
"It's like a poker game," she said. "Banks won't even talk to you until you have an offer in hand."
Successful short sales can help sellers avoid poorer credit report outcomes from foreclosure, especially when real estate agents negotiate with banks to get deficiency judgements against a homeowner waived.
Hall said 61 short sales were completed in Blaine County in the past year, with 102 more in the pipeline. She said short sales are taking from two months to two years to negotiate, even if a buyer is available.
"It can be an obnoxiously long time," she said.
Defaults can lead to limbo
One homeowner in Hailey—who spoke on the condition of remaining anonymous—said that after losing his job, he was advised by a lawyer to not pay his mortgage in order to get attention from Wells Fargo Bank. He hoped the move would result in a home loan modification that would allow him to stay in his home.
He said that after six months the attempt failed on a technicality (he had not purchased his home during a specified time period). He is now hoping to succeed in making a short sale, but he does not expect to get what his house is worth.
"I can't understand why they advise you to go into default, because when you do, people see you are in default and you will never get market value for your home," he said.
Another Hailey resident and construction worker moved out of his house and stopped making payments two years ago in the hope of getting a loan modification. Two years later, he still technically owns his property. He is hoping the bank will eventually take a deed in lieu of foreclosure, since this process will save the bank additional fees from the foreclosure process. He is also considering filing for bankruptcy.
"This will screw up my credit, but the fact is it was my stellar credit that got me into this in the first place," he said.
Woodside subdivision resident Fred Burmester succeeded recently in getting a long-term home loan modification, cutting his monthly payments in half.
"I did a lot of homework before I got started," Burmester said. "It's not a free giveaway. I had an income and that made a difference."
His home is now listed for sale.
"Now my payment is in line with what rents are in my neighborhood," he said. "I would be happy to never own again after this is over."
Red tape and screaming deals
Attorney Michael Kraynick said he has worked "both sides of the fence" in foreclosure proceedings, representing private lenders and helping prevent foreclosures through the federal Home Affordable Modification Program.
Kraynick said he knows of only two successful home loan modifications in the valley.
"Banks don't take these programs seriously," he said. "They do things that seem irrational to Realtors because they have an inherent interest in bookkeeping."
Kraynick said banks maintain stock value for shareholders by keeping loan assets on their books from several years ago, before the bubble burst, even though the home is now valued at much less.
"The banks are not prepared for this kind of business," he said. "Banks at the local level are not making these decisions. They are being made up the corporate ladder."
Kraynick said he understands why distressed homeowners are wary of dealing with banks over loan modifications.
"The loan modification servicer's incentive is to get cash, to squeeze borrowers for the last bit of cash they can get and then take the property," he said.
Greg Hogan, a mortgage loan officer at US Bank in Ketchum, said most of his business these days is writing loans for short sales and foreclosed-upon homes.
"There are well-qualified applicants out there, but the big thing affecting this valley is the lack of consistency of income," he said.
Hogan said a Sun Valley-area condominium on Saddle Road that could have fetched $250,000 several years ago recently sold for $89,000. But he said many buyers are kept from taking advantage of buying because financing has become more difficult to find.
"I get attacked by homeowners associations each summer, saying, 'Why can't people get loans?'" he said.
Hogan said Fannie Mae, Freddie Mac and the federal Department of Housing and Urban Development have made it much more difficult to get financing, especially for condominium purchases.
"There is not one complex in the valley that is warrantable [suitable for lending] under Fannie and Freddie," he said. "They don't understand the micro-markets at the local level. Decisions are being made on a corporate level."
Hogan said federal guidelines written in 2008 require that 51 percent of condo complex owners use the units as a primary residence.
"These guidelines stem from overbuilt condo complexes in Florida and Arizona," he said. "But we are a second-home market. Its not common-sense thinking."
Getting square with lenders
Kathy Grotto recently spent 55 hours of Blaine County Housing Authority staff time to keep a client couple from being foreclosed on at one of the Housing Authority's deed-restricted units in Hailey.
"It was time-intensive, but foreclosure was imminent for this particular family," Grotto said. "It is hard work finding the right person to talk to."
Grotto said she enlisted help from Sen. Jim Risch, R-Idaho, in the process, eventually persuading an attorney at a Bank of America corporate office to seek permission from an investor bank that holds the note on the home to twice postpone a trustee sale (auction).
Grotto's clients recieved a no-interest bridge loan to avoid the foreclosure, using a portion of $13 million given to the state from the $1 billion HUD Emergency Home Loan Program. The program provides up to $50,000 in loan assistance. A portion of the loan is used to get current on mortgage payments. The rest is banked for future payments.
The program application deadline is July 22.
East Fork resident Pat Czismazia lives in a spacious four-bedroom home he bought nine years ago for $415,000.
Czismazia had trouble paying $2,000 per month to Wells Fargo Bank after his tree-trimming business dropped by 75 percent two years ago. For six months, he did not pay his mortgage as he tried to negotiate with his bank for a loan modification.
"They never told me exactly why I was turned down," he said.
Since the default did not succeed in leading to better payment terms, Csizmazia recently borrowed $14,000 from a relative to get current on his payments and relisted his property for sale this summer.
"I'm not underwater on my mortgage," he said. "I might even make a profit."
Tony Evans: email@example.com