This is the second in a three-part series on rising foreclosures in the Flathead Valley.
Bob Schneider has been a banker in Montana for more than 40 years. He’s seen the dot-com bubble burst and stock markets crash. Still, nothing compares to the challenges his business and customers are facing today.
“This is the worst I’ve ever seen it in my history of banking in Montana,” Schneider, First Interstate Bank Kalispell president, said. “And this, I think, is the worst hit place in the state.”
The trouble: As the recession claims jobs or exposes financial risks, an increasing number of borrowers are facing foreclosure as they fall behind on payments. In just the first six months of this year, the number of people entering the foreclosure process in Flathead County climbed to 459 – just 18 shy of last year’s total.
The consequences are most ruinous for the homeowner, of course, but they also reverberate into the broader community, especially the Flathead’s financial and real estate sectors.
Lenders find themselves stuck between obligations to investors and struggling customers, and are left weighing the financial costs of writing down debts against the stress of taking on properties. In the real estate market, foreclosures threaten to drive down home values as they become more common.
“To some degree, it affects everything in this community – the banking industry, the real estate industry, the appraisal industry, the title companies,” Ron Rosenburg, president of Valley Bank in Kalispell, said.
Nationally, job or income loss remains the top reason people fall behind on their mortgages, followed by excessive debts and illness in the family, according to a survey by Freddie Mac, the Federal Home Loan Mortgage Corporation. That report plays out in the Flathead where local experts say the high unemployment rate is feeding rising mortgage-delinquency rates.
Other struggling borrowers include developers or individuals who gambled on one of the fastest-growing counties in the state, buying up property in hopes values would keep going up.
“There was some speculating,” Rosenburg said. “Everyone watched other people making money and wanted a piece of that. The valley was on a pretty good ride for quite a while, but market adjustments are inevitable.”
Higher-end property owners could be the next group to struggle with foreclosures, according to Dale Cosby Newmann, owner of West Venture Properties and president of the Northwest Montana Association of Realtors MLS board. “If people lose faith that the value of their property isn’t worth what they owe anymore, and don’t see an ability to sell, that might be the next area to get hit,” he said.
Contrary to what many might think, the decision on whether to continue a foreclosure action here is most often made by an out-of-state loan servicing company hired to manage billions of dollars worth of mortgages. “There’s a stereotype that people are dealing with the hometown banker,” Schneider said. “They’re usually not.”
Local lenders commonly come into play as a secondary lien holder, meaning they’ve financed a lesser loan like a second mortgage. When the foreclosure process begins, all lien holders are noticed and given a chance to bid at the sheriff’s sale.
But for local banks in a down market, taking on real estate and another financial institution’s mortgage on top of their own is often deemed too risky. The secondary lien holder takes the loss, and writes down the smaller loan.
“Believe you me that happens all day long, every day, at every bank in this valley and across Montana,” Schneider said.
When they do hold the primary loan, local bankers point out they have a fiduciary duty to the investors who bought the mortgage or their stockholders. “Whether private or public, we can’t just write down an asset value on a whim – we have to do what makes economic sense for our stockholders,” Schneider said.
But often that actually means banks work as hard as they can to avoid foreclosure. Once mortgage lenders consider the expenses involved in foreclosing the property and the fees needed to resell the home, many lenders decide it’s far cheaper to not take legal possession of the home.
“JC Penney sells clothes; we sell money,” Bob Taylor, of Glacier Bank, said. “We don’t want to have what I call inventory.”
Other lenders agree, pointing out that with a foreclosure the bank inherits all of the stresses of homeownership, from mowing the lawn to paying taxes. Some lenders, Schneider said, have gone so far as to let delinquent borrowers stay in a foreclosed home until it’s sold in exchange for maintaining the place.
Foreclosure is especially unattractive when sales volume is down: By the time the lender can sell the home it already may have sat vacant for months, making it a target to vandals, squatters and decay.
In the first six months of this year, residential sales in Flathead County were down 32 percent from the same period last year, and the median price dropped 18 percent to $188,500. As foreclosures take over a larger share of the market, real estate professionals and lenders expect them to compete with traditional sellers and further drive down home values.
“It will unquestionably put downward pressure on prices,” Newmann, said, adding that he thinks the number of foreclosures would have to continue to grow before the market sees any large changes.
To avoid foreclosure, lenders agree to loan modifications that change the terms of a troubled borrower’s mortgage; the most common approach is to reduce the loan’s interest rate. The idea is to get the homeowner through a difficult spot, until they can assume their full payments again.
“They’re friends and neighbors,” Rosenburg said. “We’re going to do the absolute best we can to have a win-win situation.”
Modifying loans, however, reduces the overall income lenders receive from borrowers. At a certain point, when the borrower has gone through their savings and used up their credit options, there isn’t any more room for give-and-take.
“If the economy or job market doesn’t approve and those resources are tapped,” Rosenburg said, “the inevitable is there.”