Loan defaults and foreclosures are altering the landscape of western Montana’s real estate market, driving down prices, forcing banks to become landlords of unwanted properties and shifting the role of Realtors.
In Flathead County, nearly 15 percent of all residential sales in 2009 were properties that had been foreclosed upon and repossessed by the bank, according to Jim Kelley of Kalispell’s Kelley Appraisal, a noted watchdog of the region’s real estate market. In December alone, 26 of the county’s 85 total residential sales were foreclosure sales.
So while home sales have been slowly rising again, it’s evident that many of the sales are repossessed properties. In some cases, entire subdivisions have been taken back by the bank.
Kelley estimates that another 10-15 percent of residential sales were “forced,” meaning properties were sold because the owners were in trouble with their loans, though they came to an agreement before the foreclosure process was carried out.
Between the bank-owned properties and forced sales, that represents roughly 25-30 percent of the county’s entire residential sales for 2009. Just a few years ago, this segment of the market was virtually nonexistent.
“The fact is that it’s becoming a larger and larger part of the market,” Kelley said.
He added: “There’s going to be a lot more coming up.”
Jim Kenyon, president and CEO of Whitefish Credit Union, said his organization has accumulated “probably about a dozen to 15” repossessed properties. A few years back, “there would have been zero,” he said. They are often referred to as Real Estate Owned – or REO – properties.
Likewise, Glacier Bancorp, Inc. is advertising bank-owned properties on its Web site. The list includes properties from the holding company’s institutions in Montana, Wyoming, Idaho, Colorado, Utah and Washington. Glacier Bank, the company’s flagship institution, owns four individual homes and three subdivisions – two in Bigfork and one in Polson.
“We are seeing more now than we have seen historically, because historically, at Glacier Bank, we have seen none,” said Dennis Beams, executive vice president and chief credit officer.
Generally, local financial institutions originate loans and then sell them on the secondary market to organizations like Fannie Mae and Freddie Mac. In that case, if people default on their loans, they then deal with those organizations, not the local bank.
But when Montana banks do keep the loans on their portfolio, and the borrower defaults, they face the prospect of either coming to an agreement with the homeowner or instigating the foreclosure process.
Beams stresses that these situations can usually be avoided entirely if the property owners talk to their financial institutions immediately when they know they’re in trouble. Banks often negotiate with borrowers to allow them to keep their property.
Residential owners, Beams said, are more reluctant to talk with the bank than commercial owners, who are often required to file periodic reports and are therefore accustomed to regular contact with lenders. Glacier Bank owns no commercial properties. And there is only one listed – in Thompson Falls – for the whole Glacier Bancorp holding company.
“We stress to borrowers to talk to us before they get into further trouble, so they don’t get into an untenable situation,” Beams said.
Echoing Beams, Kenyon said when property owners get their official preliminary notification of a loan default, or their notice of a trustee’s sale, they still have 120 days to right their wrong. Kenyon said it’s important not to ignore the phone calls and letters from the bank.
Financial institutions, Kenyon said, will consider refinancing, skipping a payment or possibly a short sale. A short sale is when a lender agrees to sell a house at a price that’s less than what the borrower owes on it.
The lender takes a loss, but avoids the expenses and hassle of the foreclosure process, as well as the burden of taking on the property. The borrower, who is behind on payments, likewise avoids foreclosure. But not all banks, such as Glacier, have short sale programs.
“More often than not, we’re working with folks trying to keep them in their homes,” Kenyon said.
According to Kelley Appraisal, there were 1,028 notices of trustee’s sales filed in Flathead County last year. In 2005, there were 158. Many homeowners, after negotiating with the lender, solve their issues before the 120-day limit is up and the foreclosure never goes through. According to Kelley, there were 285 full foreclosures last year. In 2008, there were 125.
But if a foreclosure is carried out, the property then goes up for sale. If it’s not sold to an outside buyer, it becomes the bank’s responsibility: repairs, homeowners’ association fees, lawn maintenance, taxes and the whole bit. The bank becomes a landlord trying to sell an unwanted property.
One of subdivisions that Glacier Bank has repossessed is the 79-lot Mill Creek subdivision in Bigfork. Trails West Real Estate is the subdivision’s realty company. Katie Brown, managing broker and owner of Trails West, said about 20 percent of her sellers today are banks, and up to 75 percent of her buyers are looking for REO properties or short sales because they are discounted.
“A couple years ago, we never had to deal with banks as owners,” Brown said. “It’s really different.”
Brown said many of the properties her company handles are owned by large out-of-state mortgage companies and banks, the “Countrywide types,” which can be hard to work with. It often takes a long time to get responses, Brown said, and they don’t always take care of the property very well.
But Brown said working with local banks is a different story. As an example, she said Glacier Bank is easy to get a hold of, cooperative and diligent with property maintenance.
“Glacier is amazing as far as being good stewards of the land,” Brown said. “Local is so much better.”
Where it gets really tricky for Realtors, Brown said, is short sales. She has three Realtors working on short sales, whereas a year ago she had none.
And while short sales are discounted, they can be a pain for the buyer. The short sale process, particularly when working with out-of-state institutions, can be long and arduous, Brown said. On one short sale, Brown said she had to deal with separate companies in Texas and on the East Coast, both of which had liens on the property.
“They want to make as much as they can, obviously, because they’re already taking a loss,” Brown said. “You have to prepare your buyer and be like, ‘This might take awhile. I can’t get an answer overnight.’”
Furthermore, Brown said her company has to study up on the rules and legal issues of short sales. Both the Northwest Montana Association of Realtors and the Montana Association of Realtors, Brown said, are also learning the process.
“Most Realtors in this valley haven’t dealt with this in the past,” she said. “You’re kind of relearning your business.”
Short sales and REO properties drive down market prices, Whitefish Credit Union’s Kenyon said. According to Kelley Appraisal, the average bank-owned property sold for $200,387 in 2009, while regular properties sold for $290,692. Meanwhile, Kelley’s report states that new home construction in 2009 was the lowest it has been since 1969.
But Kenyon said, ultimately, dealing with defaulted loans is part of business as usual for banks, even if the current circumstances are more extreme than in the past.
“That’s what banks do,” Kenyon said. “They’re in the business of managing risk.”