Will A Moratorium on Foreclosures Help the San Francisco Market?

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In the past week, several major banks have announced that they will stop the foreclosure process until they have more time to evaluate the process and be sure that there are no errors in their paper work.  Is this good news or bad news?  The answer of course is that it depends. 

If during this time, banks can work with homeowners to modify loans and this keeps people in their homes, then it is probably good news. Owners get to stay in their homes, and be happy (ok, the banks can't control that).  In addition to reducing or eliminating the disruption to owners' lives, fewer bank owned properties on the real estate market is better for the market overall because these homes are typically priced between the amount the bank needs to recover (the loan amount plus the banks' costs) and current market value.  As these homes sell, it creates a drag on real estate prices, pulling down the value of other homes in the neighborhood.  Modifying loans also helps neighborhoods remain stable.  In parts of the country with high foreclosure rates, some blocks or neighborhoods have huge vacancy rates, and with them higher rates of crime.  This also brings down real estate prices.  So, stopping or slowing foreclosures seems like a good thing for owners, banks, real estate values and neighborhoods, right?

Slowing down or halting foreclosures may really hurt neighborhoods and market values in the long run.  If the banks and owners can't modify loans and reach a workable solution, that is, if these owners really can't afford their loans (never could, or can't now because of job loss), then delaying foreclosures will likely serve to delay the inevitable and delay the recovery of the housing market and the revitalization of neighborhoods.

We've been lucky in San Francisco so far, and have seen fewer foreclosures than other cities.  We do have them.  Many condos at Oceanview Terrace, which sold at the height of the market and when creative financing was at its pinnacle, are for sale, mostly as short sales and as foreclosures.  Same with the Palms, at 555 4th Street in SOMA, The Beacon, near the ballpark and other buildings. We have seen several short sales and foreclosures in both of these buildings in the last few years.  Prices have been dropping, and if you view these buildings as mini-neighborhoods and imagine the problems for those who remain, it is in fact, similar to communities in Sacramento, Florida and other hard hit neighborhoods.  These short sales and foreclosures have dragged market values down.  The HOAs are also struggling to get monthly assessments paid, and this will have an impact on these buildings over time. The southern neighborhoods in San Francisco have higher numbers of short sales and foreclosures than the central and northern neighborhoods in the city.

My hope is that the banks will work with homeowners to work together to modify loans and keep people in their homes (lower rates or lengthen terms, etc.).  We'll see what transpires and the impact on homes.