DESERT LAW BLOG

"TIP OF THE ICEBERG" FOR COMMERCIAL FORECLOSURES IN PHOENIX

The Republic details the coming wave of commercial foreclosures in the greater Phoenix area.  From the article:

More than 2,000 commercial properties in Maricopa County have received 90-day foreclosure notices since Jan. 1, representing $6.3 billion in real-estate loans on which the borrowers have failed to make payments.

As the article points out, foreclosure notices on commercial property often don't mean the foreclosure is imminent for a variety of reasons.  Commercial lenders are often more likely to try to figure out a workout on a large commercial loan (as opposed to a run of the mill residential loan).  Commercial lenders don't really want a bunch of empty, devalued property on their books.  They will need to pay money to manage the property and they will also have to write down the value of the asset to its market value - putting an even larger strain on their financials and potentially putting them in jeopardy of having their bank seized by federal regulators.

The realtors in the article don't sound too optimistic for the near future (rightly so in my mind):

Isbel said there's no indication that the pace of commercial foreclosures is about to taper off. If anything, it's still building momentum.

"We're at the tip of the iceberg, there's no doubt," said Isbel, of Scottsdale-based GPE Commercial Advisors. "It's just a question of how big it is underneath."

The opportunity funds are starting to circle looking for great deals from banks, either in the equivalent of a "short sale" or purchasing directly from the bank after a foreclosure.  The problem is that opportunity funds generally don't want to buy a commercial property unless they either think they will be able to lease it out to generate some short term cash flow, or they are getting an incredible discount in the price from the banks.  My feeling is we still have a ways to go before banks decide to dump the properties at cut rate prices or commercial tenants start filling up some of the excess space.  The former will likely occur first due to many distressed bank that just need cash.  And that will be when the distressed deals start to happen here in Phoenix.

DOWNTOWN PHOENIX LUXURY CONDOS GO BUST

The Business Journal reported last night that Summit at Copper Square has had a notice of trustee sale filed against it (i.e., foreclosure) with a trustee sale date of October 14th.  The article indicates 74 of 160 condo units have been sold - but after reviewing the assessor's website, it appears 74 have YET to be sold.  Presumably the foreclosure action is being taken against only the condominium units that remain unsold - as condo units generally are released from the deed of trust as collateral when sold to an individual purchaser.

The realtor quoted in the article seems surprised that this action was taken, but if he has been following the downtown condo market, this wouldn't come as a shock.  First Bank of Nevada (the construction lender on the property) was put into receivership by the FDIC earlier this year.  The FDIC then sold the loan to a third party buyer, who presumably wants to protect their interest in the property.  With the Phoenix condo market in disarray  (read: valuation free fall) and nearly half of the units in Summit unsold, it made sense for them to foreclose on the property.  Following foreclosure, the new owner will likely decide whether to rent out the remaining units for the next several years, until the market recovers enough for them to sell the units, or to just do a bulk sale of the units to a third party buyer - who will in all likelihood turn them into rentals as well for the foreseeable future.

Another question surrounding the Summit at Copper Square is resolution of the outstanding mechanics' liens that have been filed against the property - including a notice of intent to foreclose that was recorded by the builder late last year against all of the units (sold and unsold).  Generally, a construction lender has priority over mechanics liens in Arizona.  With the value of the condominiums dropping so precipitously, it is unlikely the builder will obtain relief in the bank's foreclosure action.  But the courts may become involved to sort out priority and to figure out how to handle the mechanics liens against the condo units that have already been sold to individual purchasers.

From the perspective of a current owner of an individual condominium unit in Summit at Copper Square, the foreclosure itself shouldn't have much impact beyond (a) potentially new neighbors who are renters and (b) a new group asserting control over governance of the homeowner's association (presumably the developer still controls the board of directors of the HOA). In these types of cases, often the HOA reserves are underfunded and the developer has not been able to keep up on paying HOA assessments.  When the lender takes over unsold condominiums, they will often rectify these deficiencies - particularly if they are going to rent out the property and will have cash flow.  A fully-funded HOA could be the silver lining for the current condominium owners.

All eyes must necessarily turn to 44 Monroe, the other downtown Phoenix high rise condominium finished in the last year.  Only 8 units out of 202 have sold since they completed the project in fall of 2008.  Back in August of 2008, the developer told the Business Journal that they had received deposits on more than half of the condominiums, but to date those deposit haven't translated to sales.  It will be interesting to see whether the lender (Corus Bank) forecloses on this property or whether they allow the developer to maintain the property (perhaps as rentals).  Corus currently has its own troubles (due to its construction lending) and is rumored to be close to being taken over by federal regulators.  Stay tuned on this one...

A quick, but necessary, reminder that the contents of this blog should not be taken as legal advice.   Prior to making any legal decisions, a visitor to this blog should consult with a licensed attorney in their state of residency.  

ARTICLE SUMMING UP FORECLOSURE SITUATION IN PHOENIX

This article in the Republic today pretty much sums up the situation in the Phoenix foreclosure market.  Lots of shadow foreclosure inventory is looming over the market, even as realtors try to call a bottom to prices.  In the 90's in California, the same thing happened, with banks eventually dumping their inventory, causing a double dip price drop.  It remains to be seen whether this happens in Phoenix.

A few key passages...

At present, the system is backed up with more than 45,000 "pending" foreclosures, up from about 2,300 in June 2006, according to a historical analysis by the Information Market, a Phoenix research firm.

Most experts expect pending foreclosures to increase even more before leveling off sometime within the next 12 months.

...

There's a widespread belief that banks are purposely limiting the flow of foreclosure homes onto the market, which helps prevent home prices from sliding even further but could prolong the market's long-term recovery.

And, as the article points out, the commercial crash is just getting started.

Although most Valley foreclosures thus far have involved residential property, commercial-property owners and lenders are preparing for apartment, office and retail foreclosures to rise sky-high in the coming months.

Selling those properties back to the market could take years in some cases, analysts said, because there is little interest in new office and retail space, even at the low-rent end.

Commercial real-estate broker Craig Henig of Grubb & Ellis in Phoenix said banks aren't in any rush to foreclose on commercial real estate because it forces the lender to adjust the property's book value to today's considerably lower market price.

Significant write-downs on a few multimillion-dollar commercial loans could put a small or financially stressed bank out of business, he said.

RECORD 12% OF HOMEOWNERS WITH MORTGAGES DELINQUENT

From the NYTimes today...

A record 12 percent of homeowners with a mortgage are behind on their payments or in foreclosure as the housing crisis spreads to borrowers with good credit. And the wave of foreclosures isn't expected to crest until the end of next year, the Mortgage Bankers Association said Thursday.

The foreclosure rate on prime fixed-rate loans doubled in the last year, and now represents the largest share of new foreclosures. Nearly 6 percent of fixed-rate mortgages to borrowers with good credit were in the foreclosure process.

At the same time, almost half of all adjustable-rate loans made to borrowers with shaky credit were past due or in foreclosure.

The worst of the trouble continues to be centered in California, Nevada, Arizona and Florida, which accounted for 46 percent of new foreclosures in the country. There were no signs of improvement.

ARTICLES ABOUT THE NEW FORECLOSED HOMEBUYING "FRENZY" IN PHOENIX

Several articles over the weekend touched on the new buying frenzy that is happening at the very low end of the housing market in Phoenix - primarily at trustee sale auctions (foreclosures): 

The NYTimes highlights the increasing difficulty of winning bids at trustee sale auctions in Phoenix due to the growing number of investors now trying to turn foreclosed homes into rental properties.  The article notes that investor purchases are up 50% in the last year - nearly to the level during the top of the housing boom (4 in 10 homes are sold to investors).

The LA Times has a similar article highlighting the new housing "boom" in Phoenix.  The article notes that investors are now outbidding many first-time homebuyers who are looking at the housing bust as an opportunity to finally own an affordable home.

And the Christian Science Monitor writes about what all of these new investors should continue to worry about - the shadow inventory of foreclosed homes in Phoenix owned by banks that are still waiting to be dumped on the market.  The article mentions that only approximately 30% of the homes that have been foreclosed upon have been released onto the market by banks and that some wary realtors and investors are worried about a big dump of this inventory later in the year - further depressing prices.  Note this exact thing caused a double dip in housing prices in California during their real estate bust in the 90's.

This all adds up to very interesting times in Phoenix real estate for investors yet again.  The big issue we had during the boom was outside investors coming into Phoenix and buying residential properties several at a time.  They had no intention of hanging onto them for longer than a few months.  When prices started to drop, many of these investors walked away, leaving a huge amount of excess inventory on the market.

Now that our prices have fallen 50-60% in many areas, investors are coming back into the market.  At least this time, many of them have a longer term business plan - rent for a couple of years and then sell.  And they are often forced to buy with cash - making them more likely to hang onto the home.  This new buying (and subsequent decrease in inventory) leads many to think that Phoenix will hit a bottom in terms of housing price depreciation sometime before the end of the year.

Counteracting the new investor activity is the shadow inventory that may be dumped on the market by banks mentioned by the CS Monitor.  That will further depress prices.  And many of the new investors in these low end homes I talk to also want to sell within the next 3 to 5 years.  This combination may keep the level of inventory relatively high for the forseeable future and should keep housing prices depressed in Phoenix.  So we may hit a bottom in home prices, see a bit of recovery and then go back down again.  Either way, most people I talk to think we will see somewhat of an L shape to house pricing in Phoenix - where we bump along the bottom for several years while we wait for broader economic and job recovery.

Further complicating the pricing picture is that foreclosure activity has moved more and more to higher priced housing - as middle and upper income families lose jobs and default on their prime loans.  Or as they simply make the economic decision to walk away because they are so far underwater on their loans.  This will create more buying activity at auctions in the middle and higher priced range and should change the mix of home sales being used to calculated median sales prices.  So while median prices may stabilize and even rise, some of it may be attributable to more higher priced homes being auctioned at trustee sales.

In short, the lower end housing market may be closer to hitting bottom than the rest of the market because investors have figured out they can turn those properties into income producing properties and they are now in higher demand.  Higher priced homes may still have further to fall before investors (or regular homebuyers) decide that it is time to purchase these properties - whether it be from the bank or regular market purchase.  The data over the next year for housing prices in Phoenix will be messy because of this.

WIGWAM RESORT FINDS A PROPERTY MANAGER TO REPLACE STARWOOD

The Business Journal reports today that Destination Hotels and Resorts will take over from Starwood at the end of May as the property manager for the Wigwam Resort - which is in receivership waiting to be auctioned in June to a new owner.   Starwood declined to renew its management contract which was expiring at the end of May.  According to their website, Destination is the fifth largest independent management company in the U.S. and currently manages the Royal Palms in Phoenix and the Tempe Mission Palms in Tempe.

No word in the article on the status of employees at the Wigwam, but presumably a fair number of them will be retained by Destination to provide continuity to the operations of the Wigwam.

NEW PLAN FROM TREASURY TO SPUR SHORT SALES (FINALLY)

As if they are doing everything backwards, Treasury has finally decided to try to incentivize banks to provide one of the best (and earliest) solutions for distressed homeowners - short sales.   Short sales were the first fix that many distressed homeowners looked to in order to be able to sell their underwater home - starting back in 2007.   Unfortunately, for a myriad of reasons, banks have been less than cooperative in approving them.  It often took 4 months or more to get a short sale approval.  By that point, the potential buyer has walked.  Banks have since tried to streamline the process a bit, but many still take months to get approvals through.

Studies have shown that banks lose over 100% more by going through traditional foreclosures than they do in a short sale.  The market value of a home also ends up much lower in a foreclosure - hurting the values of surrounding homes and jeopardizing whole neighborhoods.  So everyone loses in a foreclosure.  But banks often have their hands tied because they don't own the loans (investors often do), or they want to delay realizing a loss on the mortgage for as long as possible due to their capitalization requirements.  Completing a foreclosure takes two to three times as long as approving a short sale - thus prolonging the inflated value of the mortgage on the bank's books.

Another issue is that many of the second lienholders on homes are covered by private mortgage insurance and need to get the insurer to agree to cover at least a portion of their loss if they approve a short sale (which they would have received if the property was instead foreclosed upon).

Now, finally after two years, someone has gotten through to Treasury with the idea that short sales need to be completed more efficiently in order to help homeowners.  Their solution - announced yesterday - is to provide a $1,000 incentive payment to lenders that approve short sales and additional incentive payments to junior lienholders who approve the short sale.  This will hopefully give banks and investors even more reason to speed up the short sale approval process and make more homeowners eligible - thus helping stem the tide of price depreciation in places like Arizona.

PHOENIX MAKES LIST OF MARKETS WITH MOST HOMES UNDERWATER

CNBC.com has a slideshow of cities with the highest percentage of homes with negative equity - or "underwater" (according to Zillow).  Not surprisingly, metro areas in California, Florida, Arizona and Nevada dominate the list.  The two largest metro areas to make the top 16 are Las Vegas metro - with 67.2% of homes underwater (coming in at #1 on the list), and Phoenix metro - with 41.7% of homes underwater (tied for 9th on the list).

Unfortunately, underwater homes create more walk-aways by borrowers, which further depresses home prices in neighborhoods, which creates even more underwater homes.  An ugly cycle that Phoenix and Las Vegas are attempting to break at this point.

W HOTEL SCOTTSDALE TRUSTEE SALE POSTPONED

The trustee sale of the W Hotel Scottsdale has been postponed to May 14th, the Republic noted today.  The sale was originally scheduled for April 15, 2009.  The hotel is being foreclosed by lender HSH Nordbank.  It is expected to keep operating under its management agreement with Starwood Hotels.

No word on the reason for the sale being postponed.  Perhaps a deal is in the works between the parties, or a third party has stepped into the equation.  The foreclosure comes amid a flurry of lawsuits between the developer, Triyar, and the contractor that built the hotel, Hunt Construction.

Previous posts about the foreclosure can be read here.

BANKRUPTCY CRAMDOWNS DIE IN SENATE, HARMING ARIZONA LOAN MODIFICATION EFFORT

Under intense pressure from banking lobbyists, the U.S. Senate today voted down adding in bankruptcy "cramdowns" to the bankruptcy reform bill.  The House had previously voted to include this in their version of the bill.  This effectively kills the movement to change the bankruptcy laws to allow judges to write down principal for primary residences of individuals in bankruptcy.  (It should be noted that most other types of debt, including mortgages on second homes, CAN be written down by bankruptcy judges.)

This removes the "stick" part of the equation when dealing with loan modifications and other loan workouts on residential mortgages.  The "carrot" is the payments the federal government is making to entice lenders to participate in the Making Home Affordable Plan.  And that should get some mortgage holders to move more quickly to modify loans.

The main issue, however, with modifying loans using Making Home Affordable (or any previous modification the banks have been doing) is that it is often only a temporary fix (such as temporarily lowering interest rates) and does not forgive much, if any, principal.  For Arizona borrowers who are tens or hundreds of thousands of dollars underwater, the smart financial decision often remains walking away from the home - even at the expense of destroyed credit (which is usually - but not always - the only downside to giving up a home in non-recourse states like Arizona).  It remains likely that a borrower's credit will be repaired long before the home would no longer be underwater.

As I have written before, compounding the issue is that many mortgages are held by investors who are refusing to allow principal to be written-down - thus hindering the efficacy of mortgage modifications for people very far underwater in Arizona.  The bankruptcy cramdown would have been a big stick that borrowers and servicers together could have used to convince these investors that the smart financial decision would be to allow principal write-downs instead of risking a bankruptcy judge doing the same thing (and incurring the additional cost of going through bankruptcy). 

So it seems that we will stay on the same course as before - loan modifications that truly help only a minority of borrowers, and a high re-default rate.  The banks may be happy to have won on this one - but they would still be better off financially conducting voluntary principal write-downs to keep people in their homes and to curb re-defaults.

Update:  Naked Capitalism says about the same as I am saying - in even more blunt terms.

NEW MAKING HOME AFFORDABLE PLAN GUIDELINES FOR SECOND MORTGAGES WILL HELP ARIZONANS

One of the criticisms of the Making Home Affordable Plan unveiled by the Obama administration last month is that it was light on specifics on how to deal with the many homeowners who have second mortgages on their properties.  The second mortgage holders generally have to consent to mortgage modification of the first mortgage (through subordination) or a short sale.  And since they are often completely out of the money due to homes being so far underwater, they can and do hold up any modification or short sale plans by refusing to play along unless they get a pay-off.

This is particularly an important problem in Arizona because so many buyers used second mortgages here.  The price depreciation on homes has been so steep that homes are far enough underwater that the second doesn't expect any payoff.   So they simply refuse to consent to anything unless they get paid some amount of cash by the borrower (who typically don't have it).

Today, the Obama administration put some meat on the bones of the original plan to try to deal with reluctant second mortgage holders.  I wrote back in March about the initial proposal:

A few points that affect many Arizona homeowners are how the modification program deals with junior or second mortgages and provisions for short sales or deeds in lieu of foreclosure (DIL).  The modification program only applies to first mortgages and many (most) Arizonans have a second mortgage on their property.  To deal with this, the modification program allows up to a $1,000 payment to a second lienholder to forgive the debt and $500 to the servicer of the secondary lien.  Alternatively, the second lienholder can simply agree to subordinate to the modified first loan with no payment. 

So the original plan contemplated a pay off of the second mortgage holder by the federal government and a full forgiveness of the debt (essentially a 100% principal write-down on the second).  Or the lender could keep the mortgage and simply subordinate to the modified first loan without any financial benefit.  This was obviously an attempt to get second mortgage holders to take what money they could and forgive the loan (and good thing for borrowers).

Apparently this was not satisfactory to second mortgage holders who wanted to maintain the lien on the property while still getting a payout.  Second mortgage holders don't want to forgive the debt because they have to then write-down the value of the loan, which hurts their balance sheets.  And many of the largest banks participating in the TARP program have large portfolios of second mortgages - so have a directly line to Treasury Secretary Geithner to request such things.  These banks may also be holding out hope that at least a portion of these distressed borrowers will stay in their homes for the next 30 or 40 years to pay off the loan (and a few might).

So Treasury has devised an additional plan to pay second mortgage holders $500 up front to participate in a modification of the second mortgage at a lower interest rates, with additional payments of $250 per year for up to three years - as long as the borrower does not default.  So the bottom line is that both the first and second mortgage holder will get a cash payout from the federal government for agreeing to modify the loan to a lower interest rate.  But neither will have to actually forgive any portion of the principal.

These payments will hopefully incentivize second mortgage holders to cooperate in the Making Home Affordable modification plan which is being implemented by many of the big banks as we speak.   It's a good step forward to try to find a middle ground with banks that will incentize their cooperation.

Hope for Homeowners Incentive

Additionally, the administration announced that it will give up to $2,500 per loan for mortgage holders to participate in the as-yet-failed "Hope for Homeowners" program. 

The H4H program was originally meant as a way to get banks to write down loans to the market value of the house and then the borrower would share any future increase in equity value with the bank.  Obviously it makes no economic sense for a bank to voluntarily participate in this, since this requires an immediate principal write-down - again doing harm to the balance sheet (which they are trying to avoid at all cost).  And in a market with rapidly falling housing values, it made no sense for a borrower to participate.  They would again be underwater within a month.  Once housing prices hit bottom, it may make more sense for borrowers to pursue this option, but I don't see why banks wouldn't just continue to pursue loan modifications under the Making Home Affordable Plan, instead of writing down principal under the H4H program. 

If the new bankruptcy bill allowing mortgage cramdowns ever gets passed, this program may again be in play as banks choose H4H as an alternative to judicial bankruptcy principal write-downs.

The article from the AP about the actions today can be found here.

YET ANOTHER PHOENIX HOTEL/RESORT IN FORECLOSURE - THIS TIME THE WIGWAM (UPDATED)

The Republic reports today that the Wigwam Resort & Spa in Litchfield Park faces imminent foreclosure by its lenders.  This follows on the heels of the foreclosure action against the W Hotel in Scottsdale and the Intercontinental Montelucia Resort in Paradise Valley. 

Owner Kabuto Arizona Properties received the notice of trustee's sale from lawyers for lender Citigroup Global Markets Realty on April 8th and sale at public auction is scheduled for July 9th.  The NTS filing indicates Kabuto has failed to make loan payments since November of 2008.

Included in the foreclosure action are two golf courses at Bilmore Golf Club in Phoenix proper, also owned by Kabuto.  They will also be auctioned on July 9th to help settle Kabuto's debts.

The Business Journal also notes an even more ominous sign for the Wigwam.  Starwood Hotels, the manager of the Wigwam, has indicated they will not renew their contract with Wigwam that is up at the end of May and will no longer be affiliated with the resort.  This will deprive Wigwam of the status of being affiliated with a major hotel chain, and all the benefits that come along with it (the reservations network most importantly).  The Business Journal reports that Starwood will lay off all of its 330 employees.

The Wigwam was built in 1929 and has historically been the main luxury resort operating on the west side of Phoenix - hosting many celebrities during its heyday - and still catering to a high end clientele today.  It is now questionable whether it will be able to remain open due to the foreclosure action and loss of management.  

Presumably, the lenders will want to keep the property operating if it is cash flow positive to preserve some of the value of the property.  Auctioning off a shuttered property with no management company in place will attract only low bids.  But due to the timing of loss of management and the foreclosure sale, it would seem difficult to get a new management company in place without jumping through some major legal and operational hurdles.

The question will be whether Citigroup buys the property at auction, installs new management and runs it for a couple of years until the economy recovers and they can sell it at a higher price - or whether they just dump it to the highest bidder and take the loss.  If Starwood was staying on board, the decision may have been easier as the work to maintain cash flows would not have been so great.  I'm sure there will be more to this story in the coming months....

Full text of the notice of trustee's sale can be found here (pdf).  David Weatherwax of Fennemore Craig is acting as the trustee. 

I expect this to be just another in a long line of foreclosed commercial properties over the next year as the commercial market in Phoenix continues to struggle.  For investors sitting on the sidelines with cash, there will be plenty of opportunities during that time period to pick up some great properties at foreclosure auction, prior to auction or even post-auction directly from the lenders.

Update:  The COO of Wigwam, in an article appearing in the Republic, indicates they are "confident they can find a resolution" with the bank to avoid auction.  Considering that Kabuto hasn't made a payment for 6 months, I'm not sure why the lender would have mercy on them.  The bank has little incentive to assist a delinquent owner that may be insolvent.  The only advantage to providing assistance or forbearance may be some amount of continuity in operations, but there is already going to be a fair amount of change over due to Starwood pulling out. 

According to the article, the COO would not comment when asked if a new property management company was going to be put in place in time to take over for Starwood and to save the jobs of the 330 employees.  But the article makes the same point I do above - it is to Citigroup's advantage to keep the property operating to maintain some amount of cash flow.  But only so long as the property is cash flow positive.  It will be interesting to see if Citigroup tries to put the property into receivership so it can take over ownership immediately and negotiate its own contract with a new property manager in preparation for taking over ownership - or even try to re-open negotiations with Starwood to stay on under their ownership.

It would certainly be a big blow to Litchfield Park if the Wigwam were to close.

MARCH BRINGS RECORD HIGH OF FORECLOSURE NOTICES IN PHOENIX METRO

Not the kind of news people were hoping for, but not surprising either, is that we saw a record high for notice of trustee sales (aka pre-foreclosure notices) in March.  The Republic lays out several of the potential reasons, including more certainty in the market over governmental plans.  Now that banks/servicers know who will and who will not qualify for the Making Home Affordable plans laid out by the Obama administration, they can move forward with a backlog of foreclosures they were holding off on.  So the hope is that March is simply the release of a bottleneck of pre-foreclosure notices and that April will see a drop back down in numbers.

However, as I have been writing, there is another large bubble of negatively amortized option arm mortgages set to recast over the next two years that may exacerbate the problem.  That being said, the new governmental programs will at least give these homeowners an idea of whether they should try to modify now or whether they need to seek other options (short sale or walking away).  Hopefully this increased certainty speeds up the process and allows prices to find a bottom sooner rather than later in the Valley.  That all hinges of course on whether the banks stick to the guidelines of the new plan (certainly not a given).

Note that in Arizona a notice of trustee sale typically indicates that the trustee sale at auction will occur 90 days following the notice (the statutory minimum), so the homeowner has a minimum of 90 days from the date of the notice to find a workout for their home loan.  Not all notices lead to a trustee sale because some homeowners are able to get a loan modification, complete a short sale or catch back up on payments.

FORECLOSED HOMES COMPETING WITH HOME BUILDERS IN ARIZONA

An article today in the WSJ points out what many first-time homebuyers in Phoenix already know - buying a bank owned (foreclosed) home is usually a better deal than buying a new home from the builder.  The article notes that often, foreclosed homes are priced 25% or more below what homebuilders are trying to sell their homes for in the same neighborhood.  

Apart from perhaps having to do some minor repair to the foreclosed home, I'm not sure why a homebuyer would purchase a brand new home priced 25% more - particularly in a market with housing prices that are still declining.  As the Phoenix area monthly sales figures rise, many agree this is the way to go.  Approximately 50% of sales in Phoenix metro are now foreclosed homes.  Savvy homebuyers can easily find a home that is only a year or two old that needs little to no repair and is ready to be moved into.  And they can choose their neighborhood in the Phoenix metro area as there are foreclosures in all areas. 

The net impact of this is that homebuilders are finding a tough time out there.  The Republic reported earlier this week that Chandler (formerly a top 10 fastest growing city in the nation) had only one new construction permit issued in February.   The WSJ sums up the reason for this:

Analysts question how low builders can go before building a house costs more than they can charge for it. In some markets in California and Florida, builders have reached that point and have stopped building.

I would guess we are at that point in many of the areas around Phoenix as well, leading to many builder failures already and lots of layoffs in the construction industry.  This is a big part of the reason that Arizona has had the second highest jump in unemployment numbers - next to Michigan.

ARIZONA AND THE NEW FEDERAL MORTGAGE MODIFICATION GUIDELINES

Much has already been written in the last day about the new guidelines for mortgage refinance and modifications released yesterday by the Obama administration (dubbed "Making Home Affordable").  The Summary of Guidelines can be read here (pdf).  The full Modification Guidelines can be read here (pdf).  A Q&A for loan refinance and modification counselors can be read here (pdf). And a fact sheet on the programs can be found here (pdf).  All this is from the financialstability.gov page.  The Counselor Q&A is the most helpful if you don't have a lot of time to read - skip down to #10 in the Q&A for the loan modification portions.  Then read the Summary more carefully if you think you may qualify.

Essentially, the program has two pieces - helping homeowners refinance and helping homeowners get up to five years of reduced payments through loan modification.  The refinancing part of it, while important, will help very few people in Arizona.  It is meant to assist refinancing for homeowners who have less than 20% equity remaining in their home or who are up to 5% underwater on their mortgage.  Arizona has such a high number of people who are drastically underwater that this will help relatively few people in the state.  Most are just too far underwater to qualify.

The loan modification program, on the other hand, will be able to help many Arizonans.  The program essentially incentivizes servicers and lenders/investors (through payments) to modify loans so that monthly mortgage payments end up being only 31% of a borrower's total income.  In order to qualify, borrowers must show financial hardship, but must be able to document their income showing that they will be able to continue to make payments - thus keeping people from participating who are unable to continue own a home.  If borrowers continue to pay on time over 5 years, they will be eligible for up to $5,000 in principal reduction under the loan modification. The modification program is for mortgages originated before January 1, 2009 and runs until the end of 2012.

So if you are a homeowners, you should check first to see if your monthly mortgage payment (the full PITI) is greater than 31% of all of your sources of income.  And if so, you should read the full qualifications for homeowners summarized in the above links to see if you are eligible.

Read more important details after the jump....

RECORD 12% OF HOMEOWNERS WITH MORTGAGES IN DEFAULT NATIONWIDE

The WSJ reported today that a record 5.4 million U.S. homeowners with a mortgage are behind in payments (i.e., in default) or somewhere further along in the foreclosure process by the end of the 4th quarter.  That's 12% of mortgage loans in the U.S., an incredibly high number.  Here is the press release for the study from the Mortgage Bankers Association.

This number is a leading indicator for a continuing rise in foreclosed homes taken back by banks and then eventually dumped on the market - and highlights how important loan modification efforts are to slowing down the real estate crash.  The press release from the MBA notes that delinquencies from the actual mortgage structure (subprime, alt-A, negative amortization, etc.) is starting to dissipate, while foreclosures are expected to remain high due to job losses and other economic hardships.  In Arizona, I expect it to come from people who are very far underwater on their homes and feel like they have no hope for their home to ever be worth what the loan is worth again - i.e., people who simply decide to walk away.

Interestingly, one of the reasons cited in the article for the increase is that borrowers are deliberately stopping payment on their loans in order to qualify for loan modifications - even if they can pay.  This is because banks refuse to even talk to a borrower about a loan modification unless they are seriously delinquent.  So if a homeowner is diligently making payments, but is barely scraping by due to job loss or other financial hardship, they must intentionally default in order to get the bank's attention.

President Obama's new mortgage modification program guidelines released yesterday attempt to mitigate that problem by incentivizing servicers and lenders/investors to modify loans for people who are in trouble, but who are still current on their payments.   I will write a bit more about the new program later.

This nationwide number comes against the backdrop of the following state by state graphic looking at concentration of foreclosures in the U.S.  Not surprisingly, California, Arizona, Nevada and Florida are all above the national average, while much of the rest of the country is below the national average.  Of course, because the national average is rising rapidly, this doesn't mean there isn't a foreclosure problem in states besides those four.  Nevertheless, the bulk of the problem is concentrated in a few states - Arizona among them.

(click for larger image)

Update:  As I indicated above, the continuing problem in Arizona is that massive devaluation (around 50% in many areas) has caused many borrowers to be way underwater on their loans (i.e., house is worth less than the mortgage) and they are simply walking away.  HousingWire reported yesterday that new data shows 20% of all homes with mortgages nationwide were underwater in December.  And of course that number will rapidly increase as prices decline further as expected.  Noted in the Housingwire article is the same concentration in the four states mentioned above.

BETHANY GROUP APARTMENT COMPLEXES REPORTEDLY IN RECEIVERSHIP

The Republic is reporting tonight that Bethany Group, one of the largest apartment complex owners in Phoenix metro, is losing ownership of all of its 13 local apartment complexes to lenders - affecting over 5,500 apartment units in the Valley.  According to the story, managers at the complexes haven't been paid in weeks, utility bills for complexes have gone unpaid and basic services, like trash collection and landscaping, aren't getting done.  Sources tell the Republic that all employees at Bethany Group's headquarters in Irvine, CA were fired last Friday.

It's hard not to know someone in the Valley who lives in one of these complexes.  In fact, a good friend of mine lives in Scottsdale Springs in Old Town.  Over the last several months, it became very clear that basic services were falling apart - as the weed to rock ratio skyrocketed in the complex.  The managers also seemed at the point of desperation in getting vacant units rented, offering the same rental rate for your choice of size of apartment (1, 2 or 3 bedroom) at prices 20% less than only 6 months ago.  

Rents have been dropping rather rapidly all around Phoenix and this is a prime example of the fallout of that.  Many companies who bought apartment complexes (and other commercial properties) over the past several years did so with fairly high leverage at inflated valuations.  Typically, that lending has certain debt coverage ratio covenants, requiring income at the property to be anywhere from 1.1 to 1.5 times the debt payment.   As rents drop, the income at the property falls to a point where that debt service coverage covenant is breached and the credit facility is in default, allowing lenders to foreclose on the loan. 

The story on the Bethany Group doesn't specify the exact trigger, but in order to take over the complexes it is likely that not only was the DSCR breached, but that Bethany Group was way behind in payments.  Lender typically don't want to be taking back these types of large properties in this real estate environment unless it is the last option.  The end result of this is likely foreclosure by the lenders on the properties and then a sale to a third party.  More details to come, I'm sure, on the identities of the lender(s), clarification on status of the properties, etc.

As for renters, I don't expect them to be affected much, other than perhaps having to deal with a slowdown in property management services for a period of time.  Unlike a foreclosure on a single family home where tenants are typically kicked out, in this case, the lender wants to keep as many tenants in the complex as possible to make the sale to a third party attractive.

HOUSING INVENTORY IN PHOENIX METRO STILL HIGH

One of the most important indicators that agents look at in assessing whether we are getting near the bottom of the housing price decline in Phoenix is the inventory of homes for sale and how long it will take for the market to absorb that amount of inventory at the current sales pace.  As sales have picked up over the last several months due to increased sales of foreclosed homes, realtors have expressed optimism that this will start to chip away at the inventory level to get back to a normal amount of inventory (generally five months of inventory, give or take). 

The one fear I have expressed is that banks that have foreclosed on homes aren't releasing those homes back onto the market right away and therefore have created a shadow inventory which is generally not accounted for in the MLS statistics that realtors generally rely on.

According to the Republic, one real estate analyst in Phoenix has attempted to quantify this shadow inventory number and has estimated that there are an additional 16,000 bank-owned homes that have yet to be released onto the market.  He also figures an additional 5,000 builder-owned spec homes and another 5,000 for-sale-by-owner homes that do not show up in the MLS inventory of listings.  He calculated that this brings the total inventory level to 86,000 homes in Phoenix metro and indicates a 13 month inventory based on a sales rate of about 80,000 homes per year.  And with foreclosure rates continuing steadily at an historically high pace, this shadow inventory will stay high for the foreseeable future. 

In fact, one of the fears I have is that the foreclosure rate will actually accelerate through 2009 as more and more Arizonans decide to walk away from their homes due to being tens or hundreds of thousands of dollars underwater.  Hopefully the new housing plan will at least help stem the tide of foreclosures a bit.

In any event, the analyst's calculations splash a little cold water on the view that we are working our way towards a normal inventory level by the end of 2009.  The question this analysis begs, of course, is whether this also means we won't find a bottom to our housing prices this year.

WALL STREET JOURNAL PROFILES MARICOPA, ARIZONA

The WSJ runs an article this morning profiling the former boom town of Maricopa, Arizona:

Builders rushed into this one-time agricultural crossroads during the housing boom. They put up beige stucco houses on winding streets, with names like Heavenly Place and Good Vibrations Lane. They lured young people who couldn't afford homes in nearby Phoenix or its costly suburbs. The population soared to 37,000 last year from 1,400 a decade ago, making Maricopa one of the nation's fastest-growing towns.

Now, it's become a dead end for some of those people.

"We're trapped," says Tracy Campbell, as she watches her 2-year-old daughter romp on a playground.

The rest of the article can be read here. 

Maricopa is a compelling example of the boom and bust of Arizona communities because virtually the entire town is going through this together.  But the experience detailed in this article also describes many areas in the Phoenix metro area - particularly on the outskirts where farms were rapidly turned into subdivisions during the middle part of this decade.  I moved to Phoenix in 2005 at the height of the boom and it was difficult to describe to people who had not been here.  Literally thousands of homes were being built as far as the eye could see in some areas.  It was typical to see 200 people show up at a lottery drawing to win the right to buy one of these houses (typically only 2 or 3 names would be picked each weekend in each new community).

And now, many of those homes that were built and sold are extremely far underwater and being foreclosed upon.  People are making the choice that even if they can afford the mortgage, they are so far underwater due to surrounding foreclosures that it is smarter financially to walk away.  Their credit will be repaired much sooner than their home will again be worth what their mortgage is worth.  And in the meantime, they will save hundreds every month renting.  That decision, of course, exacerbates the problem, but seems difficult to stop at this point in many of these newly built neighborhoods.

For those not living in Arizona, this handy foreclosure map provided by the Arizona Republic shows some of the fallout in every community.  And while monthly foreclosure notices in Maricopa County have diminished somewhat from their high last year (over 8,000/mo), they are still very high (over 6,000/mo) and expected to continue at a rapid pace.

CRISIS OF CREDIT VISUALIZED

I often have people ask me how we got into this housing/mortgage mess and I always wish I had a good visual explanation to just give them.  Well Jonathan Jarvis did just that.  The below explanation doesn't get into some of the deeper nuances of the CDS markets that sped up the Wall Street crash, but it does a good job of giving a simple explanation of the root of the housing/mortgage crisis.  The extended version of this would explain how the credit crisis hurts businesses, causing job loss, fear in the markets, contraction in spending and then further foreclosures and housing depreciation.

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

OBAMA ANNOUNCES NEW HOUSING PLAN IN PHOENIX

The news of the day today was President Obama's visit to the Phoenix area (Mesa to be exact) to announce the details of his plan to stem home foreclosures.  Reaction to the plan has been generally positive around the blogosphere, with many of the complaints centering around it not going quite far enough yet or there not being enough details yet (full specifications on the plan are to come in a few weeks).  The administration published an executive summary of the plan in advance of Obama's speech that can be found here (pdf).  Additional details can be found here.

Cribbing from Economist.com's Free Exchange:

Very generally speaking, there are three parts.

First, the administration will increase the number of homeowners able to refinance at current, low mortgage rates. Borrowers whose mortgages are owned or guaranteed by Fannie Mae or Freddie Mac will be able to refinance a loan up to 105% of the home's value (up from 80%, previously). This is expected to help about 4 to 5 million households who owe nearly as much or more than the value of their homes.

Note that this is for people who are not yet underwater or just a little underwater, but who have less than 20% equity left in their home due to devaluation.  Due to very strict lending standards now, unless a borrower has at least 20% equity (and often 30%), they are unable to refinance.

The second part is the one that's grabbed headlines; the president has dedicated $75 billion toward efforts to prevent foreclosures. Chief among these efforts is a plan to reduce monthly payments for troubled borrowers. For those spending greater than 38% of their income on mortgage payments, up to 43%, the government will ask lenders to reduce interest rates to bring payments down to the 38% level. The government will then match lender dollars, one-for-one, in bringing down interest payments until the borrower is only spending 31% of income. Both borrower and lender will be eligible for $1000 payments when payments are reworked, and if the planned payments are made. If it's necessary to reduce principle, then Treasury will provide assistance with this, as well.

Note that principal reduction is up to $1,000 per year over five years if a borrower continues to pay on time - only a $5,000 principal write-down and nothing to write home about for Arizonans who are way underwater.  The reduced monthly payments are also for five years and then regular payments can be phased back in.

The final portion of the plan involves measures to "strengthen" Fannie and Freddie and to keep mortgage credit available and fairly cheap.

The plan uses various fees for servicers and mortgage holders as carrots to induce them into modifying loans instead of going through typically more expensive foreclosures.

Of note is the explicit support of the administration for a change in the bankruptcy laws to allow for mortgage cramdowns.  Obama emphasized this in his speech today (full text here). 

But the best part of the plan that shows someone in the administration has actually listened to borrowers is that a homeowner does not have to be delinquent or in default on their loan payments in order to be eligible.  I have people call me all the time who are exasperated after being told by their lenders that they won't even talk to them about modification until they are at least 3 months behind in payments.  Often these homeowners have been struggling mightily to come up with their payments (including using credit cards - a no-no) and wonder why they even bothered.  So hopefully this will encourage lenders to do some legwork to talk to consumers who legitimately are unable to pay, but who have nevertheless tried to hold up their end of the bargain.

My view of the plan overall is that it at least shows that the government is starting to recognize the roots of the problem and are working to correct them.  Showing some competence and putting together a comprehensive plan like this will help boost confidence and certainty in the market and may actually slow down foreclosures to the point where buyers sitting on the sideline feel it is time to get into the market - thus further stabilizing prices.  The $8,000 first-time buyer tax credit in the stimulus package just passed will also help with this.

As for residents of Arizona, I still think that without larger principal write-downs (which this does not do), many homeowners are in trouble and will remain in trouble for years to come. I'm afraid that Arizonans will continue to look to the anti-deficiency statutes to "walk away" from their homes that are tens or hundreds of thousands of dollars underwater - even if they are able to pay.  But at least this plan will go a certain distance towards easing the short-term payment difficulties for people who want or need to stay in their homes, but no longer have the means to pay the full amount.

I will be interested to see the full details of the plan when they are introduced in the coming weeks.

MONTELUCIA GETS PRESIDENTIAL STIMULUS

The newly-opened Montelucia Resort in Paradise Valley, recently put into foreclosure but still operating, is reportedly hosting President Obama tonight as he spends a night in Phoenix prior to revealing his plans tomorrow to help out U.S. homeowners who are facing foreclosure.

President Obama will be speaking tomorrow at Dobson High School in Mesa on the federal government's plan to use of a portion of the previously-allocated TARP money that will now be used to help out homeowners instead of going to banks.  The amount to be allocated is expected to be between $50 and $100 billion - no small chunk of change.

BIG BANK MORATORIUM ON FORECLOSURES PENDING GOVERNMENT ACTION

Following getting roasted on Capitol Hill this week, JP Morgan Chase and Citigroup announced today that they are temporarily halting foreclosures for at least the next three weeks to wait for guidance from the federal government on their proposed plan to subsidize loan modifications.  The proposed federal program is meant to try to keep people from initially defaulting as one of the big problems with the loan modification process right now is that people have to stop making payments and default before the banks will even consider talking to them about a modification.

MONTELUCIA PROVIDES NEW COMPETITION FOR THE W HOTEL FOR LARGEST FORECLOSURE OF 2009

Another local hotel has had foreclosure proceedings initiated against it, this time the Montelucia Resort in Paradise Valley (previously La Posada prior to its expensive gut rehab).  According to the Business Journal, lender Eurohypo AG filed a notice of trustee sale at the end of January to foreclose on the hotel and unsold high-end residential villas and casitas being sold as part of the development by developer Crown Realty & Development.  The hotel re-opened in November 2008 following its renovation and was undoubtedly hurt by the severe downturn in home sales at all price levels and the increasingly anemic hotel market in Phoenix.

The amount of the promissory note secured by the deed of trust in the trustee sale is $180 million - clocking in at more than twice the size of the W Hotel Scottsdale foreclosure initiated earlier in January that briefly was competing for the largest Arizona foreclosure of the year.  Scott Klundt of Quarles and Brady is again acting at trustee in the sale - having also been appointed as trustee in the W Hotel proceedings.  Like the W, the Montelucia will remain open during the proceedings and operations are not expected to be affected.

As mentioned, the Phoenix metro hotel industry has been hammered by the downturn in consumer spending, clocking in at an 11.2% occupancy and 8.3% RevPAR decline from 2007 to 2008 - the largest drop in both categories of the top 25 metro areas in the U.S.  Not a pretty picture for a city that relies on tourism and its service sector so heavily.

AS ANTICIPATED - OPTION ARMS SEE RISE IN DEFAULTS

That anticipated Option ARM problem I wrote about last month is already starting to become a reality...

FED ADOPTS PRINCIPAL REDUCTION PROGRAM FOR HOME LOANS

The Federal Reserve picked up a major portfolio of home loans when it bailed out Bear Stearns and AIG.  The Washington Post writes that they are now initiating a new home loan modification program for those loans that focuses on principal reduction - a tactic many (including me) feel is the best way to stem the tide of foreclosures.

The Fed is emphasizing reducing the amount of principal owed by people at risk of foreclosure, particularly those with a loan balance that is more than 125 percent of the estimated value of their property. Private lenders have been reluctant to renegotiate loans that way, as some of the institutions that own those loans, in the form of mortgage-backed securities, stand to lose money and therefore object.

This gets to the heart of the matter - banks (and investors in mortgage-backed securities) lose money if they write down principal and have to recognize that loss on their books - which further hurts their capital positions.  So instead they try to do as little as possible in a modification and often only delay the inevitable foreclosure - costing the bank or investor even more money than if they had just written down the principal.  Furthermore, as the article points out, investors in MBS typically need to approve principal write-downs, so mortgage servicers often are not allowed to modify loans in a way that would prevent foreclosure.

For example, the Federal Deposit Insurance Corp. has tried to use its control of California bank IndyMac, which it seized last summer, to do loan modifications, but has been frustrated by investors in those loans being unwilling to reduce the amount of principal owed.

To remedy this problem, bankruptcy cramdowns are now being considered in new legislation circulating in Congress.  This would put principal write-downs in the hands of judges, not the banks - and the banks (and MBS investors) are generally not happy with that idea.  The alternative, of course, is for banks and investors to undertake principal reductions voluntarily, which they do not yet seem willing to do.  Perhaps the threat of bankruptcy cramdowns will incentivize them to do this.

Still, the amount of home loans owned by the Fed is only a small fraction of the amount of total loans outstanding and, according to the article, homeowners typically will not know whether their loan has been acquired by the Fed and is eligible for this new program.  But the hope is that by initiating a true principal write-down strategy, it will provide some empirical evidence of whether principal write-downs will be effective and will serve as a model for other government programs and the private sector.

Update:  More coverage and commentary from HousingWire, including the letter from Bernanke, can be found here.

W HOTEL SCOTTSDALE TO REMAIN OPEN DURING FORECLOSURE PROCEEDINGS

As anticipated, operations of the W Hotel Scottsdale will not be impacted by the disputes between the developer, builder and lender (see here, here and here).  The Phoenix Business Journal has a story today with comments from Starwood Hotels (the manager of the W) and they indicate it will be business as usual:

“The W is not involved in the dispute and we’ll continue to manage the W Scottsdale,” said K. C. Kavanaugh, vice president of public relations for Starwood Hotels and Resorts, based in White Plains, N.Y.

Kavanaugh said Starwood has received numerous phone calls from future hotel guests who are wondering whether they should book a reservation after reading about the pending foreclosure action on the chic hotel that opened in October. She said she wanted to set the record straight that the hotel is open for business and will remain that way.

The Notice of Trustee's Sale is now online and can be read here (pdf).  Scott Klundt from Quarles & Brady is acting as the trustee in the foreclosure proceeding.  The article today also indicates that Snell & Wilmer is representing Starwood.

MORE COVERAGE ON THE W HOTEL FORECLOSURE PROCEEDINGS

This time from the Business Journal.

SMALL HOMEBUILDERS FEELING CREDIT CRUNCH IN ARIZONA

The NYTimes has a story tonight that focuses on the plight of small and medium-sized private homebuilders who are being foreclosed upon by banks in record numbers.  Notably, they highlight long-time Arizona homebuilder Brown Family Communities, which effectively went out of business this past October due to their banks pulling credit and foreclosing on much of their property. 

The Arizona Republic covered this in a brief story back in October here, noting that BFC was not late on any payments, was not on the Arizona Department of Real Estate list of "builders in financial trouble" and was a well-regarding company that had been operating for over 30 years in the Valley.

Brown Family Communities' story is a familiar one in Phoenix as many homebuilders, large and small, purchased land planned for future projects and either land banked it or began to put in infrastructure for development of single family home communities.  At the time, buying land as early as possible seemed advisable as land speculators were swarming Phoenix metro driving up land to a price that would make cost of development difficult.  Banks were even lending up to 50% LTV on raw land - something you won't find today - further stoking the increase in land values.

As people stopped buying new homes and prices rapidly dropped in Arizona, the many builders who purchased large quantities of land for future projects or had land in mid-development got stuck with land and homes they couldn't sell easily, loans that they could not refinance and/or loans that could be called upon lower appraisal values.  The NYTimes article notes:

Many loans in the building industry are of short duration, coming up for renewal at least once a year. This allows banks to take a fresh look at the financial health of a borrower, as well as the assets securing their debt. A steep fall in cash flow or a decline in the value of the collateral — usually building lots or half-built houses — can mean an automatic default, whether a borrower has missed payments or not.

According to the article, this is what happened to BFC.  They had purchased hundreds of acres of land on the west side in Buckeye and Goodyear in anticipation of the boom continuing and got caught in the downturn.  It's a common story in Phoenix these days as well-known small and medium-sized builders that have survived some pretty rocky times in Phoenix real estate history are not making it through this difficult period, laying off hundreds at a time.  Driving into the outskirts of the city, one can see many partially-built developments with paved streets lined with dirt lots, weeds and "For Sale" signs on whatever homes were built and sold (and then often foreclosed upon).

The article makes brief mention of a request for federal bailout by homebuilders, trying to stoke buyer interest in new homes.  Although it would create new jobs, this is the last thing we need right now in Phoenix.  Our inventory is still very high and builders are just going to have to take their lumps for a few years or find other work until inventory clears and prices hit bottom.  Hopefully the ones that do survive maintain the institutional knowledge of what can happen in a housing boom and will not make the same mistakes 10 or 20 years down the road.  Phoenix will go back to a rapidly growing city soon enough, but it is going to take a few years to get back to normal growth again.

FORECLOSURE CRISIS HITTING ALL LEVELS IN ARIZONA

As I have written previously, it's not just homeowners with subprime loans that are being foreclosed upon these days.  Alt-A, Option ARMs and now even Prime loans are increasingly resulting in foreclosures - meaning that the foreclosure wave has hit all levels of incomes and classes in the U.S., and particularly in Arizona.  And a second large wave of foreclosures is expected to hit the market starting this year and over the next two years as a huge wave of negative amortization loans recast, more jobs are lost and more people simply decide that walking  away from their home is their best option.

The Washington Post has a good story today that relates some of the human side of the foreclosure fallout, focusing primarily on California. There, many people who had great incomes who could responsibly purchase homes are now very far underwater, losing their jobs and defaulting on their loans.  This creates a domino effect as values in neighborhoods are drastically reduced and buyers refuse to purchase anything other than a property priced at foreclosure levels - making it nearly impossible to sell homes.  Homes there are worth literally hundreds of thousands of dollars less than the mortgage principal amount.

While the article focuses primarily on California, it could have been written about Phoenix just as easily.  The Phoenix metro area had one of the highest run-ups in valuations (50% in a year at one point) and many people who purchased responsibly are now caught very far underwater on their home loans.  For most, this means they will be in their house for many years until the house is again worth as much as the loan amount (10 to 15 years I estimate for many), or as long as they have a job that allows them to pay the mortgage.  For others, this means making the financial decision to use the protection of Arizona's anti-deficiency statutes to walk away from the house and deal with repairing their credit instead of paying on a home that is underwater.

The foreclosure crisis is a sad story in Arizona that is now affecting people in even the most exclusive neighborhoods - not only in their home values, but in many jobs lost due to the disappearance of mortgage broker, realtor, construction, banking and other jobs related to the industry.  The same industry that generated much prosperity in the state is now dragging it back down to earth and creating some very difficult times for many Arizonans.  It's a difficult situation that Arizona will be dealing with for at least the next three years on the macro level and for a decade or more at the family level.

I encourage you to read the article as it does a good job of painting a picture of what is happening out there at the family level today.  I think a lot of people who do not live in a state that had such a severe run-up in prices and subsequent drop have a hard time grasping the devastating and wide-ranging effects of the real estate bust in areas such as Phoenix and it hopefully gives some better perspective on the situation.