By Michael Radmilovich

Part 1: How We Got Here

“ May you live in interesting times” is a subtle but trenchant Chinese curse. These are , to say the least, interesting times for the real estate industry as home foreclosures are at record levels, the highest in a generation. Then again, prior to the great swoon of aught six, for generations housing was the best long term investment going.

And there is a school of thought which espouses that real estate remains an excellent long term investment. The question is, will the market turn around any time soon? To be sure, it’s anybody’s guess at this point; but there is cause for optimism. There better be: without it the economy is in an ineluctable downward spiral that could reverberate for decades, rivaling the Great Depression which many argue could never be repeated.

The bubble was incipient in 2001 but that was the year, roughly, when it began. Not coincidentally, it was just about the time that the dot.com bubble burst. As with all monumental economic debacles, the real estate crash was a function of irrationality -– banks making unsafe loans, borrowers acquiring mortgages with very little money down, adjustable rate mortgages and interest only loans. In more parts of the country than not, speculation was rampant, with people buying second homes as investments. Then too, of course, Bear Stearns, among others, was bundling home loans into so-called mortgage backed securities. With the same lack of regulation which gave us the savings and loan implosion, the Countrywides of the lending world were allowed to make “stated income” loans -– loans based on no verification of a borrower’s financial state whatsoever.

Mortgage brokers who played fast and loose in arranging loans between borrowers and lenders are now fiercely opposing the push for new regulation, which of course is peculiarly disingenuous: The same people who brought us the crisis are now contending that any new regulation would hinder their ability to continue making loans – and commissions -- which they urge will help the market recover.

While the result was almost unthinkable, the causes were commonsensical: With the technology stocks crash people who still had money to invest -– a lot; the dot.commers who had amassed illusory fortunes were a relatively limited group -– were looking for some place to put it. And there were few places: two or three percent returns on CDs were unsatisfactory, the stock market in general was frightening and bonds weren’t appealing, which didn’t leave much choice.

Real estate seemed like a safe harbor -– which it was in the first instance -– until everybody got on board the boat.

What to do? Get back in the real estate market? That’s a function of whether the market has hit bottom yet. At this point, the conventional wisdom says no. Most markets are saturated with distressed or foreclosed properties and until the surplus is sold off demand will remain underwhelming. The New York Times ran an article in mid-January pointing out that until 2000, the relationship between home prices and rents, disposable income and mortgage rates was steady. It’s analysis indicated that in California , Nevada and Florida , home prices would have to fall another 30% to return to historical norms -- 20% for other parts of the country.

In Northern Nevada , a typical home in the range of the arithmetic mean, which peaked at $395,000, has a fair market value of roughly $289,000.00 now. According to the Times at least, home prices needn’t have to decrease much more to reach normal levels. The S&P Case/Shiller index pegs the Las Vegas metro price plunge at 22.8% over the last 12 month period, alone. An S&P spokesman, however, argues that there is no sign of the bottom, yet.

Really? If you consider the bus tours of foreclosed properties organized by realtors across the country and the web sites urging buyers to get in now, along with interest rates at a comparatively cheap 6%, it may very well be a good time to cherry pick the inventory for the best possible deal you can make. Is it pennywise to hold off for the market to fall another 5 or even 10 percent, when, all things considered, now may be as propitious a time as any? Even if prices do decline a bit, when the market turns it shouldn’t take long to gain it back.

Then too, federal initiatives, while rightly not bailing out lenders and borrowers who engaged in silly, high risk transactions, should lead to the extension of more credit by government lenders, easing credit tightfistedness. And in diametric contrast to the S&P position, Moody’s chief economist notes that, even though home buyers are watching prices slump, holding off in anticipation of further declines and a better bargain, “Sales are close to bottoming.”

So go ahead; be an economic patriot; buy a distressed property now and help turn the market around -– this country’s and maybe the world’s.

Which begs the question: do you hop on the bus and compete with other bargain seekers for one of the tour homes, or can you find distressed property on your own? Definitely the latter.

The paradigm of old, beating the paths of subdivisions looking for apparently unoccupied homes overgrown with sage and shrubs, asking a next door neighbor who owns it, then tracking him or her down and relying on her for information regarding existing mortgages and other indicators of possible equity, is just that, an old paradigm. The internet makes it a far less daunting proposition.

Start at the local county recorder’s website. When a borrower becomes delinquent on the mortgage for a period of a month or two or three, the first thing the lender does is record a Notice of Default and Election to Sell indicating its intent to foreclose if the loan is not immediately brought current. Which is how you find out who the owner is. Most websites allow you to refine your search specifically to certain documents, such as a default Notice, and a survey of a typical county in Northern Nevada with a population of 400,000 evidenced 307 recorded Notices of Default three months ago, in December, some 423 in February, 2008, and 474 in March. (The foreclosure rate in this county is up a phenomenal 600% over last year.)

The Notice of Default usually doesn’t contain the address of the property, only the tax Assessor’s Parcel Number. The information gap is easily overcome by cross-referencing the APN in the county tax assessors’ website which lists the actual address. You can as well confirm the homeowner’s name, and review all the typical information that the assessor compiles, including square footage, the year the home was built, the number of bedrooms and bathrooms, assessed value, of course, and many times even a picture of the property. It also contains a history of transfer tax payments for the home, which lists the sale price every time a taxable transfer occurred.

With that information, you can get an idea, a remarkably good idea, of whether there exists any equity in the home. With the homeowner’s name and the Assessor’s Parcel Number in hand, return to the recorder’s site and plug it in to the grantor/grantee index and every deed of trust, as well as tax liens, mechanics’ liens and any other potential encumbrance, is listed.

There is certainly no shortage of operators out there who will for a price provide you a list of potentially distressed properties but they at best offer cursory information. So why would use such an intermediary when you can get the same information they would provide on your own and, with the method outlined above, far more? No need to get on the bus either; you can do the research from home, then take a leisurely drive at your convenience.

It takes roughly 120 days from the time the Notice of Default is filed until the property is actually auctioned off on the steps of the courthouse. The most advantageous approach it to work with the lender and the owner to acquire the property prior to the sale.

Should You Simply Walk Away From Your Home?

If you’re a homeowner who’s looking at foreclosure, should you just walk away from your home and let the bank take it back?

If you do, for sure, your credit rating is going to be severely damaged, which is going to make it virtually impossible to get another home loan for, at a minimum, several years. Not to mention, the interest rate on your credit cards is going to go as high as the law allows. Working in your favor though is the reality that the bank doesn’t want your property. It takes a substantial loss when it has to resell it. So you’ve got some leverage in negotiating for time to stave off foreclosure.

Even Ben Bernanke, Federal Reserve Chairman, is encouraging lenders to reduce the principal amount of individual home loans -– which is a remarkable thing.

There are downsides for distressed borrowers who just walk away from their homes: First and foremost, in many states a lender can seek a deficiency judgment, that is, a court judgment for the difference between the outstanding balance of the loan and what the bank recovered from the foreclosure sale. This is usually attenuated somewhat by the so-called “one-action rule” which also fits into the equation.

The one-action rule requires a lender with a deed of trust recorded against real estate securing the loan to foreclose on the property first, before seeking any other remedy. In Nevada , for instance, a lender may, after the sale, file an action against the debtor to collect the deficiency. But it must be filed within six months of the foreclosure.

California law, on the other hand, is entirely different. If it’s a purchase money loan/deed of trust, i.e., the bank that loaned you the money to purchase the real estate is foreclosing, the bank may not seek a deficiency judgment against the borrower. The policy of the State is that the suffering of foreclosed debtors’ ought to be limited to the loss of the home; and they ought not be subject to multiple claims for recovery. What’s more, if the lender makes a risky loan, it ought to suffer the consequences of its laxity.

The rule, logically, doesn’t apply to second and third “junior lienholders,” whose deeds of trust were extinguished by the foreclosure of the first deed of trust holder, from filing an action to recover the amount owed. They haven’t had their “one-action.”

Even then, suppose an inferior lien holder cures the borrower’s default on the first deed of trust, avoiding the foreclosure and the extinguishment of its security. It could foreclose on its second, pay off the first and own the property. Another reality of California law is that the lender cannot obtain a deficiency judgment in a private sale -– 99 percent of foreclosures are done through non-judicial, private sales. It has to jump through the hoops of the judicial foreclosure process, which is expensive; and then the property is subject to a 1-year period of redemption whereby the foreclosed owner is entitled to repurchase the property. Thus, the foreclosing lender will then have to discount the sale price to a third party purchaser who will demand it inasmuch as she takes the property subject to the right of redemption.

Is it likely a bank would seek to obtain a deficiency judgment? All things considered, probably not -– particularly if the borrower is broke and has no other assets. Any court action is time-consuming and expensive insofar as it requires a lawyer to prosecute it. It could take a year, as in any other civil case, to get a judgment through the courts.

And when you think about, the easiest way to collect a judgment is to record it in the county where the debtor has real estate; when the property is then sold, the judgment has to be paid. So, for the bank, the easiest asset to attach has already been taken. By the bank. Getting a judgment is comparatively easy; collecting it is extremely difficult. For instance, the heirs of Ron Goldman and Nicole Brown Simpson obtained a judgment against O.J. Simpson for $33 million dollars. Do you think they’ve recovered one dollar? Doubtful. But O.J. lives in a mansion in Florida and his retirement income and pension funds are exempt from execution.