LENDERS CAN CONTAIN CALIFORNIA’S REAL ESTATE CRISIS BY TEMPORARILY SUSPENDING “DUE ON SALE” CLAUSES

California’s real estate crisis could be contained if lenders agreed to a temporary moratorium on “due on sale” clauses, according to Bruce Norris, a prominent Riverside-based real estate analyst and investor.

A “due on sale” clause allows lenders to foreclose on loans if property ownership is transferred without their approval. But in today’s market environment, with record numbers of foreclosures already in process, it is essential that homeowners have the ability to transfer their loans to individuals or investor groups who are in a stronger financial position, Norris said. Otherwise, additional properties will go into foreclosure, exacerbating lender losses while further undermining California real estate prices.

“To have any chance of averting a record number of foreclosures,” Norris said, “government agencies and the real estate industry at large must act quickly to avoid lenders taking back this huge glut of foreclosure homes. They also must work even harder to create a new pool of capable buyers to absorb the increasing inventory surplus. Suspending due on sale clauses would allow this to happen.”

Lenders can also provide immediate market relief by allowing ownership to be transferred on properties currently in the foreclosure process.

“By temporarily suspending ‘due on sale’ clauses,” Norris said, “lenders will be in a safer position because the new buyer will most likely have more money into the deal than the original borrower. Having ‘skin in the game’ is the best insurance policy a lender can hope for at this point. The lender will also avoid taking back another property and continue to lose even more money.”

Norris also warned that if lenders continue to embrace “due on sale” provisions, more than 100,000 California properties will likely be foreclosed on in 2008. “This will create a historic pile of lender-owned properties that must be sold and will compete against private sellers,” Norris said, adding that the number of short sales will also increase. Short sales are transactions where the seller attempts to have the lender cooperate in taking a loss on their loan in an effort to prevent the lender from foreclosing on the property.

“When you combine all the short sales and lender-owned properties in 2008, combined they will represent one of every three sales in the state!,” Norris said. “This will create further price damage and involve the owners who once thought they had a safe margin of equity as well as the lenders who made loans to prime borrowers. The lenders will then begin the foreclosure process on a new batch of shocked and dismayed homeowners.”

Bruce Norris is an active investor, hard-money lender and real estate educator who serves on the Board of Directors of Chapman University’s Roger C. Hobbs Institute for Real Estate, Law and Environmental Studies. A popular talk show host in his hometown of Riverside, Calif., Norris is a frequently quoted in financial publications and a speaker at investor club meetings throughout California. His latest study, The California Crash, was released in January 2006 and provides the statistics that substantiate his predictions. More information about Bruce Norris, his research and his investment seminars are available at www.thenorrisgroup.com. More information about the quest to repeal due on sale clauses at www.dueonsalemoratorium.com.