A housing crash may be on the horizon.

According to one area broker, foreclosures are hitting record low rates not seen since the early 2000s. But that may actually foreshadow the market’s next downfall.

“Everybody is always boasting about foreclosures and defaults being down, but the truth is they normally hit their lowest point right before they crash,” said Tom Lazzaro, a broker associate at Sellstate Alliance. “I hate to be the guy of doom and gloom, but that is the cycle of our U.S. housing market.”

The seasoned broker attributes the dwindling number of legal proceedings to hedge funds accumulating default home loans in addition to the current housing demand.

Risky investors

El Paso County experienced a 37 percent drop in foreclosure filings in February compared to February 2017, according to the county public trustee’s office.

“A lot of what is not being discussed out there is the trading of the home notes,” Lazzaro said. “Hedge funds have become a huge player, more so than ever, in buying foreclosures, bundling them and renting them.”

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Default home notes may be traded several times before landing in foreclosure proceedings.

“Fannie Mae is a prime example,” Lazzaro said. “They are bundling their defaulting loans and selling them off to hedge funds. That’s why they don’t have any foreclosures on the market right now.”

An increase in homeowners being allowed to continue living in their home years after defaulting on their mortgage is further proof of delayed foreclosure listings, he said.

“Why? Because banks are lazy? No, it’s because the note keeps moving,” Lazzaro said. “Until it gets where it needs to land, nobody is beginning foreclosure proceedings.”

There’s a multitude of reasons hedge funds delay the foreclosure process, he said.

“They have their own tactics, or they don’t know what they are going to do with it yet,” Lazzaro said. “The logic behind it is, when the hedge funds see the market start to turn, they are going to dump.”

The broker fears those excess properties could lead to another crash. 

“They are going to help create their own crash and just add to it, if you ask me,” he said.

Booming market

Hedge funds aside, the Springs’ red-hot housing market also is contributing to the low numbers of loan defaults.

“People go into foreclosure because they can’t sell their house, and in this market, that is not an issue,” said Cynthia Leonard, senior vice president at Community Banks of Colorado.

Houses in March lasted an average of 28 days on the market, selling eight days faster than the same time last year, according to statistics aggregated by the Pikes Peak Association of Realtors.

“It’s when the economy is doing well [that] there is more of a demand for housing,” said Tom Binnings, senior partner at Summit Economics LLC. “We didn’t hear much about affordable housing during the foreclosure crisis.”

The Bureau of Labor Statistics reveals a declining unemployment rate in Colorado Springs over the past two months as the workforce continues to grow.

“As more people become unemployed, which is not the case currently, they become less able to meet their No. 1 expense — housing cost,” Binnings said. “More homes go into foreclosure then.”

But Lazzaro said there are additional reasons to worry.

“The alarming thing is that I am hearing there was a 30 percent uptick in home equity loans, so what that tells me is that people are now using the appreciation of their homes and pulling the money out like it’s an ATM,” he said. “The minute that the market turns, they are all going to go under again. I hope that’s not the case, even though I am a foreclosure broker. But if that is the case, it’s going to get really ugly really fast the minute the market turns.”

Lending regulations also are loosening, Lazzaro said, adding that typically happens before a crash.

“There are just a lot of moving parts that could really trigger another market crash that may seem like a positive, such as lower foreclosures,” he said.

However, Leonard said the mortgage industry has tightened up procedures because of the previous crash.

“It’s not that it is more difficult to get a home loan, but we do require additional documentation maybe we didn’t require 10 years ago,” she said. “There is a lot more verification going on now that probably didn’t happen in the past.”