Editor’s note: This is the second installment in a two-part series that focuses on the waves of foreclosed, bank-owned properties (also known as real estate-owned properties or REOs) that will hit the for-sale market, and the plans and pitfalls for reducing this inventory. Part one included a discussion of the effectiveness of foreclosure prevention programs and government attempts to recapitalize lenders.
While the government’s efforts to keep lenders solvent may have allowed them to hold off on selling some properties at fire-sale prices in 2008 (see part one), real estate brokers and auctioneers expect REOs to be big business in many markets this year.
FDIC-insured banks had $23 billion of REO inventory on their books at the end of September — a 134 percent increase from a year ago. That includes $11.5 billion in one- to four-family homes and $1.5 billion in property purchased with FHA-backed loans securitized by Ginnie Mae.
According to the latest quarterly report from the Federal Deposit Insurance Corp., three quarters of those one- to four-family REO properties were in the hands of very large banks, with assets greater than $10 billion.
In addition to the fear of selling properties into down markets for pennies on the dollar, lenders face other obstacles to liquidating their REO inventories that can vary from market to market. Some states, for example, have new laws that slow the foreclosure process, while others are dealing with an unprecedented volume of bank repossessions that has strained the capacity of the system.
In Florida, lenders are motivated to move properties off of their books, but are often thwarted by an overburdened court system that can leave properties in need of extensive repairs by the time they are back in the bank’s hands, said Ann Stickel, vice president of affiliated services with Sarasota, Fla.-based brokerage Michael Saunders and Co.
"The national lenders don’t want to hold the inventory any longer than they have to," Stickel said, but bankrupt builders often try to delay the foreclosure process in court, and homeowners may fight eviction.
"Courts have said we don’t want to kick homeowners out, so we’re not going to create an express lane" to facilitate evictions and foreclosures, Stickel said. "The banks will say, ‘We have 50 properties for you (to list), but we can’t get a hold of them.’ "
Stickel is not unsympathetic to the plight of troubled borrowers — she thinks keeping more of them in their homes is a key to stabilizing housing markets — but said that the lengthy foreclosure process often leaves homes vacant and in disrepair.
In Florida’s tropical climate, vacant homes can easily become infested with mold, and other damage and deferred maintenance issues can add significantly to the time and cost of prepping a home for sale, she said.
While Michael Saunders’ newly created REO department is up to the challenge of rehabbing a mold-infested condo, "there is so much front-end prep on these properties, it’s not very realistic to have an individual agent handle the process," Stickel said.
Once the lenders working with Michael Saunders have properties in their inventory, she said, "They are actually going to market very aggressively in price, and our inventory of REO properties turns very quickly — in days, or hours — rarely more than three or four weeks."
L.J. Jennings, an Oakland, Calif.-based broker-owner whose firm, Pyramid Real Estate and Investments, specializes in REO properties, also believes banks are motivated to get foreclosed properties off their books.
"Banks are not in the property ownership business, and I don’t think philosophically they’re going to change that position," Jennings said. "They will continue to dispose of them as quickly as they can."
But Jennings said that in California, the typical turnaround time for a bank to put a foreclosed property on the market has lengthened from 60 days to six months or more.
"I have some properties I’ve been managing for six or seven months that are not on the market because of tenant-related issues," Jennings said. Problems clearing title because notes have been sold and resold on Wall Street are also common, Jennings said.
Scott Thompson of Mortgage Resolution Services Inc. said that in many markets, asset managers for lenders and loan servicers are acutely aware that their actions can have an influence on prices.
Thompson said an employee at one of the nation’s five biggest loan servicers has acknowledged to him that "the volume of foreclosures they have in the pipeline needs to be managed carefully" to avoid flooding the market.
MRS, a Fidelity National Financial Co., helps real estate brokers and agents work with lenders and loan servicers to complete distressed property sales. Before founding the predecessor of MRS and becoming its vice president of sales, Thompson did hundreds of short sales as a broker-owner.
"I have been in the business for 20 years, and never seen anything like this," Thompson said. Even though many markets are seeing houses changing hands at the same frenzied pace seen at the height of the boom, prices continue to fall. "Large transaction volumes, declining prices — it’s an oxymoron," Thompson said.
Asset managers are bidding prices down to keep buyers in the marketplace, "because they know what’s coming down the pike, and how many more assets are about to be dumped on their desk."
In order to keep a floor under prices, "You have to move properties onto the market at a measured rate."
By disposing of some properties through auctions, asset managers can keep them out of the MLS, Thompson said. That way, agents running comps on their other properties don’t have to factor in those discounted sales. This could be one partial explanation for RealtyTrac’s discovery that as many as three out of four REO properties are not listed in the MLS (see part one), he said.
"Lenders have turned much more immediately to auctioneers as the best way to get rid of properties quickly," said Joshua Olshin, president of New York, N.Y.-based Tranzon Integrated Property Group. "When they realize the waiting game is a losing game, they are much more willing to move in to auctions."
Stickel said some banks may want to sell their REOs themselves because they don’t want to pay a Realtor’s commission.
"So it’s not necessarily that the house is not on the market, it’s just not in the MLS," she said.
Name a price
That raises the question of whether banks and loan servicers are able to accurately price distressed properties and REOs.
A recent analysis of more than 1,000 distressed properties in 25 states suggests lenders and loan servicers stand to lose billions of dollars because they are either underestimating or overestimating property values when deciding whether to foreclose on a property or do a loan modification or short sale.
In "Home Pricing in Rapidly Changing Real Estate Markets: The Need for Micro Market Metrics in Lending and Loss Mitigation," Norm Miller, a professor at the Burnham-Moores Center for Real Estate at the University of San Diego, and co-author Michael Sklarz argue that lenders rely too much on backward-looking valuation tools such as appraisals, broker price opinions (BPOs) and automated valuation models.
As many real estate brokers and agents are aware from firsthand experience, lenders may overestimate the foreclosure value of a property, and turn down short-sale offers or opportunities to engage in workouts or loan modifications with troubled borrowers. Instead, they foreclose on a home and put it on the market at an unrealistically high price. In rapidly declining markets, those homes may sit on the market while their real value declines, causing an even greater loss for the lender.
At the same time, Miller and Sklarz say lenders sometimes underestimate the value of some REO properties in their inventories by relying on macro-level data — such as the Standard & Poor’s Case-Shiller indexes — that don’t reflect the unique characteristics of individual neighborhoods.
Such undervaluations by lenders can create windfalls for savvy local real estate investors who purchase and flip these properties, Milller and Sklarz say, but fire-sale pricing can also hurt neighborhood property values (the two are the co-founders of Collateral Intelligence, a Sherborn, Mass.-based firm that helps lenders tackle valuation issues).
The challenge for lenders, Miller told Inman News, is to modify the loans which are salvageable and foreclose on those that are not — but only after careful analysis of current values and price trends based on very localized data, and not aggregate indicators like the Case-Shiller index.
Michael Davin, president and co-founder of Hermosa Beach, Calif.-based discount brokerage CataList Homes Inc., said that REO homes will fetch fair value if they are listed in an MLS.
"I am a broker so I believe in the MLS and its market," Davin said. "It’s just almost impossible to pick off deals that are below-market. Because if you price it really low, you’ll stimulate a multi-offer scenario."
Davin said CataList recently handled an REO listing for Wells Fargo that had seven offers and sold above its list price.
CataList, which provides marketing and transaction management expertise for sellers, is a partner with the Los Angeles Times Media Group and others in Zetabid, an online auction marketplace for bank-owned and builder-owned properties.
Many auctions, like Zetabid’s, involve agents and brokers in the process, and Davin estimates brokers are still selling 90-95 percent of foreclosed properties — even though many of those properties are sold at auction.
If Davin is correct that lenders and loan servicers can depend on the MLS to help them obtain the fair market value for REO properties, Miller and Sklarz’s work still raises questions about whether they are seizing opportunities to engage in workouts and short sales that are likely to provide better recoveries than foreclosing on a property.
"I think most everybody’s intentions are good, but if you are Bank of America, Wells Fargo, Chase — the big guys — every decision you make given the size of your portfolio could have unintended consequences," MRS’s Thompson said. "I think lenders are trying to be real careful that they don’t take a step in the wrong direction that could ultimately hurt their franchise."
What’s your opinion? Leave your comments below or send a letter to the editor.