NEWS

Lenders high bids at foreclosure auctions keeping investors away

Date: Dec. 22nd, 2010
Contact: Aldo Svaldi
More than 25,000 Colorado homes are expected to sell at foreclosure auctions this year, but only about one in 10 auction sales have gone to outside investors in recent weeks.

Lenders are taking back the bulk of homes, leaving them on the hook for a raft of expenses to repair, maintain and eventually sell the properties.

And the lender-owned, or real-estate-owned, properties can sit empty for months, driving down surrounding homes prices and blighting neighborhoods.

"It would be in the best interest to get the home into the investor's hands as quickly as possible," said Ryan Lantz, managing director of Claremont Information Systems, which tracks foreclosure and residential real estate data.

The cost of carrying an REO home is not insignificant, about 1.5 percent per month of the total mortgage amount by some estimates, Lantz said.

Closing costs ranging from paperwork to commissions can consume 10 percent of the selling price. And when prices are falling, lengthy delays can leave lenders getting significantly less than a sale at auction.

Investors have a motivation to sell or rent the home quickly because failing to do so will hurt the returns they earn. That quick turnaround benefits neighborhoods by getting homes occupied and easing the downward pressure on home prices from vacancies and decay.

Claremont's numbers show 293 home sales so far in the fourth quarter to outside investors in the 10-county metro area, compared with 2,898 homes offered at public-trustee auctions.

Lenders can determine who gets a home in foreclosure based on what they bid. Most bid the unpaid mortgage amount, plus delinquencies and fees tied to the foreclosure.

Given that so many homes in foreclosure lack any equity, that formula keeps investors away. Lenders who want to sell a home usually set their bid close enough to the market price to draw a buyer, taking the hit.

"Banks are not pricing these things to sell them at the auction," said Rick Sharga, a senior vice president with RealtyTrac, a California provider of foreclosure data.

Sharga said his analysts think the only logical explanation for above-market price bids is a change in accounting rules following the financial crisis.

Banks don't have to record their assets at market value, so by bidding high, they can delay taking write-offs and losses.

"The lenders wouldn't have to write down the value of these assets until they resold them," he said.

Owning the properties gives lenders more control over when they recognize a loss, making it easier to meet quarterly earnings targets or comply with regulatory requirements, Sharga said.

But Mike Rosser, a lending industry veteran, said the delays also reflect a desire to avoid dumping too much inventory into an already strained market and a hope that housing markets will improve.

"It really becomes an issue of whether you are going to make money by holding or whether you do a massive dump on the market," he said.

Home prices nationally have rebounded above the lows they hit in the spring of 2009, according to the S&P/Case-Shiller Home Price Indices.

But they have started falling again in recent quarters, adding to the risk of a strategy that delays a sale.

There are other more technical explanations. Lantz said that in cases where mortgages are securitized or sold as bonds, the trust documents sometimes don't allow underbidding the loan amount, even when in the investors' best financial interest.

"There is no decision-maker guiding the process," he said.

Colorado changed the foreclosure rules in 2008 to make it easier for an outside bidder to purchase a home by eliminating a redemption period during which a borrower could reclaim a home after it sold at auction.

Borrowers, in return, received more time before the foreclosure sale to catch up on their delinquent payments.

Initially, the share of homes going to investors shot up, and the homebuyer tax credits in late 2008 and early 2009 gave investors an added incentive to participate, said Jon Goodman, an attorney with Frascona, Joiner, Goodman and Greenstein in Boulder.

"Lenders pretty clearly understand that at the right price it is better to be cashed out at the foreclosure auction than to have to deal with one more REO property, but lenders also don't want to give away the farm," said Goodman, who has represented investors, lenders and borrowers, and has also invested directly in foreclosures.

When the homebuyer tax credit was in place, investors stepped up their pace, buying more than 15 percent of homes sold at auction in the metro area, according to Claremont's research.

Some of those investors were stung when buyers disappeared after the credit went away in April and home prices dropped sharply, Lantz said.

"We used to have 75 to 80 people coming to my sales every Wednesday," said Carol Snyder, Adams County public trustee.

At a sale earlier this month, only two bidders showed up, something Snyder attributes to a tightening in credit lines that banks provide investors. Outside buyers at foreclosure auctions in Colorado must pay cash.

Lantz disagrees. If lenders priced properties attractively, investment money would find its way to the auction markets.

But those markets must be free and rational, and, so far, foreclosure sales appear to be operating more on a mind-set of "extend and pretend," Sharga said.

To back that up, he notes that lenders are slowing the process down even more by postponing auction dates.


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Numbers
2,898 Homes in the 10-county Denver metro area offered at public-trustee auctions during the fourth quarter of 2010

293 Homes sold to outside investors



Read more: Lenders' high bids at foreclosure auctions keeping investors away - The Denver Post http://www.denverpost.com/business/ci_16889838#ixzz18rFa8ZhK
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