Banks Undercutting Themselves at Courthouse Foreclosure Auctions

This weekend’s open thread touched on one example of a bank bidding nearly 25% less than what it was owed for a foreclosed home at the courthouse auction.

Well, our good friend Jillayne Schlicke over at Rain City Guide actually attended a foreclosure auction a week ago, and wrote up an interesting post on this new phenomenon: Why are Banks Setting the Opening Auction Bid Below The Principal Balance?

I attended a foreclosure auction in Bellevue, WA last week to discover if the rumor was true that banks are opening their bids below the amount owed. I received confirmation from three professional investors that yes, the banks have been doing that, it’s no secret, and there seems to be no discernable pattern. It’s not one particular bank or lender, it’s not particular types of property or in any specific area. It appears to be random.

Only a few of the trustee sales attracted bidders, and the rest were deeded back to the bank. Out of the 92 active sales, 25 had opening bids below the amount owed to the bank.

Jillayne has also uploaded a series of videos she took at the foreclosure auction to her YouTube page.

Interesting stuff. Anybody have any theories on this? Does this open the door to possibly getting a good deal at a courthouse foreclosure auction?

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

16 comments:

  1. 1
    eaisu says:

    My theory is that they are trying to get people bidding and hopefully bidding against each other in an attempt to recreate some of the bidding fury and associated psychology present during the bubble.

    We have already seen a couple of posts here commenting on being worried about being outbid either now at an auction or in a couple of years. I believe one of the posts even mentioned that the opening bid / price was below the amount owed only to be bid higher.

    I would bet this is an attempt to recreate some buzz and excitement that not only has the bottom hit but people are bidding prices back up. For a bank, this sort of marketing / adjustment to psychology is worth far more than the 25% discount they would stand to lose if the property sold at opening bid.

  2. 2
    Jonnny says:

    i think we will be at the bottom when the average person no longer cares where the bottom is and houses are no longer seen by the public at large as an “investment”.

  3. 3
    Groundhogday says:

    I’m surprised they haven’t done this sooner. If the lender KNOWS the property has declined in value, then why not try to sell it at the courthouse and save realtor/auctioneer costs?

  4. 4
    David Losh says:

    This is exactly what I thought Jillyanne was saying, and it makes absolute sense.

    First let me say that there are investors who have money in the properties. The bank services the debt.

    In other parts of the country like Florida buyers at auction are bidding thirty cents on the dollar. The same happened in California.

    Some properties in foreclosure are out in the middle of nowhere, newly constructed, with failing commercial districts. Those can probably handle the low offers. Properties that are a bit more viable could be held in a land trust or Real Estate Investment Trust.

    A Real Estate portfolio is the same as any type of investment. Some properties are worth keeping. In other words some investors may be choosing to lose money on some foreclosures while reinvesting dollars into other more viable properties.

  5. 5
    Kary L. Krismer says:

    I really don’t think this is anything new, just something that’s now more common. Back when I was practicing law banks would determine what they would bid in at. It’s just that back then the amount was more likely to be full price because they were close to being fully encumbered, especially with the large number of 80/20 transactions where only the 80 would foreclose.

    As to the bargain, the problem is foreclosures are risky. I’ve been told you cannot get title insurance on a foreclosure sale, and so you might have title issues. A good example of that was a short sale last year in my neighborhood where someone had a growing operation in the house and the sheriff had an abatement action pending. If someone had bought at foreclosure, the abatement action would not have gone away, and in theory they could have lost their entire investment.

    Also, if you are going to buy at foreclosure it would be best to limit yourself to houses that are listed so you can go inside before bidding. Lots of these things are in really bad shape and/or filled with garbage.

  6. 6
    Kary L. Krismer says:

    By Groundhogday @ 3:

    I’m surprised they haven’t done this sooner. If the lender KNOWS the property has declined in value, then why not try to sell it at the courthouse and save realtor/auctioneer costs?

    Not to mention the costs of cleaning the property up, or the risk of discovering the property is worthless because of some tenant activity (e.g. meth lab). But again, I think they always have been doing this.

  7. 7
    geon says:

    Another example:

    http://www.redfin.com/WA/Des-Moines/27419-8th-Ave-S-98198/home/345268

    House looked a lot better when my wife I looked at it a few years ago. Now it goes for less green, but more green all around. LOL Bad driveway though–good if you have no visitors.

  8. 8
    neverabrogatedcommunity says:

    Might the easy answer be the right one? The banks are taking the writedown to “fair market” in the quickest way possible.

    This only seems logical to me with some of the majors reporting themselves “profitable” again. It may be opportune to clear out some of their overvalued assets right now, alongside rallying markets and happy financials.

    I admit I’m terribly curious about this, and any other theories out there to explain it…

  9. 9
    Pegasus says:

    The banks have already got too many houses in inventory and many of those are not listed for sale on the MLS. There are approximately 600,000 to 800,000 in this shadow inventory nationwide. Capital is king and they can’t afford to sit on any more homes as their values drop. Why are you seeing more short sales? It’s the same philosophy. Take a smaller loss and avoid inventory costs, damages, etc. Many had delayed the foreclosures in hopes of there being a viable solution floated. There really isn’t and now they are doing what all investors have to do when they are over-leveraged. Dump before your competitor does and be in front of the crowd! He who panics first, panics best!

  10. 10
    mukoh says:

    This has been going on for a long time at least since ’07. Nothing new. Have seen a project with a loan balance of $1.2m sell at court house for $500k. When you get to the auction the banks usually call the trustees and let them know of the change in bid.

  11. 11
    Kary L. Krismer says:

    The more I think about this topic, the more I don’t understand it.

    I’m as big of critic of banks as anyone, but even I don’t think that they stumble through daily activities without giving their actions any thought. Why wouldn’t they try to determine in advance what they’re likely to get from a piece of property and then bid accordingly? It’s not like bidding $400,000 on a property they know will likely only get them $300,000 is going to make it more likely they’ll get $400,000.

    Banks make all sorts of earlier decisions based on what the property is likely worth. For example, they’ll start foreclosure or seek relief from a bankruptcy stay earlier if they think they are under-secured. It’s not like they suddenly only realize what their situation is when they actually bid in at a foreclosure sale and end up with the property. If there are any surprises at that point, they’re far more likely to be negative. That means in the example above, if they think the place is worth $300,000 they might be more likely to bid in $280,000 than $320,000.

  12. 12
    Niceguy says:

    It’s more likely that people have the total amount of debt on the home confused with only a first mortgage. The bank is likely only interested in their first lean position and has already written of the the second loan in an 80/20 situation.

  13. 13
    Kary L. Krismer says:

    RE: Niceguy @ 12 – What’s sad is that in Washington most people don’t understand the increased exposure of having that second loan.

  14. 14
    eyewitness043 says:

    M.E.R.S , THE SECONDARY MORTGAGE MARKET & PRICE FIXING:

    http://www.youtube.com/watch?v=zTVo2RuiDF8

  15. 15
    Doug Francis says:

    I feel that this is a sales strategy intended to fuel the bidding fire in potential bidders. People often bid simply because they see someone else is interested in a home which results in a higher price point… and I have seen this be effective in getting a foreclosed property sold. It is called getting-caught-up-in-the-moment. Pricing low can get the momentum rolling!

  16. 16
    smallz says:

    What’s going on here at these “auctions” is FRUAD FRUAD AND MORE FRUAD.

    Here’s why: “Servicers” are serruptisously recording “Trustee’s deed’s upon sale”, “assignments of deed” and even “Rescissions” that DECLARE certain parties where present at these “auctions” that allegedly took place.

    If we were all just shootin’-the-shit this wouldn’t mean squat! But, these ya-hoo’s pencil whipping these documents are doing so “UNDER PENALY TO PERJURY” then filing them with a county Recorder.

    Who needs a legal strategy if you got em’ on perjury and fraud.

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