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maybe lenders DON'T want to sell foreclosed homes after all

snigletsniglet
edited January 2008 in Housing Bubble
The sluggish rate of sales of Real Estate Owned (REO) properties (that lenders wound up with after foreclosure) is leading me to question the conventional wisdom that assumes lenders are eager to rid themselves of foreclosed properties. The masses of REO homes that are piling up in many places of the country today would seem to indicate that lenders are not in a rush to unload them after all.

I can think of 2 good reasons for this reluctance to sell re-possessed homes at market prices.

1. The managers of these REO properties do not want to get blamed for taking big losses on the homes and want to wait until there is significant evidence that they have to lower the price. This "evidence" consists of a lengthy listing period, with slowly lowered prices. If the home finally sells after a couple years of continually slowly decreased prices the manager of this property can sufficiently protect herself from accusations (from upper management at the financial institution) that she is just letting the homes go at fire-sale prices.

2. Selling REO properties at significant losses could lead to even swifter property depreciations for a given area which could push even more home-owners into default. It might be tempting for a lender to help prop prices up to prevent further delinquencies from customers that are still current.

Comments

  • rose-colored-coolaidrose-colored-coolaid
    Interesting thoughts, but I think #1 will probably be discredited soon. A number of cities are acting to force banks to maintain properties they have repossessed. If the bank does not, the city places a lien on the property, and essentially prevents the bank from selling it (or other properties in the municipality?).

    Plus, each judgment comes with a price tag, often in the 10s of thousands of dollars.

    So in other words, either the banks start hiring grounds keepers to water the lawns, or they start racking up tickets. Neither is a business the banks want to get into.

    #2 is probably pretty accurate though. I doubt they want to encourage any additional people to walk away based on the fact the identical house next door sold at auction for 1/2 what they paid.
  • jillaynejillayne
    the meltdown that nobody's talking about yet except sniglet is the servicing meltdown.

    I'd like to see some background analysis of the amount of non-performing assets a bank can hold before the federal (or state) regulators start doing whatever it is they do when a bank starts tipping towards insolvency.

    I think that the bank executives are walking into a situation that they've never yet had to handle.

    There is no way that all these servicing departments are set up to handle the number of defaults, foreclosures (or loan mods) and then REOs that are starting to come in.

    I'm sure the third-party vendor management companies are also overwhelmed.
  • AlanAlan
    Say that large scale RE holdings force a bank to go under. I wonder what sort of discount that RE would sell for. Would it be possible for a buyer to pick up a huge RE portfolio at ten cents on the dollar?
  • snigletsniglet
    jillayne wrote:
    I'd like to see some background analysis of the amount of non-performing assets a bank can hold before the federal (or state) regulators start doing whatever it is they do when a bank starts tipping towards insolvency.

    Yes, it would be nice to have more details about what the regulations are about non-performing assets. However, I doubt they apply to servicers of the assets of mortgage securities. There are no regulations governing what happens to the assets held by CDOs, or other mortgage securities.

    What particularly interests me is the fee structure the servicers work under. If some of what I have read about servicers not being compensated for handling messy foreclosures is true we could have a major structural flaw in the mortgage finance industry. The incentives may be entirely different from what one might logically conclude (i.e. that mortgage holders will aggressively pursue recompense ).
  • perfectfireperfectfire
    jillayne wrote:
    I'd like to see some background analysis of the amount of non-performing assets a bank can hold before the federal (or state) regulators start doing whatever it is they do when a bank starts tipping towards insolvency.

    Apparently it doesn't matter how many NPAs you have, the government will bend over backwards to help you hide them.
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