FIRST, WE’RE GOING TO DO A SIDE BY SIDE TO COMPARE THE FACTS AND THE MINDBLOWING SCHEME THAT IS DOCUMENTED FIRST IN THE SARASOTA TRIBUNE ARTICLE, THEN FOLLOWED ON THE DEEPER LEVEL WITH AN ARTICLE ON NAKED CAPITALISM
In some cases, lenders this year have bid up to 600 percent more than a property’s worth to retain foreclosures — one of the primary reasons the acquisition costs for competing real estate investors also has spiked in recent months.
In the 12 months ending June 1, 4,865 foreclosures were auctioned in Sarasota and Manatee counties. Lenders outbid third-parties to keep 3,754, or 77 percent.
Banks paid $259.2 million for the properties, an increase of 34 percent from the amount they spent in the same 12-month period a year ago.
It also was the highest tally dating back to the peak of the foreclosure crisis in 2009, a Herald-Tribune review of court records showed.
Banks do not have to pay out-of-pocket until they bid more on an auction than what a court judgment deems they are owed on the foreclosure. That is a fairly rare phenomenon.
Most of the bids from banks and investors alike remain below the principal amounts borrowed on boom-time home loans.
But turning down hard cash offers above assessed value to instead list a home on the market — and assuming the cost of maintenance, repairs and Realtor commissions — is a risk most banks would not dare to attempt just two years ago, Adamaitis said.
“Banks were watching the market carefully, and they have figured out they can hold onto these foreclosures a little longer and make some additional money,” he said.
It’s conventional to deem local journalism to be dead, but Josh Salman at the Sarasota Herald-Tribune has written well-researched investigative story on bank bidding at foreclosures in his neck of the woods, Big lenders bidding to keep homes, that has national implications.
Here’s the overview:
Banking giants from Wells Fargo to Fannie Mae are routinely paying top dollar on the auction steps to hold onto their own distressed properties, outbidding cash offers and paying well above assessed value, according to a review of thousands of Southwest Florida auction purchases.
They are speculating that the properties will appreciate even more in the next couple of years.
The article does not indicate whether the “banking giants” like Wells Fargo are only bidding on properties where the bank owns the loan or serviced loan for private label (non-Fannie and Freddie investors). We’ll assume only the former. It’s ugly enough that way; if the banks are doubling down by deciding to buy homes that they were formerly only servicing (as in simply acting as an agent), this practice goes from typical bank lemming-like behavior to affirmatively deranged.
The degree of outbidding is not modest, at least in Southwest Florida (emphasis ours):
In some cases, lenders this year have bid up to 600 percent more than a property’s worth to retain foreclosures — one of the primary reasons the acquisition costs for competing real estate investors also has spiked in recent months.
In the 12 months ending June 1, 4,865 foreclosures were auctioned in Sarasota and Manatee counties. Lenders outbid third-parties to keep 3,754, or 77 percent.
Banks paid $259.2 million for the properties, an increase of 34 percent from the amount they spent in the same 12-month period a year ago…
“The banks seem to be offering more than they usually would — going for market value and above,” said Shannon Moore, broker and owner of Green Lion Realty in North Port. “I don’t quite understand the logic. It’s a vast shift from the last few years when would take any reasonable amount just to get rid of them.”
Now it’s worth keeping in mind that in the good old fashioned days, when homeowners had equity in the home at the time of purchase and prevailing home prices went down only at most on a regional basis, and then usually not too much, the bank would put in a bid for the home at the courthouse for the value of the mortgage so it would take it into “real estate owned” inventory and dispose of it later if no one was willing to snap it up on the courthouse steps for a high enough price. But analysts would probe banks about their REO inventories, particularly in a weak economy.
But the “paid” is a misnomer unless the bank bid above the mortgage balance to win at the auction, which the article says doesn’t happen that often. So from an accounting standpoint if the mortgage was $160,000 and the highest third party bid was $90,000, the bank could take the offer at $90,000 and recognize a loss of $70,000 plus foreclosure costs. Or it can bid $110,000 and move the property into REO. If I read the OCC guidance correctly, the bank has to value the REO at the lower of the “recorded investment in the loan satisfied” which I assume is the mortgage balance PLUS the foreclosure costs OR fair market value as determined by an appraiser. Gee, we know how independent those appraisers are!
Now the far more important thing about this whole issue highlighted in this article is the perverse and quite frankly illegal impact this is having upon the “free” market.
In this madness, this fever to punish consumers and “clear the foreclosure docket”, no one in policy positions cares to look more deeply into these issues.
Mr. Weidner,
What exactly is “illegal” about the bank bidding more than the property is worth? Take out everything else you know about banks and the foreclosure system. What law is being violated exactly that one cannot bid more than the property value for whatever reason they may have? That’s a ridiculous assertion.
Further, this example fails. Say the bank lent $150,000 and the house was valued at $150,000 when you bought it. Now it’s only worth $80,000. Why should the bank NOT be able to bid up to the judgment amount? Did they actually lend that money? Yes. Why can they not bid against that judgment amount?
I think this is just looking for a conspiracy where one does not exist. The bank bids what it bids, you are perfectly free to outbid them. no one says you cannot bid more than the judgment amount, although that would not be prudent. Not prudent does not equal illegal though.
This is in response to Chris’ comment.
I am a bit thrown off by your comments. Do you know anything about what an REO is? Banks have rights to the judgment amount until it is reached, and THEY KEEP BATTLING AFTERWARDS IS THE ISSUE! You cannot see the long term damage this potentially create (it’s already showing in many areas actually). Google Blackstone my friend. Then see how Fannie became a copy cat b/c “they can afford to they control everything.”
Did you NOT KNOW THE government took over Fannie and Freddie through a legal process known as conservatorship in 2008 as the housing-market losses mounted. Do you think it’s fair that they basically get to cheat others out of opportunities bc they have a long term plan for ONLY themselves and not the American people? The plan they have basically equals us RIGHT BACK TO A FLAWED MARKET! Oh boy. Read up my friend.