“Why are the banks refusing to reduce the principal for the owner rather than foreclosing on homes and wholesaling them for pennies on the dollar”?
Some banks deliberately are holding off on foreclosing on homes and selling them as REOs, in part, because they want to avoid booking losses on their toxic mortgage-backed securities, said David Wyss,chief economist at Standard & Poor’s. Taking the losses would limit their access to additional government money, he said.
“They want to keep the paper active,” Wyss said. “They don’t want to take a loss on those securities because it affects how much they can borrow against them for TARP money.”
In the past week I have spoken to two different homeowners of properties with loan amounts in excess of $1M who have come to us through the email address of InvestorGroupContact@UniqueGlobalEstates.comasking for help. Both had FICO scores in the 750-800 range, both had situations where there was not direct ‘hardship” involved. Instead there were factors such as relocation and a need to downsize involved. Our Investor group cannot help owners unless there is “hardship”, even though the values of the properties can be about 50% of the amount of the first loan. These owners are falling through the cracks.
This prompted me to begin to research on “why are the banks foreclosing on homes and then selling them for pennies on the dollar” after refusing to work with the homeowner in cases where the value has depreciated below the amount of the first loan and the owner needs to get out for any number of reasons (other than absolute hardship).
However, I did find excerpts from the below article that even though it does not address the luxury market niche specifically…it does have information that I believe you will find interesting and useful in communicating to your sellers that price reductions NOW are extremely important. Please note that this information (as well as other research) indicates that we will continue to see a “re-set’ of value and pricing that will continue until 2011-2012 at least.
I personally believe that the trophy homes will not be as impacted as the rest of the luxury real estate market….but we just do not know at this time…it is still unchartered waters in a world we have never seen.
My hope is that you will be able to use the below information to assist your sellers in understand that this market is not a quick turn around (as we all wish it could be). Denial is still paramount. We know that all homes coming back on the market thru this “tsunami” will be significantly reduced and re-set the appraisal process which will impact lending and continue the spiral down.
Our goal is to assist you in communicating the facts to your sellers as part of being a consummate professional delivering the information they need to know…in order to make informed decisions.
7/9/09 Update:
Since this blog appeared 10 minutes ago, I just received a telephone message indicating that the "answer to the Question" is simply that the loans have been so sliced and diced that there is absolutely no way for a bank to reach out to all of the participants of portions of that loan to get agreement on modifying the original amount and/or terms. Rather, they must foreclose on the mortgage….and start over.
Very interesting….and it does seem to make sense as to the “why” of what we are observing……
Real estate owned properties expected to hit 1.5 million
By Mary Kane3/4/09 8:05 AM
(Please see the article in it’s entirety at: http://michiganmessenger.com/14161/bank-owned-homes-surge-communities-stung
Banks that received government bailout money are taking heat for spending billions of dollars on bonuses, executive pay, and lavish outings. But there’s another outrage that
Washington
seems to be missing: The growing number of bank-owned properties in foreclosure scarring neighborhoods across the country.
The foreclosure crisis, however, is changing the REO process, with some banks holding off on following though with foreclosures or letting empty houses sit in limbo - where they deteriorate further - instead of selling them. Some banks can’t keep up with the sheer volume of foreclosures. But others are waiting for a better deal from the government for their toxic mortgage assets, avoiding booking losses so they can qualify for more bailout funds, ….There’s more pain to come. RealtyTrac’s sampling of fourth-quarter data showed that as many as 70 percent of REOs it tracks haven’t yet been listed for sale — meaning a large number of bank-owned properties have yet to even hit the real estate market………
“This is a big issue, and the number of REOs definitely is growing,” said Alan Mallach, a senior fellow for the National Housing Institute and at the Brookings Institution. “Its kind of like an iceberg. You only see part of it.”
Some banks deliberately are holding off on foreclosing on homes and selling them as REOs, in part, because they want to avoid booking losses on their toxic mortgage-backed securities, said David Wyss,chief economist at Standard & Poor’s. Taking the losses would limit their access to additional government money, he said.
“They want to keep the paper active,” Wyss said. “They don’t want to take a loss on those securities because it affects how much they can borrow against them for TARP money.”
Usually, banks recover 75 to 80 percent of the value of a mortgage by foreclosing and reselling the home. Because of the foreclosure crisis, that percentage is down to 40 percent,.
Sean O’Toole, CEO of www.ForeclosureRadar.com, which collects data on the
California
market, agreed. He said banks are hedging their bets, holding on to the possibility that the government eventually will create “bad bank” to take toxic assets off their hands
Some loans just can’t be modified, meaning the property will go into foreclosure anyway and could end up as an REO. And lenders will have to do something, eventually, about all the foreclosed homes they haven’t yet listed as REOs. RealtyTrac predicts the housing market won’t be able to absorb all the REOs ahead until late 2011, at the earliest.
REOs, in fact, are adding to the troubles of already ailing banks, with new FDIC figures showing REO losses totaling nearly $27 billion in the fourth quarter, compared to $12 billion during the same period last year. One thing Leggett did agree on: The problem is only going to get worse.
The Federal Reserve itself holds more than $100 billion in toxic-mortgage backed securities, acquired through the rescues of Bear, Stearns and insurance giant AIG………..
(Mary Kane writes for Michigan Messenger’s sister site, The Washington Independent.)
Ambassadors, please note that if you are aware of a REO luxury property that is listed with a bank at a price over market, you have the ability to present your BPO to our alliance, The Investor Group, and if the numbers work, the IG will purchase the property from the bank and bring it back to you to list and sell a greatly reduced price.
Respectfully,
Donna Lee Laue
President/CEO
www.UniqueGlobalEstates.com
DLL@UniqueGlobalEstates.com
www.TheLuxuryConclave.com(event and testimonials)
See our portal under
Market
Center
www.RealEstateJournal.com (the Wall Street Journal Online)
I agree. Instead of 'location, location, location', the new mantra is 'price, location, location'. We are seeing a slow return of interest in the upper end market at Tahoe. Inventory of lakefront properties is greater than ever - about twice what we usually have. So far, sales have been slow, but as is typical for us, interest is building as we head into the fall. Historically, there is a surge in contracts at the end of summer, after school starts. I am seeing well qualified, strong buyers looking at the more expensive properties. You are correct, buyers and sellers will be setting the new 'comps' as the comparisons from two years ago are not going to fly in this climate. There will always be some homes that survive price downturns....those very special properties that can't be replaced for the asking price.