New wrinkle in courthouse foreclosure auctions

Interesting story over at Calculated Risk about a possible trend in foreclosure auctions: In a few recent cases, banks are showing signs that they don't want to take possession of foreclosed houses.

It's a bit complicated. There are two kinds of foreclosure "auctions." The first, which usually take place on courthouse steps, are usually uneventful. Say the homeowner has defaulted on a $500,000 mortgage; the opening bid at the courthouse auction is set at $500,000, and usually nobody bids because the house is worth quite a bit less than $500,000. So the house goes back to the lender. (Calculated Risk has a nice short video of this process -- it lasts about 37 seconds, it's a real courthouse auction, nobody bids).

The second kind of "auction" is when an auction company, working with Realtors and banks, rounds up a bunch of foreclosed houses already repossessed by lenders, rents a hotel ballroom, advertises for a few weeks to build a crowd of bidders, and auctions them off one at a time to the highest bidder.

The Calculated Risk post -- actually a link to a post on Jim Klinge's San Diego real estate blog -- is about a possible trend in courthouse auctions. CR reports that, in a few notable cases, banks have been setting the opening bids in courthouse auctions at less than the amount of the loan -- essentially inviting investors to buy foreclosed houses before the bank ever gets its hands on them.

As I say, not yet a trend, but something to watch.

--Peter Viles

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo credit: Los Angeles Times

Comments

[Rational Renter]

This should accelerate some of the inevitable drops, methinks.

Why Prices Will Keep Falling
http://findingbottom.blogspot.com

[Cal]

From ForeclosureRadars last press release: "Sales to 3rd parties at auction continued to increase, and were up 9.8 percent from the prior month. 3rd Party purchases, which must be paid in full at the time of auction, exceeded $180 Million. The percent of properties returned to the lender decreased to 96.8%, the lowest it has been since last October."

"Discounts offered by lenders at auction increased again. In June 2008, the average opening bid was 31 percent
below the amount owed on the loan in foreclosure. 87 percent of opening bids were discounted, with nearly 1 in
4 discounted by 50 percent or more. Opening bid discounts exceeded 40 percent, on average, in Merced,
Monterey, San Joaquin and Stanislaus counties."

The courthouse auction process is begging for modernization, the lenders could really do a lot to jump start the process. Between advertising the prices much more in advance and providing a new special form of title insurance (or just allow a recission if clear title isnt achieved) they could completely eliminate realtor fees, cleanup fees, eviction fees and carrying costs.

It is too radical of an idea and it would require someone very high up with a lot of power to take the lead, but it is clearly an idea whose time has come. The lenders should prioritize this and short sale workouts to maximize their return, processing inventory is a very slow and expensive model that is costing them huge sums. If they really wanted a homerun they should prequal buyers for loans and allow them to bid. Adding financing (even if it required 30-40% down) instead of cash only would maximize the lenders return.

[SoCalRealEstateNews]

From what I've seen in researching properties over the past couple of months, this reducing minimum bids is getting pretty common. Pretty close to a trend, at least.

When the bank actually takes the home back their cost and liability increase. They don't get their money back for at least four more months.

It's easy to see why they'd rather sell directly to a wholesaler or flipper and let them deal with the eviction, rehab, and sale.

I think this is a welcome trend, because most REO brokers are too busy to do a decent job of pricing let alone prepping or staging their listings. Many REOs are "broom clean" at best. often with appliances and even fixtures missing.

I say let the "40 thieves" fix 'em up right & flip 'em, or hold 'em as rentals until the market improves. Keeps foreclosures from ruining neighborhoods and running down prices so much.

Some good news in my book.

[D]

California hints at bottom to housing slump

SAN FRANCISCO (Reuters) - California's battered homes market may be hitting bottom, suggesting a national housing recovery may follow, veteran banking analyst Charles Peabody said on Friday, citing a rebound in home sales as renters become owners.

In many parts of California, buying a house, especially at auction, makes more financial sense than paying rent so home sales have been on the rise recently.

"The key is to try to get some stability in the price of homes, which appears to be happening in California," Peabody, of the independent research firm Portales Partners, told Reuters by phone on Friday.

As goes California, the most populous state, so goes the rest of the United States, according to Peabody, who warned early on about the pending credit and mortgage market slumps and put "sell" ratings on many banks.

Peabody sees the tumble in California home prices nearing its end and suspects prices elsewhere also will stabilize.

"Since California constitutes 25 percent of the housing stock in the U.S., any stabilization can have a profound impact on national averages," Peabody said in a recent report.

Home ownership in California is growing affordable again thanks to reasonably low mortgage rates and the fall in home prices, fueled by the firesale of foreclosed homes. As a result, home sales are picking up, foreshadowing a stabilization in home prices before year end, Peabody said.

"By extension, a stabilization in home prices is required before any sustainable rally in financials can be expected," he said. "It is our belief that we are moving in that direction."

Peabody said he was uncertain whether stable home prices will stick. For now he sees "a bottom, but not the bottom" for housing and financials, adding that, "We think a temporary bottom in housing is at hand."

Reasons to believe California home prices will firm may be found in data from the California Association of Realtors, Peabody said.

Notably, buyers are responding to sharply lower home prices. The realtors' group reports the state's June home sales rose 17.5 percent from a year earlier while its median home price plunged 37.7 percent. June also marked the third consecutive month of increases in home sales from year-earlier levels in the state.

California's backlog of homes for sale shrank to 7.7 months of supply in June from 16.8 months in January. The days a home for sale stayed on the market fell to 49.1 in June from 71.6 in January.

June's supply of homes for sale is well below the national average and approaching the six-month's supply level of a balanced market, Peabody said.

He noted Lompoc, California home prices are "depressed," with the local median price down 39.7 percent in June from a year ago. A buyer may find a house in Lompoc that would have cost $500,000 in the hey-dey of the housing boom earlier in the decade now selling at auction for $250,000.

The annual "carrying costs," or monthly mortgage payments and property taxes, for a home in Lompoc now equates to about 25 percent of the $80,000 gross income of a two-income earning blue-collar household. More important, that $20,000 in annual carrying costs now are in line with rents in Lompoc, where monthly rents run $1,500 to $2,000, Peabody said.

"At last, the carrying cost of purchasing a home equals rental rates, a condition that should lead to more stable home pricing going forward," he said.

(Editing by David Gregorio)

[Nick]

I totally agree with Cal; it's a process which is begging to be modernized and streamlined, and would save the banks a bunch of money in the medium term. If they provided a web interface and central database for the property information, a title guarantee, up-to-date appraisal information (eg: the appraisal info the bank was using to set the opening bid price), and opening bid prices, you could probably sell most foreclosures before they became REO's, especially if the opening bids were reasonable relative to the appraisal value. Adding financing with a sufficiently high down payment requirement would help too.

[Chris]

CAL FOR REAL ESTATE CZAR!

[Cal]

You can see most (not all) Trustee sales for free here (free signup required):
http://www.fidelityasap.com

You can see the remaining mortgage amount and if the property sells to a private party ("Sold on") or the lender gets it ("Back to Bene") and the amount at sale.

Some lenders will advertise the courthouse price a couple days before. It is all cash and you have to do your due diligence because there are some liens (tax and mechanics for example) that aren't extinguished in a trustee sale and you could inherit some other issues as well.

[Laker]

I can share my experience with trusty sales auctions. Basically, most foreclosures are 1st mortgage foreclosing, and in most of the case, these are 80/20 loans on the houses.
So it actually doesn't make a difference if the two loans belong to the same lender as the 2nd mortgages are wiped out completely on 99.99% of houses in foreclosure today.
So you get 20% automatic discount from the last sale price.
I have seen many properties that had asking bid price that was 60-70 cents on the dollar and still no bidders. Values have dropped 20-30%, so it is hardly any sense to buy at auction. Most of the investors/flippers I've seen had maximum $300,000 dollars in checks so they mainly scoop cheap properties. With today relative easy money for loans up to $417,000 and almost impossible to get jumbos, they know it is by far easier to flip a cheap property than an expensive one.
Also, there are some major risks if you buy on the courthouse steps.
1) if the previous owner didn't pay property taxes, you will have to pay them.
2) If there is any damage, you pay for it, there are no inspections.
3) In many cases, the foreclosed loan owners are still living in the house at the time of auction. You will have to evict them and it cost a lot of money and time (months and months and tens of thousand dollars)
4)if you need to borrow hard money to buy as it needs all cash - this is expensive and risky. You might get stuck without ability to get standard mortgage (can't qualify, will not appraise,etc) and end up paying arm and leg for the loan sharks to the tunes of 20-40% interest rates....

Buttom line, from at least 9 of 10 properties that i see, the bank takes the house back and list it on the MLS for LESS than what he was asking at the court steps auction....conclusion, in todays down market, better wait for it to foreclosure and buy as REO.
We are almost at the known slogan that says as soon as you drive out of the lot, the car(house) is worth $5,000 less than what you've paid for it....

[jake d.]

I have a couple of questions regarding this whole repo/auction business:

a) Is there a way to bypass the real estate agent and go straight to the bank before they list the reposessed property? (They are selling it as is so I don't see much use for any go-between person.)

b) What is the general consensus on the discount that banks are giving from the loan price - is it mostly only 20% (meaning the second loan) or are they moving to 30-35%at this point? (Or is this still very much location driven? If so - what are the differences in discounts regarding the geographical areas?)

c) Is there any feeling that real estate agents are discouraging the banks from further reducing the prices? (Are they legaly forbidden from not passing on the offer to the owner/bank?)

[SoCalRealEstateNews]

Jake--
Based on what I'm seeing right now plus 28 years in the business:

a. Pretty hard to bypass bank in most cases, but you can always try. The problem's getting through to the right person before it's listed, so start working it right after the trustee's sale. If you're a bulk buyer (multiple properties), dealing direct might be easier.

b. Banks try to list and sell at market. The loan amount is irrelevent. They want as much as they can get on a fast, solid sale. The discount comes because their agents tend to be overworked and often can't be bothered with even minimal preparation and staging, so the home sells as a fixer most of the time, with the price reflecting that.

This is unfortunate, because there are many capable, experienced agents with little work, but banks don't seem that interested in expanding their network of agents, from what I've seen.

c. Most REO agents I know want to get the home priced at or below market to expedite both a quick sale and also so they can pick the most qualified buyer from competing offers. If anything, REO agentss tend to underprice and bring down values.

In this regard, the banks are their own worst enemies, bringing values down when a little staging and prep could sustain neighborhood values. Instead, they have helped perpetuate the current downward spiral.

Hope that helps.

If you want more details on foreclosures, market trends, and staging to sell on our blog--just click the name, then use the "search" box in the upper right once you're there.

[Laker]

SoCalRealEstateNews,

I got a question for you. How long does it take to evict a tenant that got foreclosed 3 months ago, but still lives there. Tenant has 2 babies...but shows no sign of moving out...

[SoCalRealEstateNews]

Laker--
That changed immediately on July 8, when our governor signed S.B. 1137. The bill applies only to loans made between 1/1/03 and 12/31/07-- which are the loans most likely to go into foreclosure.

According to the state legislative counsel, "Until January 1, 2013, this bill would give a tenant or subtenant in possession of a rental housing unit at the time the property is sold in foreclosure, 60 days to remove himself or herself from the property. . . ."

From the bill itself: "a tenant or subtenant
in possession of a rental housing unit at the time the property is sold in foreclosure shall be given 60 days' written notice to quit pursuant to Section 1162 before the tenant or subtenant may be removed from the property as prescribed in this chapter.
(b) This section shall not apply if any party to the note remains in the property as a tenant, subtenant, or occupant."

This is a new law, but it appears to give a tenant 60 days from when notice is given after the foreclosure, as long as neither the tenant nor anyone else living in the property was a signer on the loan that foreclosed.

It would probably take the lender at least a week to prepare and post the notice. After the 60 days had elapsed it is unclear (to me at this time, at least) if the owner would then have to obtain a court order if the tenant had not vacated, which could take as long as 30 days if the tenant contested the order, possibly longer if the tenant declared a bankruptcy.

Once the court order was obtained, if necessary, it usually takes a week or two for the marshall to post notice to quit and then come back after several days have elapsed to meet the owner and the owner's locksmith at the property and enforce the order with a "lockout."

At that point, the tenant would be gone, but would have an additional time frame (I'm thinking 30 days) to come back and claim any personal property that was left in the property.

In regards to the situation you described, if by "foreclosed" you mean sold or taken back by the lender at the trustee's sale as Peter describes in this article, the law was 30 days notice rather than 60 before our gov signed this bill. But if the home just started the foreclosure procedure (filing of a Notice of Default) 3 months ago, it takes a minimum of 111 days from filing the notice to actual holding of the trustee's sale. Then that 60 day notice begins as described above.

Some lenders are so overwhelmed they don't post the required notices quickly. We've also encountered a number of smaller lenders who are choosing to hold the property until the market rebounds. If the existing tenant continues making monthly payments, they'd probably just let her stay.

Hope that helps. I am posting additional text and links from the law on our site, which you can access simply by clicking our name below.