Banks Are Unwilling to Solve REO Problems

Tim Iacono writes about an article that appeared in the San Francisco Chronicle. I have seen similar stories elsewhere over the past few weeks. The following is from the article:

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

Banks who hold these homes are in a position to sell them if they want to. The answer to selling at least some of these homes is simple: PROVIDE SELLER FINANCING.

The reason that the homes are not selling is that loans are not available to a wide swathe of Americans who can and want to purchase a home either to live in or as an investment. One hundred percent financing at reasonable rates could solve the problem. The sales could be to investors or to borrowers who occupy the homes.

What do the banks have to lose? The loans have already been written off their books, and the assets in REO status are carried at some discount to market value. If banks were to sell the homes with seller financing, buyers would take care of them to avoid further depreciation. Prices in these seller-financed transactions would be significantly higher than in other types of transactions. Over time, assuming a market recovery of some kind, owners would refinance or sell their homes to others, satisfying the seller-finance notes. If some buyers default, then the banks can simply repossess those homes and they are no worse for wear. Keep in mind in this regard that a vast majority of mortgage loans, even subprime loans, are not in default.

This approach would take no additional outlay of bank capital. In addition, at today's low interest rates, banks and borrowers could recognize significant principal payments in short order. Performing notes could be put back on the banks' balance sheets after some period, or sold to investors or other banks. I understand the objections to making loans to risky borrowers, but the losses here are already fixed. There is no further downside risk.

The alternative that the banks are choosing is to sit on their hands and their money. Empty homes are deteriorating in value as the banks try to time the market and to avoid making loans for some reason I do not fully understand. The damage is done. The banks hold at least part of the solution and are refusing to take reasonable actions to ameliorate their problems.

Disclosure: No position.

Comments

[Griz:]

Instead of seller financing, lower interest rates, builder give-aways, loan modifications, cram-downs, presidential proclamations on refinancing, tax breaks, REO sidelining, PIPPs, TARPs, TALFs or even RALPHs (as in: makes me want to).... how about we solve this crisis the old-fashioned way by allowing home prices to fall to their true equilibrium pricing?

Apr 12 11:51 AM

[John Wake:]

That would be a great strategy once banks figured prices have bottomed out in an area. Right now, I assume the banks assume prices will continue to fall so they want buyers to have some skin in the game. 100% financing and falling prices is a bad combination.

Another strategy as prices approach bottom would be for banks to become landlords and just rent the properties until market conditions improve. But again it's a strategy that depends on prices leveling off to be successful.

It's all moot however because banks aren't clever enough to use either strategy. Bureaucracy is more important than profits for banks.

Apr 12 11:51 AM

[Fresh Start:]

Agree with your thoughts, banks are part of the problem. Banks should entertain the idea of becoming landlords. There are solutions and creative programs which credit unions are using to solve their REO problems. In fact, selected institutions are actually turning a non-performing asset into a performing asset. They are helping those who cannot buy home due a credit issue actually have a chance to become a future home owner. There are solutions, but lenders must get "out of the box" which does not infer returning to the wild times of the early 2000's.
Jack

Apr 12 11:53 AM

[Fresh Start:]

Fresh Start Homes provides unique and creative methods for marketing lender owned homes. Fresh Start provides lenders with an opportunity to help home buyers, the neighborhood and themselves. The program is a win/win/win.

Apr 12 11:58 AM

[CaptainJJack:]

I have one word for you :securitization.

The foreclosures are done by the servicer acting on behalf of the investors.

The investors are bondholders that own some fraction of the pool and hence some fraction of the foreclosed home.

Unless a new bank wishes to loan 100%, I do not see where the loan will come from.

Apr 12 12:15 PM

[Realtorjohny:]

Did anyone notice what the article said, banks have foreclosed the homes and not put them on the market?.....after flooding the market with distressed properties, the values in some areas have been crushed. Nationally about 40% of sales have been bank owned properties. They aren't affecting the markets, they are the market. Lately in our area and I'm sure others, bank properties have been witheld for some period. The remaining properties have had multiple bids and selling prices higher than the original asking price. There may be a movement to restore a modicum of value to the bank "assets". We are at a point that bank homes (and the market) are selling at a discount to current cost of construction with the land, permit, school fees etc. thrown in for free. How do rational people expect prices to go much lower?? There still is a problem with lending, as truly qualified people are having to wait 60-90+ days for approvals slowing down the sales process considerably.

Apr 12 12:19 PM

[OptimizedPrime:]

This is amazing. We have 14M too many houses in the country according to yesterday's USA Today. According to the author here, the solution to this problem is not to observe the laws of supply and demand and adjust prices to a point where there is actual demand, but rather to play more games with finance until we (attempt to) create more money out of thin air.

This is what got us into this mess. Everybody keeps blaming "the banks" or "wall street" for this mess. Maybe we should turn our anger to the real estate pimps like this guy.

The REAL SOLUTION is simple. Banks should auction these houses with bids starting at $1. Will the banks take a loss? Sure, but that's reality. Are Greedy Speculators going to come in and buy these up at fire sale prices? Sure. Will the Greedy Speculators make money? Maybe. That's their problem. Banks shouldn't be in the Greedy Speculator business though. They shouldn't be "waiting for a better time" or pretending that those assets are worth 3x what they say they are (which is to say what they paid for them).




OP

Apr 12 12:41 PM

[woodsey:]

I talked with a fellow who had just bought a house. He wanted to pay 20 pct. down and 30 year coventional mtg. He was urged to go the other idiotic route. It was only after much persistence that he prevailed.

Apr 12 01:10 PM

[yk00002:]

Banks that provide mortgages style themselves as "not being in the real estate business". As a result they make moronic decisions - like destroying any remaining value in the houses they foreclose upon and selling them for pennies on the dollar, and making sure that they do not provide any financing to the new buyers who buy at an incredibly low risk.
regarding skin in the game - please note that smart Fannie Mae will provide 90% financing to investors in certain properties they own, while insisting on 75% financing for investors buying REOs. The amount of cash which includes down payment, closing costs and other parasite subsidies, and renovation can become easily 50% of the price. Why would anybody finance? those who can buy for pennies using cash buy and are becoming rich, the rest are sitting on the sidelines.
If these policies continue house prices may plummet in some areas by another 50% before it will be worthwhile for investors to get back in and stabilize the price.

Apr 12 05:04 PM

[Sandy1529:]

Congress and the Banks, really ARE responsible for this crisis. Congress told the banks, etc. that they had to lend to anyone, yet did NOT demand any standardized minimum provisions for the mortgages. More 100% financing will certainly NOT improve the situation, nor will more adjustable rate (or other exotic forms) mortgages help. Unless people have some equity in the game, they are not likely to take care of a property, or make sure to make the payments. If a buyer can hardly afford the initial payments, he certainly will NOT be able to cover the increased ones when the rate adjusts upward.


On Apr 12 12:41 PM OptimizedPrime wrote:

> This is amazing. We have 14M too many houses in the country according
> to yesterday's USA Today. According to the author here, the solution
> to this problem is not to observe the laws of supply and demand and
> adjust prices to a point where there is actual demand, but rather
> to play more games with finance until we (attempt to) create more
> money out of thin air.
>
> This is what got us into this mess. Everybody keeps blaming "the
> banks" or "wall street" for this mess. Maybe we should turn our anger
> to the real estate pimps like this guy.
>
> The REAL SOLUTION is simple. Banks should auction these houses with
> bids starting at $1. Will the banks take a loss? Sure, but that's
> reality. Are Greedy Speculators going to come in and buy these up
> at fire sale prices? Sure. Will the Greedy Speculators make money?
> Maybe. That's their problem. Banks shouldn't be in the Greedy Speculator
> business though. They shouldn't be "waiting for a better time" or
> pretending that those assets are worth 3x what they say they are
> (which is to say what they paid for them).
>
>
>
>
> OP

Apr 12 08:14 PM

[Sandy1529:]

You are certsainly right - 100% financiang, adjustable rate, and other exotic terms mortgages, are what caused this crisis. Congress, the banks, Freddie and Fannie, could have easily prevented the problems. Congress is mostly to blame, because they told banks, etc. to lend to everyone - creditworthy or not! Yet, Congress did not specify any standard minimum provisions for mortgages, nor did they tell Freddie and Fannie to refust to accept the "crazy terms" paper. Congress is MOST responsible for the crisis, and what they are now doing, is only going to make the situation WORSE.


On Apr 12 08:57 AM D. McHattie wrote:

> "One hundred percent financing at reasonable rates could solve the
> problem."
>
> I must respectfully disagree with you, Mr. Bost. Your solution is
> precisely the problem. 100% financing is a recipe for disaster, as
> we have just witnessed over the last 3 years. Please stop trying
> to re-inflate the housing bubble - it will only burst again and put
> us right back where we are now.
>
> Home prices need to return to their historic relationship to rents
> and incomes, as difficult as that may be in the short term for some
> current homeowners, builders, banks, lenders and realtors.
>
> Those who care about young people, the economically disadvantaged,
> the working class and the taxpayer see lower housing prices as a
> good thing.
>
> We will all be better off when the consumer is able to buy good,
> quality housing at a reasonable price without needing special taxpayer-supported
> financing. Lower housing costs leaves us all with more money to invest
> or to spend on items that we decide are of value to us.
>
> Lower prices and higher quality are what drives the economy and sustainable
> improvements in overall living standards, not short-term solutions
> like 100% financing or other compromises to prudent lending standards.
>
>
> I thank you for posting this article, misguided as your suggestions
> may be.

Apr 12 08:25 PM

[Sandy1529:]

Put the blame where it belongs - on CONGRESS!! They precipitated this mess - they said lenders had to lend to anyone, set no minimum standards for mortgage contracts, and created Freddie and Fannie, without requiring them to accept only "sound" mortgage contracts, while rejecting the "crazy terms paper!!" This crisis is totally the fault of Congress! When do you remember them doing anything right? They certainly aren't making things any better with their current dumb moves. It makes no difference which party is in power - one is as dumb as the other!! They only care about themselves, and reelection!


On Apr 12 08:57 AM D. McHattie wrote:

> "One hundred percent financing at reasonable rates could solve the
> problem."
>
> I must respectfully disagree with you, Mr. Bost. Your solution is
> precisely the problem. 100% financing is a recipe for disaster, as
> we have just witnessed over the last 3 years. Please stop trying
> to re-inflate the housing bubble - it will only burst again and put
> us right back where we are now.
>
> Home prices need to return to their historic relationship to rents
> and incomes, as difficult as that may be in the short term for some
> current homeowners, builders, banks, lenders and realtors.
>
> Those who care about young people, the economically disadvantaged,
> the working class and the taxpayer see lower housing prices as a
> good thing.
>
> We will all be better off when the consumer is able to buy good,
> quality housing at a reasonable price without needing special taxpayer-supported
> financing. Lower housing costs leaves us all with more money to invest
> or to spend on items that we decide are of value to us.
>
> Lower prices and higher quality are what drives the economy and sustainable
> improvements in overall living standards, not short-term solutions
> like 100% financing or other compromises to prudent lending standards.
>
>
> I thank you for posting this article, misguided as your suggestions
> may be.

Apr 12 08:36 PM

[WaltB:]

Bill Bost is completely correct. The huge oversupply of homes and the foreclosures to come are a far worse threat than 100 percent financing to credit worthy buyers. Homes need to be made more affordable by lower rates not lower prices. In the last 2 years, here in mid Florida $450,000 homes are now $250,000 and even qualitied owners are ready to dump their loser homes back to the banks that destroyed their investment, personal balance sheets and net worth by indiscriminate dumping. Homes were never intended trade wildly like stocks.

Why should a new buyer step up in a declining market? Why join the pain? Buyers need a major incentive and that is easy financing for QUALIFIED buyers. Try 2 percent for 5 years and no or little money down. We have millions of homes that need to sell now and only an extreme measure will cause the extreme number of sales we need. (Tighter lending practices can later be adopted after we have saved the ship from sinking.)

In the Depression home prices dropped by 80 percent in many areas. We are already down 40-50 percent. Further adjustments to price to rent parity could destroy the nation. Banks need to agressively lower rates on foreclosures and refinance their current borrowers on the same basis.

Apr 12 09:07 PM

[ThePhoenix:]

I agree with you. However, I believe that eventually they will get it and have not choice but to provide the financing. Close to my home I drove a particular street, Medeiros Street in Zip Code 95829 in Sacramento. On that single street there is a total of 7 vacant homes, 3 are on the market and the other 4 are vacant (shadow inventory). A couple of those houses have been vacant for at least 6 months. Those assets are not performing. The homes are big, over 3,000 sf. I got a thumbs down on my previous post, not sure why, but renting the house by the bank will yield a market rent of roughly $1,500.00 to $1,800.00. If they sold it with 100% financing, they could generate a payment of $2,500.00 and have none of the maintenance costs. Maybe we should be thinking about contracts of sale as well. I think that the seller carrybacks generate more revenue than renting... risky? You bet. In the short run, more risky than renting but in the long run, more beneficial. Those first 6 months are very risky.


On Apr 12 12:15 PM CaptainJJack wrote:

> I have one word for you :securitization.
>
> The foreclosures are done by the servicer acting on behalf of the
> investors.
>
> The investors are bondholders that own some fraction of the pool
> and hence some fraction of the foreclosed home.
>
> Unless a new bank wishes to loan 100%, I do not see where the loan
> will come from.

Apr 12 09:41 PM

[sr9web:]

Ostrich syndrome is running amuck


On Apr 12 12:40 PM WAKEUP wrote:

> "Empty homes are deteriorating in value ..." This item, even apart
> from the other thrust of this article points up a problem that I
> have been noticing for over a year, now. There is an ever-increasing
> number of houses sitting empty throughout at least the entire southeastern
> part of this country. I see them in my travels, and I can tell you
> that the number is increasing steadily. I make notes as time allows,
> when I pass through these areas. A street, for example, that has
> more than one empty, upscale home, in January, will have a couple
> more empties, in February; by April, in some cases, eight of the
> fifteen houses on that street stand empty. Some have "For Sale" signs,
> some don't; but they are obviously EMPTY. Where, you ask? Oh, start
> with Birmingham, Memphis, and Charlotte, for examples. (This is not
> limited to the larger cities; smaller cities are getting hit, also.)
> And make no mistake about it, vandalism is taking hold. A striking
> feature of this is that most of the damage, plainly visible from
> the street, goes unrepaired. But mention this to anyone who works
> in real estate or banking in any of these cities, and they will claim
> that "there's not all that much of that, HERE." Then start naming
> places in THAT city where you have SEEN these empty, vandalized houses,
> and the real estate/banking persons suddenly remember that they are
> late for a meeting, someplace else. My conclusion, based on the above
> and other personal observations is that the real estate mess is even
> bigger than anyone in Officialdom is letting on. What I SEE flies
> in the face of ANY optimism that the real estate collapse is anywhere
> near "bottoming." It's a real MESS out there, folks, and it's getting
> worse, as the feel-good talk flows. There is no telling how long
> this situation is going to go on.

Apr 13 03:41 AM

[Smalltownba...:]

"The reason that the homes are not selling is that loans are not available to a wide swathe of Americans who can and want to purchase a home either to live in or as an investment. One hundred percent financing at reasonable rates could solve the problem."

What are you smoking? The reason we are in this mess in the first place is 100% financing for people who do not have the common sense to save for what they want.

The banks are holding these properties because they believe they will have more value at some point in the future. They have the right to do that and are being prudent with their assets. They will not dump them on the market because that would diminish the gains they hope to achieve by holding them. They could later dump them if they are wrong about the market but it is doubtful that they will all decide to do so at the same time.

"If banks were to sell the homes with seller financing, buyers would take care of them to avoid further depreciation. Prices in these seller-financed transactions would be significantly higher than in other types of transactions."

More comments from smoking the same substance. Home buyers with no skin in the game could care less about maintaining a property. If it falls apart they walk away. This is one of the primary lessons learned from all of this mess. In addition, when they walk away they take the appliances, the fixtures, and anything else that is not nailed down. What you suggest is not a solution but a catalyst to perpetuate this problem and insure that we will return to the same problem again in the future.

Apr 13 07:39 AM

[Smalltownba...:]

I think we have already seen the impact of artificially low rates and incentives to "qualified" buyers. 100% financing is not the solution. Acceptance of reality is the solution. All of your suggestions will serve to prolong and deepen this market correction.


On Apr 12 09:07 PM WaltB wrote:

> Bill Bost is completely correct. The huge oversupply of homes and
> the foreclosures to come are a far worse threat than 100 percent
> financing to credit worthy buyers. Homes need to be made more affordable
> by lower rates not lower prices. In the last 2 years, here in mid
> Florida $450,000 homes are now $250,000 and even qualitied owners
> are ready to dump their loser homes back to the banks that destroyed
> their investment, personal balance sheets and net worth by indiscriminate
> dumping. Homes were never intended trade wildly like stocks.
>
> Why should a new buyer step up in a declining market? Why join the
> pain? Buyers need a major incentive and that is easy financing for
> QUALIFIED buyers. Try 2 percent for 5 years and no or little money
> down. We have millions of homes that need to sell now and only an
> extreme measure will cause the extreme number of sales we need. (Tighter
> lending practices can later be adopted after we have saved the ship
> from sinking.)
>
> In the Depression home prices dropped by 80 percent in many areas.
> We are already down 40-50 percent. Further adjustments to price to
> rent parity could destroy the nation. Banks need to agressively lower
> rates on foreclosures and refinance their current borrowers on the
> same basis.

Apr 13 07:45 AM

[highwaytose...:]

The GSE's (ie Congress) cause the problem by insuring risk implied by government bailout. As recently November 2006 William Poole said

"I believe that supervisory oversight is in pretty good shape, with one glaring exception. Government-sponsored enterprises are not adequately capitalized and the supervisory powers of the Office of Federal Housing Enterprise Oversight (OHFEO) are inadequate. I’ll concentrate on the housing GSEs—Fannie Mae and Freddie Mac. This is a topic I’ve addressed several times in the past (Poole, 2003 and 2004) and I’ll not repeat those arguments in any detail here. Although the GSEs are not formally insured by the federal government, the market clearly believes that they are effectively backstopped. As I’ve emphasized before, the Federal Reserve does not have the legal authority to bail out a troubled GSE. The Fed can provide liquidity support through its discount window, but only indirectly through collateralized loans to banks that would then bear the credit risk of making loans to a troubled firm. Under emergency conditions, the Fed does have the authority to make loans directly to a GSE, but the loans must be fully collateralized. The Fed is obviously disinclined to use its emergency powers to lend to firms other than banks; despite numerous financial upsets over the years, the Fed has not used this authority since the 1930s."

Now rather than admit that Congress by usurping their responsibility to the FED, Treasury and executive (PPT or Working Group on Financial Markets ) has created a tremendously unproductive housing and banking sectors. Why should the banks sell? The FED just prints for them..This is the regulations that caused the problem. Shiller attempts to build an index in Irrational exuberance where the index is around 130 and the norm has been after WWII 100. The depression level is around 66...So protecting the banks is crazy... The numbers indicated we are in the middle of this asset bubble. A simple solution would be to take the census household (you might think about women in the workplace) income for the states and force the banks to liquidate REO at around 4 x income. Free markets seek this equalization. So California 4 times would be 200k same as Massachusetts. The politicians have created bad economics as a collection mechanism for education which has squandered the dollars by slipping for first to seventeenth with a 7 to 8% increase YOY for 30 years. Now if you think this is gloomy think look at medical policy... It is government policy supporting warfare mindset on drugs, poverty, nation building, empire preservation that cause the economic misery that led to Stalin, Mao and Hitler. Policies matter and finger pointing at anyone except the policy makers is a perjurer to the Constitution. Sector rotation will happen just hope that good policy (letting the bad sectors fail) not war the policy. If this makes any sense please write you congressman and as a start support HR 1207 to audit the FED.


On Apr 13 03:41 AM sr9web wrote:

> Ostrich syndrome is running amuck

Apr 13 07:55 AM

[cynewulf:]

God save us from communism in its greedier forms. This man is dangerous.

Apr 13 01:02 PM

[HardwoodFlo...:]

Griz- I agree. Let 'em fall. Get it over with already. It's working. people are seeping up inventory at great rates- banks are toally swamped with FHA loan processing. My guess is the JUMBO scene will fall to. So what. This is all part of "getting well".

Wake-Up- I gotta disagree with your "the ski is falling" deal. The reality is that real esate is different in different parts fo the country. What may be true of LV is not true of Chicago.

100% financing! Common that's ridiculous. People should save some money, make a down payment, get a place to live. Jeez- the thing is just workingit's way through. Sure New York is now just coming to grips with what hit most of the country 2+ years ago, but a lot of markets have cleared out inventory (not talking about parts of Cali/ Las Vegas) and some markets are even building again. (Again housing is regional- that goes for pricing and building- it's not one big monothytic blob).

cynewulf- Right on. Let's stop natinalizing this stuff (well except the home mortgage tax deduction- I can't believe the Democrates want to take that away- stupid).

On the guy from Florida. What home in mid-florida should be worth $400K? I don't get it if the market drops to $250K isn't thqt wha tthe home is worth. Maybe people should have taken a realesate class before buying a home or getting 100% financing on and ARM. Location- Location. Mid-Florida what a dump you couldn't give me home there.

On the otherside, housing is (in soem areas) and will (in others) come back. It won't look the same but it will come back. There are certainties to the market place which cannot be denied.

Apr 13 04:21 PM