Countrywide Financial: Old vs. New Foreclosure Methods

In the past we have looked at Old World (Europe) to see what is coming to the New World (North America). This shouldn't be done on a regular basis as in many areas the opposite holds true. However, with a little insight it is relatively easy to pick up on trends that cross the Atlantic and get the direction correct.

Real estate in general has been one of the worst performing sectors in 2007. Noting this before, we dropped coverage of most real estate REITS a while ago. There is one bright spot that has yet to materialize. As foreclosures increase, more houses are put on the market for sale, exacerbating the oversupply problem. What seems to be missing in the equation is where do all these people go? The vast majority of families end up renting their new premises. If that indeed is the case, then rentals should hold up pretty well and perhaps start outperforming as early as the first half of 2008. Rent indexation is common in Europe and is likely to become commonplace in the U.S. in the future.

Companies that have a good mix of residential and commercial leases should fair better than others. This Old World article caught our attention.

MarketWatch 09/04/2007

Hammerson profit up 22%, confident for future

LONDON (MarketWatch) -- Property firm Hammerson (UK:HMSO) said Tuesday that its first-half adjusted pretax profit rose 22.3% to 54.8 million pounds, after net rental income increased 26.5% to 138.3 million pounds. Rental income was boosted by lettings, asset management initiatives, rent reviews, indexation of rent from leases in France and development completions, the firm said. It added that it's confident about its future. Separately, Hammerson also exchanged contracts to acquire an interest in Grand Maine, a shopping centre in Angers, Maine et Loire, for 44 million euros from Locasic.

Rather than foreclosing and shoving thousands or perhaps tens of thousands of families out of their homes and placing tens of thousands of units on the market, wouldn't it be better to foreclose (take the house) but enter into a rental agreement with the prior owners? If you can't sell it anyway, under certain circumstances it would pay to rent out the house for three years and then sell.

Prior owners/current renters could be given a first refusal three year price option. Naturally the rent would have to be less than the mortgage payment otherwise you haven't done anything. As for banks trying to work out stretched-out payments on refinanced loans, this could be a better option as this would shore up their balance sheets. Technically the non-performing loan is transformed into an asset at loan/foreclosure value and the new performance metric is the rent. Naturally banks will want to index the rent - which is going to happen anyway.

If done carefully, Countrywide Financial (CFC) could benefit from the current environment. First, the hassle and cost (and embarrassment) of relocating is avoided. Second, by working with the financially distressed customer, CFC builds trust and loyalty. In ten years from now, many of the now foreclosed families will be in the market again, hopefully all the wiser this time around. Third, this stops the downward spiral as the sooner supply is cut off, prices will stabilize reducing the number of new (additional) houses that owners will let go.

It is sort of like fickleing with the unemployment figures. If you're not looking for a job, you may be unemployed but you're not included in the official unemployment figures.

"Foreclosure for Rent" is something that lenders might want to take a look at.

Disclosure: No conflicts. The above will not work on all foreclosures.

Comments

[Sr. Pessimist:]

That's not such a bad deal. I received an email with foreclosed houses at like 1/3 to 1/4 their original price starting at the auction. Nobody's buying. At least rent them out for dirt cheap.

2007 Sep 11 12:15 PM