As Lenders Hold Homes in Foreclosure, Sales Are Hurt
Joshua Lott for The New York Times
Jayson Meyerovitz, a broker in the Phoenix area, is concerned about bank-owned foreclosures: “If so many houses hit the market, what is going to happen then?”
By ERIC DASH
Published: May 22, 2011
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All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.
Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months.
“It remains a heavy weight on the banking system,” said Mark Zandi, the chief economist of Moody’s Analytics. “Housing prices are falling, and they are going to fall some more.”
Over all, economists project that it would take about three years for lenders to sell their backlog of foreclosed homes. As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year. Regions that were hardest hit by the housing collapse and recession could take even longer to recover — dealing yet another blow to a still-struggling economy.
Although sales have picked up a bit in the last few weeks, banks and other lenders remain overwhelmed by the wave of foreclosures. In Atlanta, lenders are repossessing eight homes for each distressed home they sell, according to March data from RealtyTrac. In Minneapolis, they are bringing in at least six foreclosed homes for each they sell, and in once-hot markets like Chicago and Miami, the ratio still hovers close to two to one.
Before the housing implosion, the inflow and outflow figures were typically one-to-one.
The reasons for the backlog include inadequate staffs and delays imposed by the lenders because of investigations into foreclosure practices. The pileup could lead to $40 billion in additional losses for banks and other lenders as they sell houses at steep discounts over the next two years, according to Trepp, a real estate research firm.
“These shops are under siege; it’s just a tsunami of stuff coming in,” said Taj Bindra, who oversaw Washington Mutual’s servicing unit from 2004 to 2006 and now advises financial institutions on risk management. “Lenders have a strong incentive to clear out inventory in a controlled and timely manner, but if you had problems on the front end of the foreclosure process, it should be no surprise you are having problems on the back end.”
A drive through the sprawling subdivisions outside Phoenix shows the ravages of the real estate collapse. Here in this working-class neighborhood of El Mirage, northwest of Phoenix, rows of small stucco homes sprouted up during the boom. Now block after block is pockmarked by properties with overgrown shrubs, weeds and foreclosure notices tacked to the doors. About 116 lender-owned homes are on the market or under contract in El Mirage, according to local real estate listings.
But that’s just a small fraction of what is to come. An additional 491 houses are either sitting in the lenders’ inventory or are in the foreclosure process. On average, homes in El Mirage sell for $65,300, down 75 percent from the height of the boom in July 2006, according to the Cromford Report, a Phoenix-area real estate data provider. Real estate agents and market analysts say those ultra-cheap prices have recently started attracting first-time buyers as well as investors looking for several properties at once.
Lenders have also been more willing to let distressed borrowers sidestep foreclosure by selling homes for a loss. That has accelerated the pace of sales in the area and even caused prices to slowly rise in the last two months, but realty agents worry about all the distressed homes that are coming down the pike.
Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months.
“It remains a heavy weight on the banking system,” said Mark Zandi, the chief economist of Moody’s Analytics. “Housing prices are falling, and they are going to fall some more.”
Over all, economists project that it would take about three years for lenders to sell their backlog of foreclosed homes. As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year. Regions that were hardest hit by the housing collapse and recession could take even longer to recover — dealing yet another blow to a still-struggling economy.
Although sales have picked up a bit in the last few weeks, banks and other lenders remain overwhelmed by the wave of foreclosures. In Atlanta, lenders are repossessing eight homes for each distressed home they sell, according to March data from RealtyTrac. In Minneapolis, they are bringing in at least six foreclosed homes for each they sell, and in once-hot markets like Chicago and Miami, the ratio still hovers close to two to one.
Before the housing implosion, the inflow and outflow figures were typically one-to-one.
The reasons for the backlog include inadequate staffs and delays imposed by the lenders because of investigations into foreclosure practices. The pileup could lead to $40 billion in additional losses for banks and other lenders as they sell houses at steep discounts over the next two years, according to Trepp, a real estate research firm.
“These shops are under siege; it’s just a tsunami of stuff coming in,” said Taj Bindra, who oversaw Washington Mutual’s servicing unit from 2004 to 2006 and now advises financial institutions on risk management. “Lenders have a strong incentive to clear out inventory in a controlled and timely manner, but if you had problems on the front end of the foreclosure process, it should be no surprise you are having problems on the back end.”
A drive through the sprawling subdivisions outside Phoenix shows the ravages of the real estate collapse. Here in this working-class neighborhood of El Mirage, northwest of Phoenix, rows of small stucco homes sprouted up during the boom. Now block after block is pockmarked by properties with overgrown shrubs, weeds and foreclosure notices tacked to the doors. About 116 lender-owned homes are on the market or under contract in El Mirage, according to local real estate listings.
But that’s just a small fraction of what is to come. An additional 491 houses are either sitting in the lenders’ inventory or are in the foreclosure process. On average, homes in El Mirage sell for $65,300, down 75 percent from the height of the boom in July 2006, according to the Cromford Report, a Phoenix-area real estate data provider. Real estate agents and market analysts say those ultra-cheap prices have recently started attracting first-time buyers as well as investors looking for several properties at once.
Lenders have also been more willing to let distressed borrowers sidestep foreclosure by selling homes for a loss. That has accelerated the pace of sales in the area and even caused prices to slowly rise in the last two months, but realty agents worry about all the distressed homes that are coming down the pike.
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“My biggest fear right now is that the supply has been artificially restricted,” said Jayson Meyerovitz, a local broker. “They can’t just sit there forever. If so many houses hit the market, what is going to happen then?”
The major lenders say they are not deliberately holding back any foreclosed homes. They say that a long sales process can stigmatize a property and ratchet up maintenance and other costs. But they also do not want to unload properties in a fire sale.
“If we are out there undercutting prices, we are contributing to the downward spiral in market values,” said Eric Will, who oversees distressed home sales for Freddie Mac. “We want to make sure we are helping stabilize communities.”
The biggest reason for the backlog is that it takes longer to sell foreclosed homes, currently an average of 176 days — and that’s after the 400 days it takes for lenders to foreclose. After drawing government scrutiny over improper foreclosures practices last fall, many big lenders have slowed their operations in order to check the paperwork, and in two dozen or so states they halted them for months.
Conscious of their image, many lenders have recently started telling real estate agents to be more lenient to renters who happen to live in a foreclosed home and give them extra time to move out before changing the locks.
“Wells Fargo has sent me back knocking on doors two or three times, offering to give renters money if they cooperate with us,” said Claude A. Worrell, a longtime real estate agent from Minneapolis who specializes in selling bank-owned property. “It’s a lot different than it used to be.”
Realty agents and buyers say the lenders are simply overwhelmed. Just as lenders were ill-prepared to handle the flood of foreclosures, they do not have the staff and infrastructure to manage and sell this much property.
Most of the major lenders outsourced almost every part of the process, be it sales or repairs. Some agents complain that lender-owned home listings are routinely out of date, that properties are overpriced by as much as 10 percent, and that lenders take days or longer to accept an offer.
The silver lining for home lenders, however, is that the number of new foreclosures and recent borrowers falling behind on their payments by three months or longer is shrinking.
“If they are able to manage through the next 12 to 18 months,” said Mr. Zandi, the Moody’s Analytics economist, “they will be in really good shape.”
The major lenders say they are not deliberately holding back any foreclosed homes. They say that a long sales process can stigmatize a property and ratchet up maintenance and other costs. But they also do not want to unload properties in a fire sale.
“If we are out there undercutting prices, we are contributing to the downward spiral in market values,” said Eric Will, who oversees distressed home sales for Freddie Mac. “We want to make sure we are helping stabilize communities.”
The biggest reason for the backlog is that it takes longer to sell foreclosed homes, currently an average of 176 days — and that’s after the 400 days it takes for lenders to foreclose. After drawing government scrutiny over improper foreclosures practices last fall, many big lenders have slowed their operations in order to check the paperwork, and in two dozen or so states they halted them for months.
Conscious of their image, many lenders have recently started telling real estate agents to be more lenient to renters who happen to live in a foreclosed home and give them extra time to move out before changing the locks.
“Wells Fargo has sent me back knocking on doors two or three times, offering to give renters money if they cooperate with us,” said Claude A. Worrell, a longtime real estate agent from Minneapolis who specializes in selling bank-owned property. “It’s a lot different than it used to be.”
Realty agents and buyers say the lenders are simply overwhelmed. Just as lenders were ill-prepared to handle the flood of foreclosures, they do not have the staff and infrastructure to manage and sell this much property.
Most of the major lenders outsourced almost every part of the process, be it sales or repairs. Some agents complain that lender-owned home listings are routinely out of date, that properties are overpriced by as much as 10 percent, and that lenders take days or longer to accept an offer.
The silver lining for home lenders, however, is that the number of new foreclosures and recent borrowers falling behind on their payments by three months or longer is shrinking.
“If they are able to manage through the next 12 to 18 months,” said Mr. Zandi, the Moody’s Analytics economist, “they will be in really good shape.”
9 of 129 Readers' Comments
3.
HIGHLIGHT (what's this?)
Wouldn't it have made more sense for these big banks to renegotiate mortgage terms with home owners than to foreclose and now hold all these empty homes that will fall into disrepair and continue to erode in value?
Not only that, wouldn't it also have been better for the families that lived in these homes and those who live next door to these homes (not that big banks care about that)?
I must be missing something.
Not only that, wouldn't it also have been better for the families that lived in these homes and those who live next door to these homes (not that big banks care about that)?
I must be missing something.
Recommend Recommended by 168 Readers
10.
HIGHLIGHT (what's this?)
How about this: let me stay in my depreciating home until I find a job and can resume payments! I assure you, JP Morgan Chase, you will lose more money than the home was ever worth by foreclosing now! My $110,000 mortgage home will sell for $50K, at best. I could easily have a new job by then and resume payments!
But logic is lost on you, which would explain the multiple communiques I receive from you each day, each one in direct and utter contrast to the one received before it.
Just give us a track to save our houses!
But logic is lost on you, which would explain the multiple communiques I receive from you each day, each one in direct and utter contrast to the one received before it.
Just give us a track to save our houses!
Recommend Recommended by 141 Readers
26.
HIGHLIGHT (what's this?)
I have a sinking feeling the big banks want to hold on to the foreclosed property. Later they will rent homes much like a credit card. That is huge penalties for late payment, property damage, etc. The homes can then be rolled into CDOs. If you look at the history of the financial industry since Walter Wriston of Citibank began pressing for deregulation back in late 1970s, it has been a series of financial debacles trending toward the catastrophic. So there is every reason to believe planning is underway for a more grandiose scheme.
Recommend Recommended by 20 Readers
32.
HIGHLIGHT (what's this?)
Reset mortgage principles to "Fair Market Value" write off that amount and keep people in their homes. As a Short Sale Realtor in the Palm Springs area, it kills me that the Lenders EVERY SINGLE ONE OF THEM, counter my offers with HUGELY high amounts, drag out the deals, lose papers, every trick imaginable to keep collecting their monthly "service fee" which is based on the original loan amount, NOT the value of the home. Just another Scam. "Don't want to depress the markets?" Ha! That's exactly what the Banks are doing. Each of us is a File #, not a human with hopes and dreams..it pains me every day, yet when I am successful in a Short Sale, I feel I have helped that one person or family push back Foreclosure for at least a little while.
Recommend Recommended by 57 Readers
59.
HIGHLIGHT (what's this?)
I predicted that this is exactly what would result from the post subprime bubble burst; millions buying overpriced homes in an overheated housing market, that in fact, was screaming 'DO NOT BUY', from lenders too greedy to do the right thing (scrutinizing buyer quality) and thereby creating the current foreclosure Big Box bank, deed owned housing glut.
I've been looking to buy my first home going on three years now and I could tell you, in a laundry list, stories about some of the back-handed bait and switch/hold and desist tactics I've seen occurring on a daily basis, by the bank owned deed holders, and often using the RE agents as the conduit to keep these properties from selling for the price they are worth, circa 2011. It is not pretty and, even as a shopping buyer in a buyers mkt, I do not relish the many people/families I've come across who are desperate to sell, pre-foreclosure. It is one sad scenario.
Point blank; the banks are going to hold onto their properties for as long as they can, or until 'someone' tells them (forces) to let them go. They are oblivious, for many reasons, to the fact that property values no longer reflect 2004-2007 highs. In 9 out of 10 cases they want to recoup their $$ loss, so thus, they are going to hold onto these properties for as long as they can, to protect themselves. They refuse to hire (and pay) the processors to do it correctly, so, they just hold on, and doing so, are in effect creating a RE property monopoly.
I am now in a purchase contract, but am financing with the seller, NOT the bank. Very grateful I will not have to deal with these behemoth financial institutions, but, this isn't the norm. All I can offer is- buyers- caveat emptor. I don't foresee much improvement anytime in the near or distant future.
I've been looking to buy my first home going on three years now and I could tell you, in a laundry list, stories about some of the back-handed bait and switch/hold and desist tactics I've seen occurring on a daily basis, by the bank owned deed holders, and often using the RE agents as the conduit to keep these properties from selling for the price they are worth, circa 2011. It is not pretty and, even as a shopping buyer in a buyers mkt, I do not relish the many people/families I've come across who are desperate to sell, pre-foreclosure. It is one sad scenario.
Point blank; the banks are going to hold onto their properties for as long as they can, or until 'someone' tells them (forces) to let them go. They are oblivious, for many reasons, to the fact that property values no longer reflect 2004-2007 highs. In 9 out of 10 cases they want to recoup their $$ loss, so thus, they are going to hold onto these properties for as long as they can, to protect themselves. They refuse to hire (and pay) the processors to do it correctly, so, they just hold on, and doing so, are in effect creating a RE property monopoly.
I am now in a purchase contract, but am financing with the seller, NOT the bank. Very grateful I will not have to deal with these behemoth financial institutions, but, this isn't the norm. All I can offer is- buyers- caveat emptor. I don't foresee much improvement anytime in the near or distant future.
Recommend Recommended by 19 Readers
65.
HIGHLIGHT (what's this?)
While it's tragic that so many were so positive the future would be bright and wealthy that they invested in homes and mortgages that made no sense given their financial status, I on the other hand chose not to because I could see that housing prices were too high and lending practices were too loose (a bit like Ahnuld, come to think about it).
Giving these folks - the banks or the home buyers - a break *might* help the economy in the short run. But it punishes those who used sound judgement in making business decisions. And it teaches people that they don't have to take responsibility for their poor decisions and actions... Like voting for "W" (aka Mr. "Let the financial institutions regulate themslves!") not just once, but twice !!!
Getting out of a mess like this, either on the personal level or the national level, will take time. If you wanna whine about it, keep it to yourselves, it's your own ---- fault.
Giving these folks - the banks or the home buyers - a break *might* help the economy in the short run. But it punishes those who used sound judgement in making business decisions. And it teaches people that they don't have to take responsibility for their poor decisions and actions... Like voting for "W" (aka Mr. "Let the financial institutions regulate themslves!") not just once, but twice !!!
Getting out of a mess like this, either on the personal level or the national level, will take time. If you wanna whine about it, keep it to yourselves, it's your own ---- fault.
Recommend Recommended by 7 Readers
77.
HIGHLIGHT (what's this?)
I've been an Illinois real estate broker since 2004 and have been in the business since roughly 2000. I've got a unique perspective on the entire foreclosure issue because I've worked in many different positions and for several different comapnies. There are so many issues that need to be addressed and brought to the attention of regular and prudent folks that just haven't seen media attention at all.
One of my favorite things to talk about is what I call the Real Estate Racketeering Heirarchy. I first discovered the Heirarchy in 2006. I was working with a pool of provessional real estate investors and we were trying to design our next profitable business model. Obviously, the market was going to crash, so we were trying to figure out a way to profit from it. Cash offers on short sales seemed like the most logical idea.
By the end of 2006 I had 30 bona fide and pending short sales on my desk with cash offers from our investment pool. All of the properties were unoccupied, all of the owners of record hadn't made one payment, and all of the properties were unmarketable to the general public because they were in disrepair. In short, the banks were simply gong to lose if they took these properties back and we were offering them a logical alternative that would save them time and expeses. After more phone calls and faxes than I could count, I think that 2 actually closed. What's funny is that all of these properties went to judicial auction (the last step in foreclosure before the bank takes ownership) with numbers purposely set rediculously high evn though the banks new what they were worth. A few months later, we started noticing some of them creeping back into the market at numbers about what we offered or lower. Some of the prices fluctuated a few hundred thousand or more within a few months - remember that they had all of the information and resources that they needed to determine fair market value. Either some of the realtors were sending kickbacks to the bank asset managers to get the listings, or the banks just didn't care because there was something else going on that we couldn't figure out. (Read: Bailout and Fed Guarantee)
First off, make no mistake, there's some very powerful people that are calling the shots here. The Racketeering Heirarchy is no joke and this story is just a small snapshot of what is going on. The example above is just on of more than I could even imagine and some of the large scale purchase package fraud is wayy worse. There's absolutely no regulation at any of these loan servicing companies responsible for the large losses like my story. Eventually, I'm guessing the banks are going to blame the loan servicers for losses and mismanagement of inventory much like B.P is blaming Transocean for the oil spill.
There is no contractual oversight, disclosure, or review to protect shareholders or institutional investors from these losses. It is literally impossible to figure out what is going on behind the scenes here because all of these comapnies work behind a cloak of secrecy. These servicing companies change their phone numbers often, re assign employees for no reason, change corporate headquarters, etc.
Basically, the entire Foreclosure game is rigged. The NY Times would have great stories if they did some forensic research and followed some of these houses through the system.
One of my favorite things to talk about is what I call the Real Estate Racketeering Heirarchy. I first discovered the Heirarchy in 2006. I was working with a pool of provessional real estate investors and we were trying to design our next profitable business model. Obviously, the market was going to crash, so we were trying to figure out a way to profit from it. Cash offers on short sales seemed like the most logical idea.
By the end of 2006 I had 30 bona fide and pending short sales on my desk with cash offers from our investment pool. All of the properties were unoccupied, all of the owners of record hadn't made one payment, and all of the properties were unmarketable to the general public because they were in disrepair. In short, the banks were simply gong to lose if they took these properties back and we were offering them a logical alternative that would save them time and expeses. After more phone calls and faxes than I could count, I think that 2 actually closed. What's funny is that all of these properties went to judicial auction (the last step in foreclosure before the bank takes ownership) with numbers purposely set rediculously high evn though the banks new what they were worth. A few months later, we started noticing some of them creeping back into the market at numbers about what we offered or lower. Some of the prices fluctuated a few hundred thousand or more within a few months - remember that they had all of the information and resources that they needed to determine fair market value. Either some of the realtors were sending kickbacks to the bank asset managers to get the listings, or the banks just didn't care because there was something else going on that we couldn't figure out. (Read: Bailout and Fed Guarantee)
First off, make no mistake, there's some very powerful people that are calling the shots here. The Racketeering Heirarchy is no joke and this story is just a small snapshot of what is going on. The example above is just on of more than I could even imagine and some of the large scale purchase package fraud is wayy worse. There's absolutely no regulation at any of these loan servicing companies responsible for the large losses like my story. Eventually, I'm guessing the banks are going to blame the loan servicers for losses and mismanagement of inventory much like B.P is blaming Transocean for the oil spill.
There is no contractual oversight, disclosure, or review to protect shareholders or institutional investors from these losses. It is literally impossible to figure out what is going on behind the scenes here because all of these comapnies work behind a cloak of secrecy. These servicing companies change their phone numbers often, re assign employees for no reason, change corporate headquarters, etc.
Basically, the entire Foreclosure game is rigged. The NY Times would have great stories if they did some forensic research and followed some of these houses through the system.
Recommend Recommended by 21 Readers
81.
HIGHLIGHT (what's this?)
I agree with almost all of the comments on the evil doings of the banks. But in dealing with large institutions over the years, I have also learned that one should not always attribute problems to sinister and nefarious dealings when they could more simply be explained by incompetence and stupidity. I believe that both explanations are at work here. We got a mortgage to buy and apartment through Wells Fargo a few years ago and a refinancing to a lower interest rate more recently. The piles of paperwork were unbelievable. The main problem was that we were getting forms and requests from 4 different Wells Fargo offices in different places in the U.S. They were working at cross-purposes and none of them seemed to know what the others were doing. So add administrative incompetence to evil - an unbeatable combination. (Unless, and here a little paranoia is healthy, the incompetence is a planned part of their operations.)
Recommend Recommended by 13 Readers
HIGHLIGHT (what's this?)
If these banks are so backlogged, why aren't they hiring some of the thousands of qualified unemployed to help them get caught up? They certainly can't say they can't afford to hire people!
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