Why are Banks Setting the Opening Auction Bid Below The Principal Balance?

[Pale Blue Dot]

I attended a foreclosure auction in Bellevue, WA last week to discover if the rumor was true that banks are opening their bids below the amount owed. I received confirmation from three professional investors that yes, the banks have been doing that, it’s no secret, and there seems to be no discernable pattern. It’s not one particular bank or lender, it’s not particular types of property or in any specific area. It appears to be random.

...

Banks and lenders have duties to their shareholders and investors to maximize profits and miminize losses (well, at least they use to.) If opening bids are set LOWER than what’s owed, perhaps the banks have already tallied their losses, realized that if they had to take back the house, get it cleaned out and cleaned up for resale, pay a real estate agent their commission to sell it, pay for title, escrow, excise tax, utilities, and any other carrying costs, they might as well sell it at a discount at auction. But maybe there are other reasons. I wondered if the banks were trying to keep more REO inventory off the market in an attempt to prop up home values for their existing REO inventory. Maybe appraisers can ignore trustee sale prices in their reports. Not knowing the answer, I emailed three appraisers for help and here’s what I learned: Appraisers need to mention trustee sales in the neighborhood if these trustee sales make up a significant percentage of available comps because they are legitimate sales even though title is transferred using a trustee deed instead of a warranty deed. If an appraiser choses to ignore these, he/she will run the risk of having the appraisal run through an “enhanced review” process in order to catch trustee sale market activity. If a trustee sale is a significant comparable sale, it can be used. The requirement to use closely comparable trustee sales as comps can also vary based on the requirement of the lender and investor. It may not be absolutely required but it may be in the appraisers best interest to mention trustee sales. Thanks to Jonathan Miller, Shane Leady and Richard Hagar for teaching me something new today.

That still doesn’t explain the phenomenon of banks undercutting their own principal balances at the auction. My theory is that banks are relying on third party information such as a mini appraisal or Broker Price Opinion (BPO) prior to auction. If the BPO suggests that the outstanding principal balance is so high and out of range as to likely attract no bidders at auction, then the banks have nothing to lose by setting the opening bid closer to or significantly lower than the principal balance owed. If no one bids at auction, they’re still only out the money they would have been out anyways and on the upside, if the low opening bid attracts investors, then perhaps the bidding will rise closer to the payoff. If not, they have an immediate loss that could be significantly LESS than losses that would add up over time, having to carry the REO on its books for months of marketing time in addition to the other costs mentioned above.

If banks are undercutting their own payoffs, then why isn’t this phenomenon more widely publicized? Okay, so we know that bidding on a home at a trustee sale is too frightening for most first time homebuyers but still, if more people know about this, then maybe there would be more folks showing up at the trustee sales and bidding those homes UP, thereby reducing the banks losses. There certainly is NO shortage of tall, well-groomed, good looking, muscular investor gurus in shorts showing off tanned legs, even though it was only 63 degrees outside hanging out at foreclosure auctions with all kinds of downpayment solutions to offer newby real estate investors: ”We have zero down financing available for the right investor!” and “We have private hard money financing available for your purchase and you can refinance out of that loan in 30 days….My mortgage broker is right here, let me introduce you to her.”

http://www.raincityguide.com/2009/05/01/why-are-banks-setting-the-opening-auction-bid-below-the-principal-balance/

[wroberts189]

1. I just do not understand why banks will not renegotiate their loans.

lower the interest ..extend the loan... keep community values high


They would make out better in the end.

No common sense in these bankers... inbreds


knr

[AwakeAtLast]

4. A bunch of Mr. Potters. n/t

[BlooInBloo]

2. I asked that earlier...

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=5582604&mesg_id=5582827

In particular, why can't they allow re-negotiated mortgages (aka cramdown), if they're just gonna sell them at a loss anyway?

Only thing I could even speculate on was that maybe there's fine print in foreclosure law that says something like: if the bank sells a foreclosed home at a loss (compared to the original sale), then the original borrower is still on the hook for the difference.

That's pure speculation, though.

[AnneD]

19. I think one of the reasons they may not negotiate is that....

they have insurance on the losses. If the folks have to default-insurance covers the loss. Since it is written off-they can then sell for less than the loan and still make a profit....or something like that.

[grasswire]

3. that last comment is stunning

"The answer for me is extremely simple…INSURANCE! I am in the middle of doing a shortsale with my servicer and asked “since my home was valued at over $1million when I refinanced in April 07 and now you have already approved my buyer’s short sale for $640,000, then why would you not just drop the principle to the current valuation since I’ve been in the property for over 11 years and would prefer to have a loan modification?”
ANSWER: “…I don’t think I’m supposed to say this, but we are covered by insurance and if we foreclose or do a short sale, then we will be reimbursed for the total amount of the loan…” i.e., that’s why the banks did NOT want the cram down legislation!!
Amazing isn’t it. Now we know why the banks aren’t lowering anything but the interest payments. They could, of course, keep the current loan principle, do the loan modification for a fixed 40-45 year term, and make a profit, and still keep the current buyer in the property.
Anyway, just my opinion. In the meantime, although I’m in the process of the short sale, I plan on turning it down and plan on filing suit re Tila and Respa violations. After doing an audit, we have found that just one of the things my lender did was to overcharge me $311K over the term of the loan. I will also be pursuing “where’s the note” theory here in California.
Good luck to anyone else out there having similar problems.
kensingtont
[e-mail]"

[glitch]

5. This should be wider known. nt

[DemReadingDU]

7. I recently had just read this about being covered by insurance

sounds like another scam

[many a good man]

8. Insured by whom? AIG?

[xiamiam]

10. YELL THIS FROM THE ROOFTOPS...this has been my suspicion..or something like this..who insures these

loans...AIG?....

[Control-Z]

12. What is

“where’s the note” theory? Can you explain?

[struggle4progress]

13. ‘Produce the note’ trick stalls foreclosures

Updated: 10:27 a.m. February 24, 2009
‘Produce the note’ trick stalls foreclosures
Homeowners’ simple request forces banks to prove they have mortgage paperwork
By MITCH STACY
Associated Press Writer
Tuesday, February 24, 2009

ZEPHYRHILLS, Fla. — Kathy Lovelace lost her job and was about to lose her house, too. But then she made a seemingly simple request of the bank: Show me the original mortgage paperwork.

And just like that, the foreclosure proceedings came to a standstill ...

During the real estate frenzy of the past decade, mortgages were sold and resold, bundled into securities and peddled to investors. In many cases, the original note signed by the homeowner was lost, stored away in a distant warehouse or destroyed.

Persuading a judge to compel production of hard-to-find or nonexistent documents can, at the very least, delay foreclosure, buying the homeowner some time and turning up the pressure on the lender to renegotiate the mortgage ... http://www.ajc.com/business/content/business/stories/2009/02/24/produce_the_note_foreclosure.html

[mistertrickster]

14. Keep us posted. If you've been paying on your loan for 11 years, it's insane that

the banks wouldn't work with you.

[Schema Thing]

6. If the auctions are not "absolute", it may make sense to start

the bidding at a lower price. Doing so can be part of an effective strategy to get the most money for an item at auction.



But I suspect what is going on is as you described in your third paragraph.

[unblock]

9. auction start prices ought to be based on market value, not principal outstanding.

appraisals and comparables matter more. if a house will reasonably fetch $200,000, then what does it matter if the bank is owed $250,000? why on earth should the bank start the auction at a price far above market value? no one would bid, and the auction would be pointless. on the other hand, if they guss too low, chances are good that buyers will bid it up to something close to market value. at least, that's the whole idea behind an auction.

the principal outstaning was based on a market value and lending standards from a different time, in a different market. it has nothing to do with today's market value.

[sendero]

11. Exactly..

... what is the point of asking more than the current value? It's a waste of time.

[mistertrickster]

15. It seems to me that the bank should offer the house for the appraised value of the house

MINUS what they've already been paid on it.

That is, if somebody has been living there for 4-5 years making payments, the bank doesn't need to get ALL of its money back--it already got the 4-5 years of payments back.

[Hannah Bell]

16. This deserves a wider audience.

[pokercat999]

17. It seems to me what most people miss in this equation is

FUTURE VALUE. While it's true that housing prices will not decline forever, just like they couldn't climb forever during the bubble, the prices in most professionals estimation (that I've read) will go down for the next 12-24 months. If I buy today and lose 10%-40% over the next year or two how long will it take to recover that loss? If I'm buying to live in the house forever it might not matter so much; but I've already bought that house, six years ago. Now my wife and I are both unemployed with no income and this will be the first month we miss our mortgage payment. The house is about $70k upside down on the loan and worth about $162K less than it was at the top of the market. The sad part for us is during the last six years we have paid thousands extra into our mortgage in an effort to get it paid off before retirement, now just wasted money we could use.



edited for spelling

[xiamiam]

18. while this is no comfort, i know...you are not alone..when is somebody going to do something !!!..nt