Archive for the 'Auctions' Category

Date: July 21st, 2008, Filed under Auctions, Foreclosure, Refinance, bailout, short sales

Chicago, IL
By A.B. Dada
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On numerous housing bubble forums and blogs, I’ve noticed some people are recommending a tactic that may help stave off foreclosures while attempting to bring the market back to more realistic prices: the idea that the bank should re-appraise the property, and modify the loan downwards to the new market value. This would be the equivalent of a short-sale from the current owner to the current owner, with the bank eating the loss.

There are many reasons why this is a terrible idea, but parts of it do have merit. First of all, it would be difficult to keep EVERY homeowner who is underwater from asking for a reappraisal and a lowering of their principal owed. Banks would be overwhelmed, and finding the current true market value of a home is impossible except in a sale situation. Appraisers were, en masse, one of the cause of the bubble by their poor appraising and bad use of discretion in looking at housing value, not just prices.

One option that might work is the idea of a short sale auction with a preapproval amount for the current underwater homeowner. I’d say it would be important to limit these short sale auctions to homeowners who are already 90 days late on their mortgage, but have the income necessary to pay some sort of mortgage. Why 90 days late? It would keep homeowners who can afford their mortgage payment, but don’t want to, from taking advantage of a rewriting of the terms of the loan. 90 days late gives a homeowner a terrible hit on their FICO score, so those with clean reports will likely not run into default just to try to get a lower monthly payment.

The first step would be to verify what the homeowner really can afford, taking into account a fixed rate mortgage, outstanding debt elsewhere, and their income levels. Once a realistic figure, no more than 3X their annual income, is decided upon, the bank can then offer the homeowner a price that they can keep their home for. Let’s say that a homeowner who is underwater with a terrible loan package makes $50,000 per year, but their mortgage was based on a $250,000 home (5x income). The bank, after looking over every aspect of their debt and income, sets the new recalculation value at $150,000 maximum.

Then the home goes to auction. The current homeowner is allowed to bid up to $150,000 on their own home, preapproved for a mortgage rewriting. If anyone else bids over $150,000, the homeowner loses their home, and the bank makes a short sale. If no one else does, the homeowner keeps their home, gets a new mortgage, and the bank takes a loss.

I don’t like this option, but it is a possibility because it is no different than any other short sale or auction, it just allows the chance that the current homedebtor can stay in their house, saving the bank significant money in rehabilitation or tax liens or other costs.

Comments: none

Date: September 25th, 2007, Filed under Auctions, Foreclosure

Orlando, FL
By A.B. Dada
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I left for Tampa, Florida on Saturday, September 22, 2007 to take part in an auction in Orlando. The auction was held by Fisher Auctions, who has done numerous housing market auctions in the past.

My father has been eyeballing a condo in Fort Lauderdale for about 8 months now. He’s visited twice, and has made multiple offers, against my recommendations. The condo was listed for around $249,900 going back to early spring. Based on its market price in 1997, plus inflation, I told him the condo was likely worth no more than $125,000 (50% haircut!) because of the pending condos being brought to the market. He’s wanting something without a major stair climb, within a mile or less of the ocean, and in a preferably decent community. He’s retired, and would use it only 2 months out of the year, so price is not as much a consideration as usefulness. Of course he didn’t want to take a haircut, but 8 months ago everyone was piping “Housing always goes up!”

In early spring, he made an offer to the bank (it was an REO) for around $210,000. It was rejected. In summer, he made another offer after the price dropped 5-10% of $200,000. That offer was rejected. 30 days ago, he offered $180,000 (asking price now at $194k) and the real estate broker said the bank would likely accept that offer if he closed immediately. Since he lives primarily in Europe, a quick close was impossible, so the broker said no to that offer. This particular condo was to be auctioned at the very auction I attended, with a “last asking price” of $193,900.

The condo came up quick, and the bidding was quick but quiet, with a final bid of $135,000. No one bid higher. This is close to my market price, but doesn’t include the 10% buyer’s premium which means the bank (Fannie Mae) would get $135,000, but the auction house gets another $13,500 for providing for the auction. I’m 80% certain that Fannie Mae will deny this deal, because it would mean marking-to-market many other condos they’re sitting on in the area.

I stayed for about the first 50 auction listings, and I entered in every final asking price versus what the auction received in a final high bid. The average haircut was 30% off the final asking price, which may be more than 40-50% off of the initial asking price, based on discounts. Only one unit, the initial one, sold for the asking price (an error on the bidder, likely).

The offerings were all over the place, from asking prices of $80,000 up to $500,000. All of them stopped at around 30%, with a significant number stopping at 40% off. This is a HUGELY important matter, since there are still tens of thousands of REO (bank owned) properties that are sitting with ridiculous asking prices, while new homes and condos hit the market monthly. For Fort Lauderdale, a 50% haircut from peak in 2005 is not just realistic, but maybe not enough. I still think many parts of south Florida will bottom at a 60% chop from the peak. Ouch. This will leave millions of homedebtors upside down if they refinanced with a cash out, or swallowed up a good portion of their equity via a HELOC.

I’ll be attending another auction in Rosemont, Illinois, my old home town, in October, to see how the Chicago market does with 200+ properties for fire sale.

Note that Fannie Mae removed “absolute” auctions from the auction I attended. In an absolute auction, a property sells for the high bid, regardless of what the seller wants to get for it. Fannie Mae is in a position of having to mark-to-market tens of thousands (or even more) REOs it is sitting on, which could reduce its portfolio by billions in value if it was required to sell-off by banking regulators.

I spoke with an anonymous (by request) ex-regulator who told me that they sold of $40 billion of homes and condos in the 90s housing crash. They said this time around could be much worse, once regulators force banks and Fannie Mae to set the books correctly.

Comments: 4