Sobering Stats
The recovery prospects for second-lien holders in residential foreclosures keep looking dicier.
At American Banker's request, Realtytrac Inc. surveyed more than 60% of first-quarter foreclosure activity across the country and found that 63% of the properties in the foreclosure process had a loan-to-value ratio of more than 120%. Of the properties in foreclosure with a loan-to-value ratio of more than 120%, 45.8% had more than one loan, the Irvine, Calif., data firm said.
Since simultaneously originated second-lien loans typically covered 15% to 20% of a property's sales price, the holders of many of these second liens stand to receive nothing in a foreclosure sale.
In better times a short sale would be a way for all parties to cut their losses. The stain on a borrower's credit from a short sale would last two to three years, versus five to seven years after a foreclosure. Lenders also stood to recover substantially more money if they agreed to let the borrower sell the home for less than the amount owed on the mortgage than if they foreclosed.
According to Realtytrac, properties that are sold while they are still in foreclosure are selling at around 13% below the price of properties not in foreclosure. But once a property goes through the foreclosure process and become bank-owned, the average sales price drops to 36% below that of properties not in foreclosure.
However, with the drop in home prices, the amount of money second-lien holders stand to recover in a short sale is shriveling, and it might make more sense to for the lender to just keep the loan alive for as long as possible.
That may be one explanation for the steep drop in short sales. In the fourth quarter, Realtytrac recorded 54,000 short sales of preforeclosure homes — down from 100,000 in a year earlier.
Short-Sale Science
At a
"The seller has no leverage, the seller has no equity. And on average in Southern California, short sales result in a loss of $200,000 per transaction to the investor," he said. "If you make them [the investor] accept the loss today, what are the odds that they're going to provide $6,500 for termite repair? Not very good." The audience laughed.
Seelenbinder said investors typically are looking to recoup as much of the original loan amount as possible, even in a short sale, which explains why many short-sale offers are rejected.
"If you get an offer of $380,000 and it's approved at $425,000, what they're saying is, '$425,000 is what it's going to take to settle this debt,' " he said.
"They don't care where the difference comes from. If the buyer doesn't want to come up with more than $380,000, that's fine; the seller has to come up with the difference."
Many agents have questioned why banks ask for a cash contribution or a promissory note from the seller in a short sale. Seelenbinder said that often a mortgage insurer will request the contribution because insurers pay a claim only when there is a loss, and they are trying to reduce their losses.
In a short sale, "you're essentially asking an insurance company to preapprove a claim," he said. "Most insurance companies don't like to preapprove a claim. So they will negotiate more aggressively on the short-sale side, because not only are they preapproving a claim, they're also preapproving a time line on when they have to pay that claim."
The luncheon was sponsored by the National Association of Hispanic Real Estate Professionals. George Kenner, a broker at Keller Williams Realty in San Diego, posted a
Beazer's a Buyer
In Phoenix, a city hit hard by foreclosures, lenders and loan servicers can now turn to an unlikely place to unload their repossessed homes: one of the nation's largest home builders.
Borrowing a marketing term from the automotive industry, Beazer Homes USA Inc. started a "preowned"-homes division during its fiscal second quarter, which ended March 31. It buys foreclosed and distressed homes at a discount to replacement cost, fixes them up and rents them out.
"We expect to appeal to a broader range of consumers, including those who have elected not to become homeowners at this time, as well as those who simply may not qualify for mortgage financing right now," Ian McCarthy, Beazer's president and chief executive, said Tuesday on a
Despite the benefit to bankers of having an institutional buyer in the market for seized homes, that Beazer is resorting to being a landlord is another reminder of how dire things are for housing generally.
When an analyst on the call asked why the Atlanta company was investing resources in an ancillary activity when its core home building business was suffering (Beazer posted a $55 million loss for the period), McCarthy replied: "The market is just not strong enough to give us the results that we want, the number of homes sold that gets us back to profitability."
