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Incompetence, Misinformation, and Ignorance

Banks are incompetent as real estate sellers. The general public is largely misinformed about the current state of real estate.

Some media outlets report that the housing decline is due to a simple supply and demand problem.  The inventory levels of properties are high, so logically, as long as this remains, sale prices will remain low.  They report that foreclosure properties contribute to this decline, but that’s about it. 

We often hear that it’s the past practices of the banks that explain the meltdown.  There is some truth to that, as each year brings new mortgages that reset at interest rates that people will be no longer able to afford.  These bad mortgages will have to make their way through the system before their negative contributions will cease.

The banks that are selling foreclosure properties are disposing of their real estate in manners that defy logic, supply, and demand principles. The general public doesn’t know it’s happening, so they are misinformed.  The agents that are selling real estate for the banks don’t dare expose this because they are the only ones in real estate that are making any sort of money and will not risk the loss of their gravy train by biting the hand that feeds them.

I’m going to leave you with some data and a story that will hopefully begin the enlightenment, and speak to the seriousness of this problem.  Realtytrac has shared with us that in 2010:

  1.  When a property becomes a short sale, the average discount on the home’s sale is 15 percent.
  2. When a property becomes a foreclosure, and is owned by the bank that is now the seller, the average discount is 36 percent.
  3. In the State of Illinois, when a property becomes a foreclosure, and is owned by the bank that is now the seller, the average discount is 46 percent.   

When I look at the above data, I question the supply and demand theory.  Why would real estate decline so much when it becomes a foreclosure to be sold by the banks?  To me, the answer is simple: It is HOW the banks sell their properties. 

We know that the banks were ill prepared to handle the influx of bad mortgages, evidenced by the settlements that they have made with many states by mishandling foreclosure paperwork.  Why should we believe in a fairy tale that all is well and running smoothly in the 'never never land' of the bank’s REO departments that are tasked with selling these foreclosed properties?

In early 2011, there was a property in the Chicago area listed for $190,000, and the agent was negotiating an offer that had reached $170,000 before it was 'pulled' from normal inventory and sent to auction.   A few days later, the bank agreed to sell the property for $121,000.  At $170,000, that represents at 28 percent discount.  The buyer may have come up more, so the net could have been even higher.  So I ask the media and their real estate experts:  Is this an example of supply and demand driven real estate selling?

The sad fact of the above story is that this sale took place in a “cookie cutter” community, where there are only a few models of homes.  The untold and scary reality of this is that not only are the banks contributing to the housing crisis by having given bad mortgages to unqualified people, but they are now perpetuating the problem by incompetent business practices.  How banks sell their foreclosure properties is creating a new group of distressed homeowners. 

What do you think the probability is that the values in this subdivision have now decreased?  Has it now caused a homeowner to be underwater in their mortgage?  Has some ones home equity line of credit been canceled because there is no equity?  Has that homeowner had to cancel the plans for the new pool or play set in their backyard because their line of credit has gone away?  The implications of these business practices have far reaching implications beyond just the housing market.    

I’m sorry to report that unless the general public, share holders, the media, and our legislators begin to understand, act, and hold the banks accountable now for how they sell their foreclosures, this housing crisis continues into perpetuity. 

Chris Stovall May 28, 2011 at 06:21 PM
Thank you I get sick every time I hear some bankster or wall st scum bag say, "underwater homeowners were not affected by illegal foreclosures".. The only thing that will stop walk aways and further price declines are principle reductions. We keep bailing out fannie and freddie with my underwater tax dollars and fannie and freddie keep refusing to participate in any of the principle reduction programs available. Since they own 80% of all mortgages in this country their participation is going to be required. How is it that those two companies can even declare what programs they will or Will not participate in, they would be dead if not for my tax dollar bail out. Now there back to paying bonuses to there executives while the middle class just keeps getting sodomized.
Marc Bulandr May 29, 2011 at 04:53 AM
Thanks for your comments, Chris. Public awareness needs to be increased on this very important issue. The business practices of Fannie and Freddie, along with all banks, on how they sell their foreclosure is critically important.
Michael Kurowski May 29, 2011 at 12:15 PM
Marc, well done. As a broker I have a number of examples (on the buy and sell side) where the banks forewent approving a short sale because they couldn't hit a certain 'net' figure they supposedly needed. One most recent transaction, both buyer and seller made concessions to close a deal, but the bank wouldn't participate by giving up $1,000 on a $100,000+ sale. The property now has been abandoned by the seller, will go into disrepair and will most likely sell at auction for your above-mentioned discount of 46% affecting the entire neighborhood. In this case, a third-party administrator is managing and I only speculate a lack of communication with the lender/investors.
Liam Snell May 29, 2011 at 02:25 PM
The banks aren't crazy... We are!!! http://www.youtube.com/user/fiercefreeleancer
Marc Bulandr May 29, 2011 at 03:49 PM
Michael: Thanks for sharing your story. Your example, and countless numbers of others, are happening all the time. It's time that this information gets out. I'm not sure what school of economics these decision makers at the financial institutions are coming from. On the one hand, I can understand the concept of mitigating a loss. However, if "mitigating" the loss causes one of these banks other mortgages in the same neighborhood to go under water, and damages communities, it's penny wise and pound foolish.
Marc Bulandr May 29, 2011 at 03:55 PM
@Liam. Very interesting! I like that this Youtube story received $3M hits. I wonder why more media outlets report that the foreclosure mess stops when the mortgages were given out or sold, in this case, when the bank goes belly up. There is no doubt in my mind that when the business practices of these very financial institutions that are now real estate sellers comes out, it will be every bit the scandal that these previous issues have been. One of these stories needs to go viral...once it does, watch out!
Carol Best - Coldwell Banker Real Estate November 12, 2012 at 09:42 PM
Perhaps you'll recall that all the bankers wanted to receive carte blanche real estate licenses in the late 90's so they could listing and sell real estate. Since they had the money and the appraisers in their back pocket, I think they wanted control when they also held title via a mortgage. The National Association of Realtors stopped that initiative; however, in my opinion, they outfoxed everyone the way they handled out money for mortgages. Tell me again why the bankers aren't in jail? The homeowners have suffered 40% declining values and as Marc so well put it, it's a constant downward spiral at this rate.
Jordon Mathew November 30, 2012 at 04:35 AM
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