Repo’s now you see them, now you don’t!
Just like the famous magicians on the Las Vegas strip the major mortgage companies may not be making tigers disappear but they are making houses disappear, or at least manipulating what the buyer is seeing in the market place. It is impossible to tell how many homes are currently “Real Estate Owned” (R.E.O.’s or reposessed) by the mortgage companies and banks here in Las Vegas. Month after month we see huge numbers piling up the number of homes bought at foreclosure auction by the mortgage companies. These REO’s keep adding up every month minus those the banks are able to sell off (liquidate) from their inventories. What the average Buyer understands about REO’s and the reality may surprise you.
The first thing you have to understand about Foreclosures are the shear number have over whelmed the banks and mortgage companies. Foreclosures are not a PROFIT center and thus have not received the staffing to handle the massive influx. The staff’s are increasing but it is slow and is not keeping pace with the number of foreclosures.
The process of foreclosing is handled by a different department of the bank than the the homes that have been foreclosed on and are now REO’s. This means that once the home is auctioned at the County Sheriffs auction the home file must be transferred from the foreclosure department to the asset management department. These departments can be spread all over the country or may be in the same building.
Because of the way mortgage loans were packaged and then sold off as “Mortgage Backed Securities” the company that foreclosed on the home may not be the owner of the loan and thus may not be the owner of the home. The home may actually be owned by a retirement fund in Ireland or a multinational corporation. Most of these mortgages are not owned by the companies that foreclosed on them such as Countrywide, Wells Fargo, Indy Mac bank, etc..
So now we have a situation where the foreclosing entity must receive approval from the owners of the property to sell the property and receive an agreement for how much or how little it can sell the property for. There must also be an authorization or limited power of attorney for the foreclosure asset management company to sign in the owner (sellers) behalf. Further their must be an agreement as to commissions, property maintenance expenses, repairs, etc. with the owner-sellers. As you may expect this can take a while with owners spread all over the world and different corporate structures and requirements on asset sales. It is estimated that from the time a property is sold at the Sheriffs auction to the soonest it will be placed up for sale is 3 months but more frequently 6 months.
It is estimated that the cost of maintaining, selling, and interest costs of holding a home in inventory by the owner-seller-mortgage-holder is 1% per month of the assets value. It is further estimated by the mortgage industry that in most cases the mortgage-holder-seller-owner will receive in the range of 50% of the total investment back from the sale of the asset.
So we can now see why repossession are not immediately available for use to purchase and that by the time the mortgage-holder-seller-owner offers the home for sale they have an additional 3% to 6% in holding costs plus an additional 5% in real estate marketing costs when it is offered for sale. According to the Greater Las Vegas Association of Realtors the average time on market for a home to sell as of August 2008 was 119 days or 4 months.
So let’s take a look at the costs as the mortgage-holder-seller-owner sees them.
- Original asset loan plus lost interest and foreclosure costs +100%
- Loss due to foreclosure and interest costs -15%
- Loss due to market depreciation -30%
- Loss due to holding and marketing costs til offered for sale -15%
_________________________________________________________ - Balance on investment at sale if sold in the 1st 30 days +40%
There are other factors which may limit the mortgage-holder-seller-owners losses.
If the property had private mortgage insurance then the top 15% of the loss will be reimbursed to the mortgage-holder-seller-owner.
If the property was financed with a 20% second mortgage then when the home was sold at sheriffs auction this lein was wiped out giving the mortgage-holder-seller-owner a 20% edge against their total losses.
If the property had one mortgage that the balance was substantially lower than the value of the property. For instance the borrower had purchased the property before 2004 and/or borrowed less than the maximum allowable finance available at that time.
There are also factors that will increase the mortgage-holder-seller-owners losses.
If the person who defaults on the loan damages or strips the home before they exit. This can severely affect its value at sale.
H.O.A. or Home Owners Associations have the power to lien for not only unpaid monthly dues but also for violations of their rules. They very often have the power to hire the violation repaired and attach a lien to the property as well as fines and assessments. These can add up as most people when loosing their home quit paying their assessments, stop maintaining their property and can even vandalize the exterior causing the Home Owners Association to hire contractors to make repairs, levy fines, late fee’s and assessments on the property. These liens must be generally cleared by the mortgage-holder-seller-owner in order to pass clear title to the Buyer. BE CAREFUL that the mortgage-holder-seller-owner doesn’t transfer this liability to you in the “Purchase Agreement.”
If the property has a “Site Improvement District” SID and the yearly assessment as not been paid it may have gone to auction which means now that not just the yearly amount, interest (1% per month) and penalties must be paid, but the entire balance must be paid in full to clear the title.
If the property has past due property taxes and has been sold at tax sale then the property must be redeemed within the redemption period and all taxes, interest and penalties must be paid for clear title.
Other amounts that may be attached to the property may be garbage collection, sewer and water fee’s including interest and penalties.
The mortgage-holder-seller-owner usually uses and Asset Management Company to sell/dispose of its asset. This Asset Management Company may be the asset management departments of Countrywide, Indy Mac, Wells Fargo, Bank of America or it could be a specific independent company such as American Home Mortgage Services, etc.. To the asset management company the sale of a home is just an accounting decision as they keep track of all the variables on the cost side and also evaluate the value of the property on the open market through the use of real estate agents “Broker Price Opinions” B.P.O.’s and/or appraisals.
Because the mortgage-holder-seller-owner may have huge asset portfolios it may not be very fast for the asset management companies to pipeline the new R.E.O.’s that come through their system. Slowing the stream of new REO inventory being offered for sale.
The asset management companies are hired to obtain the most money from the homes that they can. So if they flood the market with homes then the price of home go down. If they limit the number of homes for sale in the market and thus a higher percentage are selling they can manipulate the perceived value of the homes and yield a higher price per unit. It’s the old saying that if their is limited bread on the shelf then the price of bread is expensive but if their is a lot of bread on the shelf the price of bread is cheap. Supply/ demand can be manipulated by not putting all the inventory available on the market.
If you have a home that isn’t selling rather than leaving it on the market and adding additional new inventory you can allow the listing to expire and and new inventory to the market that will sell. Thus holding down the number of REO’s for sale at one time while liquidating the inventory that will sell. As the number of successful sales go up using this method then it appears that sales are rising in relation to inventory creating the impression of a bottoming out in the general real estate market. It also helps create the impression the R.E.O.’s are selling quickly and thus attracting more and more Buyers into the market. If the plan works well then the additional number of Buyers will allow for additional inventory to be released to sell furthering the liquidation of more inventory without realizing additional drops in average sales price. We have seen an example of this strategy for years in the diamond business world wide. The mortgage business is world wide as well now and is primarily controlled by a small group of companies.
The media has made recent declarations that sales are up in Las Vegas and the REO’s are hot and that Buyers and investors are back in the market. What are some of the important factors in this up surge in sales besides limiting inventory? A very important factor is that with recent mortgage legislation the Federal Government is outlawing Nehemiah after October 1, 2008. The Seller will no longer be able to contribute to the Buyers Down payment and closing costs under the FHA loan program. And with the conventional mortgage money being severely restrained right now FHA is about the only finance program that is currently working well for Buyers. This means that their have been a flood on FHA Nehemiah Buyers trying to purchase a home before the program is shut down. In the statistics through September 2008 you will continue to see the number of units sold shoot up but the overall price continue to descend as these fist time home buyers close on their Nehemiah loans. But what will happen in October, November, December and from there on? October will have reasonable numbers of Buyer lured by the previous months sales believing that the market has bottomed out but come late November after the October sales statistics are published we will see a decrease in unit sales in-spite of our normal fall sales increases.
“21,400 R.E.O.’s in Las Vegas
With Only 9,169 for Sale!”
You may be wondering where all these houses are that are not for sale? Pretty much all you have to do is take a walk in almost any neighborhood in the Las Vegas Valley. You won’t see a real estate sign because they are not listed. Look for un-kept yards, dead grass and vacant homes. Generally you will see a piece of paper taped in the window or on the front door. Las Vegas City, Clark County, Henderson and above all North Las Vegas City have been up in arms about what to do with all these vacant homes and the blight that they are creating in our neighborhoods. The Clark County Health District is over run with stagnant pools and the breeding mosquitoes that result.
If your still not convinced that inventory is being held off the market. Please take a look at RealtyTrac.com and go to Search Results for Clark County. RealtyTrac reports that there are 21,400 Bank-Owned properties in Clark County. The GLVAR shows as of 09/08/2008 there are 9,169 REO homes for sale. My question is where are the 12,300 that are currently not listed for sale? This last month the Fed’s declared that we are now half way through the sub-prime foreclosure crisis. That means that in the next 3 to 6 months we will see the first half of the inventory to have made it to sale. We will no longer have Nehemiah to help sell it, the conventional mortgage market will still be severely restricted as to money available as well as loan qualification requirements. And we currently have only about 42% of the available inventory of R.E.O. homes on the market with many more to come.
Hopefully the mortgage companies will take advantage of the new government programs that will help them and the home-owners refinance with FHA at 90% loan to value under the new rescue program. This will require them to charge off some of their debt but allow them to recover from what otherwise would be another repossession. It remains to be seen just how much this new program will curb sub-prime loan repossessions.
But what hasn’t been talked about very much in the media is what is currently headed down the tracks which is the next wave of foreclosures. One of the most popular loans for buyers with good credit from 2004 through 2006 was the product known as “Alt ‘A’ loans.” These loans allowed the buyer at their option to make one of 3 different kinds of payments at any time: 1) A full principle and interest payment. 2) An interest only payment. 3) A less than full interest payment with the balance of the interest to be added back to the principle each month. Tens of thousands of Buyers went out under this new program and bought more house than they could afford under the stated income program. They have been paying less than the interest payments adding to the principle each month. The mortgage industry is seeing the maximums on these mortgages to start maxing out in Feb. 2009. This means the loan payment will reset requiring a full interest and principle payment be made from then on. This will drive a whole new batch of generally higher priced homes into foreclosure along with the previously home owners with good credit. This could be just as devastating as the sub-prime default wave. The only hope may be the lenders willingness to renegotiate these loans buy partial right off of the balances and asset value and have them insured where possible under the new government rescue program. This will not save all from foreclosure but anything would help.
So there you have the amazing magical diversion created by the master magicians of the mortgage world who know how to make thousands of houses disapear (well sort of) from right before your eyes! The ultimate illusion in Las Vegas real estate.
Not all is bad news in my next article. Find out about the amazing non-disappearing jobs in Las Vegas! And what the future of employment is that will dry up the excess homes we have here.
Don’t forget to check out this months latest market statistics and comments on my website www.MaxSellsVegas.com
For the Latest in Las Vegas real estate call Max at 702-334-2200. Or email me at:Max@MaxSellsVegas. com. Your comments and questions are welcome.
Tags: buying repo's, Las Vegas foreclosure sales, Las Vegas Foreclosures, Las Vegas home reposessions, Las Vegas REO's