Distressed Whole Mortgage Loans & Real Estate
Every day across the nation investors purchase properties that go to courthouse foreclosure sales — trustee sale. Sadly, due to lack of third-party interest — mostly related to the opaqueness of the foreclosure market and process — most properties are taken back as REO by the bank/servicer. In CA over the past several months over 90% of foreclosed properties went back as REO.
Those that are taken back as REO get listed with a real estate agent and resold some day at some price point. Tracking the public market resales of foreclosed properties and backing into distressed valuations is a bad gauge of the actual value of the assets for a variety of reasons.
However, those that do sell to private party investors at the courthouse steps provide a valuable near real-time look at what price professional investors are presently paying for distressed real estate assets.
Because the database tracks all elements of each foreclosure we can drill down and extract near real-time market values for distressed real estate and mortgage notes recently acquired by professional investors at every courthouse auction. If you are a bank analyst — translated another way, this report can provide a near real-time look at loss severities provided the bank still owns the note. But even over a wide body of a specific bank’s originations it will provide a very close indication.
The chart below shows the aggregate monthly discount to the present amount-owed on residential mortgage notes/properties taken to foreclosure sale in CA. Essentially, this is the note discount level it took to attract third-party investors/buyers through the courthouse foreclosure process.
Higher on the chart are more of the Subprime lenders with 100% loans on lower-end properties coming through. In the mid to lower range are more of the 80% original loan-to-value deals. Either way, in March the note discount it took to attract investors when factoring in 80% loans was in the 60%’s, or 30-40 cents on the original note amount. BUT…
If one wanted to extend these findings out to distressed residential mortgage notes somewhere still in the foreclosure process — time to foreclose, property rehab, time/cost to resell, carrying costs and profits would have to be additionally discounted from here. Remember, the percentage discount to the amount owed on the notes at which sales occurred as displayed in this chart resulted in the investor taking the property at that point. Therefore, displayed here is best case scenario.
**Note — this report is pulled by servicer not originating lender. We can pull by originator in order to drill down on a specific bank’s origination universe if necessary.
**For more information in our default/foreclosure related research including real-time mortgage default, foreclosure and loss tracking across large-named publicly traded companies please email me at the address below. Looking ahead of the housing and mortgage market and into bank’s residential mortgage portfolios and balance sheets is now much clearer.
Best Regards,
Mark Hanson
Mark@TheFieldCheckGroup.com
Analysis by Mark Hanson, Field Check Group Real Estate & Finance
Data provided by ForeclosureRadar.com
April 15th, 2009 at 6:36 am
OMG! That’s just ugly. I don’t think these figures are factored in the “bottom” calling I’ve been hearing on CNBC.
April 15th, 2009 at 7:08 am
This is during moritoria and 80,000 shadow inventory in CA and current foreclosure spigot about to reopen? With a tilt in the supply/demand equation the banks might be abandoning some CA properties just like the $8K homes in Detroit.
April 15th, 2009 at 7:43 am
These note losses come after any homeowner equity, so , for example,if the note loss was 50% that means the home sold at a loss of 60%. I can’t believe these are the prices during moritoria – unless there is a comparable buyers moritoria with 80,000 shadow buyers holding back. The banks could cause a price implosion -what would that mean for abandonment and jingle mail?
April 15th, 2009 at 9:08 am
The banks have a HUGE case of prisoners dilemma. If they play smart, they coordinate in holding back from flooding the market with REOs. But a few of them will just want/need to liquidate, fast. Which will cause the others to reconsider their otherwise prudent strategy. Sell now for a loss, or hold and risk further losses?
So, do we see a controlled release of REOs? Or a race for the exits?
April 15th, 2009 at 9:37 am
The big banks didn’t get into this mess by thinking independently, it’ll be a jailbreak!
April 15th, 2009 at 11:26 am
It looks like the perfect storm on the horizon, a bank run of sorts. If this creeps up the market(an it already is, currently trying to sell my house in NC) where conventional, good standing loans are almost par, it will just snowball into our worst nightmare…my question is how does inflation play into this? Everyone says that inflation will go nuts in 2-3 years how does this play out in a distressed housing market, to me it sounds like the only way out for some, or abandonment? Thoughts…
April 15th, 2009 at 2:33 pm
Anybody having problems viewing today’s blog with Internet Explorer?
Having problems with IE7, but works on Firefox.
April 15th, 2009 at 5:10 pm
I see that on IE Jae – will try to fix.
April 15th, 2009 at 7:28 pm
Mr. Mortgage,
congrats on your shout-out in today’s WSJ. You’re leading the leading press.
http://online.wsj.com/article/SB123975395670518941.html
April 15th, 2009 at 10:52 pm
So the note holder is selling on the court house steps for 50% to 70% off the note’s stated amount? And it looks like 10% of all foreclosures sell on the court house steps. 90% go back to the lender and then they decide how to sell them at that stage…list on MLS, sell bulk , etc….?
April 16th, 2009 at 7:25 am
Wow. This is going to get ugly.
April 16th, 2009 at 9:24 am
It should be pointed out that third party bids at trustee sales (foreclosure sales) will tend to be on the low side because of uncertainty. For example, the foreclosed homeowner often has a right of redemption that extends for some period of time, say 90 days, in which he can reverse the sale by paying arrears. This means the buyer has to carry the property for that time until he is certain his purchase is good. Typically lenders acquire the property at the foreclosure sale by bidding in the amount of their loan balance, regardless of actual property value, so third party purchases will typically be of properties with low remaining mortgage debt. Otherwise, there would be no bargain purchase.
April 16th, 2009 at 10:11 am
I’ve heard, from Ward Hannigan, that mortgage holders are lowering their asking bids significantly on the day of the auction at the court house steps. Hard to get data on this as it’s such a small and closed group that does this.
April 16th, 2009 at 2:07 pm
What I just can’t understand is, who the hell is running up the bank/financials stocks when information like this is readily available? These quarterly earnings numbers they’re coming up with are completely bogus, everyone should be able to see right through it, yet over the past month C, BAC, etc. are up 300%. Unbelievable. I simply can’t see that continuing for much longer, but what gives?
The banks will have to account for the losses/shadow inventory/delayed foreclosures at some point, especially with the enormous numbers of jumbo loans (that simply will not be covered by any stimulus package/bailout due to size of the loan, % underwater, etc.) that are going bad now – the losses on those will probably average in the hundreds of thousands of dollars for each loan!
And Mark, you called it – all the media, including the local news channels, were reporting this morning on the huge foreclosure spike – I was quite stunned it was “only” a 29% increase. I’m sure that’s just the beginning.
April 16th, 2009 at 3:47 pm
Regarding inflation: when it takes off (it will) and the government does NOT depress interest rates, then as interest rates increase, to create a real return after inflation for the lender, housing prices will likely decline further to offset the higher mortgage payments due to the higher interest rates. If prices do not decline, even fewer sales will result (assuming wages do not keep pace with inflation). If the government keeps interest rates artifically low allowing lenders to borrow from the Fed Discount Window at low rates, then hyper-inflation will likely result and housing prices will increase and long term fixed rate mortgages will disappear, unless Fanny and Freddie agree to buy fixed rate mortgages with interest rates less than the inflation rate. Unfortunately, there are other possible scenarios which depend upon what the Fed does with their discount window and whether the Fed continues to artificially prop up Treasury bond prices through its purchases and thereby depressing interest rates. Lastly, Congress, the President and Geithner could come up with some other mis-guided scheme and send prices and interest rates in some illogical direction. In other words, nobody can really ever know. Thus the future uncertainty of it all is exasperating the problem we face today.
April 17th, 2009 at 12:46 am
@11, Bill Modahl:
No, there is no statutory right of redemption in California after the foreclosure sale when the sale was done through a deed of trust and there is no deficiency judgment allowed, which is how virtually all foreclosure sales are conducted in this state. No chance to reverse the sale by redeeming.
There is equity of redemption in CA where the borrower can redeem by paying the arrears during the 90 days after the NOD was recorded. But that’s prior to the foreclosure sale, not after.
April 17th, 2009 at 4:24 am
Bill – you are correct but I qualified that in the report. You must also realize though that by the time the servicer takes it back — sometimes trashed, gets a low ball BPO from a realtor, and perhaps waits months to sell, the values may also come. So the numbers quoted there from original loan amount are likely very close to the final loss severity when sold. I have the same chart by current value vs amount owed as well. That is very interesting — I will post it sometime.
April 17th, 2009 at 8:43 am
Mark -
Good to see you back. Nice site too – clean & easy to follow. Glad to see Jim Willie referencing you as well – he’s got the inside dope much the same way that you do.
-C.C.
April 17th, 2009 at 9:00 am
MM, nice look on MSM. kudlow could use some “schooling”. But I guess the roll of Cheerleader pays well.
April 17th, 2009 at 10:18 am
@ 16 Mr mortgage
I have seen this very thing. For proof of anyone that lives in the Fairfield, CA area look at listing:
20907960
Just drive by the house and see the difference in the yard. (I thought banks were required to maintain them?). Not to mention the original tenants shattered the tile on the kitchen counters, took all the applianches, broke all cabinetry in every room, poked about 200 – 300 holes in the walls with the rod from the closet. Shattered the fireplace glass, and wrote some nice words on the walls with a can of spray paint.
It’s listed at 240k and I expect in its condition to sell for around 150k to a flipper..
April 17th, 2009 at 11:09 am
Ben K
694 Wildwood Ct Fairfield, CA 94534
bought 2004 $425,000
down payment 110K
refinanced 450 2005
downpayment returned to her plus 25K
Line of credit 85K 2006
Has bilked the home for 105K
She still owns it so its a short sale!
She did all that and didn’t pay taxes on the 105K income, she got a tax write off.
Nightmare on Wildwood Ct
April 17th, 2009 at 4:19 pm
Glad to find your blog before making a mistake.
Have made a few offers on investment rentals in Bakersfield only to be overbid each time.
Right now inventory is low in the better neighborhoods.
Realtor says “we hit bottom a few months back, now cash investors out in force and prices are going up”
After what I have read here it looks like late summer to fall will be a better time to buy.
April 17th, 2009 at 9:45 pm
Thanks Mr Mortgage. You provide real value for free, and I suspect even more value for those who are willing to pay.
April 20th, 2009 at 7:16 am
One thing to keep in mind is that buying a home at the courthouse steps in CA is a cash business (cashier’s checks actually, buyers show up with checks in multiple denominations). It is akin to the wholesale auto market where dealers buy at auction and then sell them at retail with financing.
I know a few people pursuing trustee auctions. It can be a “flippers” paradise, assuming you have the capital and know what you are doing.
April 24th, 2009 at 10:00 am
I can see this coming. There are other areas around the country where it’s already happened – apart from Michigan. I started buying in a particular neighborhood in another State (I live in CA) in December. I now have 3 SFR and 2 duplexes and purchase and fix up were about 80K and have about 4k rental income per month. But others have caught on and the low-priced supply is now gone. These were all cash sales, of course.
My point is that the banks were all trying to get rid of their inventory and just threw it on the market. So there were a few months when each one was trying to outdo the others and the prices got lower and lower to 5-10k per unit.
May 16th, 2009 at 7:50 am
I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Keep up the good work. Look forward to reading more from you in the future.
May 20th, 2009 at 4:27 pm
I don’t see Litton in very many of your charts. Are they that far off the leader board in terms of size?
January 23rd, 2010 at 5:19 pm
I love your site. I look forward to reading more of your posts. Thank you!
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