Aziz Hafid, an engineer with Siemens in Northern Virginia, had been trying since January to purchase one of several foreclosed homes he’s signed contracts for. More than once, he’s gotten the runaround, he says, from agents representing banks that own those real-estate owned (REO) properties or from the banks themselves: unanswered phone calls, glacial responses to letters and other documents, and a bewildering lack of urgency to close the deal. “They are playing games with us,” says Hafid about the banks and their functionaries.
Hafid is one of many buyers, sellers, and brokers who find themselves caught in the sputtering machinery of foreclosure and short-sale transactions. They hope the federal government’s intervention into the credit markets can help grease the bureaucratic wheels. If it doesn’t, builders could face competition from millions of unsold and foreclosed existing homes for much longer than they expected to.
One would think that the last thing a bank would want would be to hinder a foreclosure resale. The FDIC estimates that foreclosure-related costs equal at least 40 percent of a property’s value. Banks’ carrying costs on REOs run 1 percent to 1.5 percent per month. And several cities, including Boston and San Jose, Calif., require mortgage servicers to maintain foreclosed homes until they are resold.
Yet, homeowners, brokers, and even builders say banks sometimes seem to be doing everything in their power to forestall the sale of submerged property. “Our clients are encountering roadblocks and, in some cases, barricades,” says Ronald Phipps, a broker with Phipps Realty in Warwick, R.I., who testified before Congress in September about foreclosure mitigation. Phipps came away from that hearing with the impression that lenders “would rather have a non-revenue–providing asset on their books than a charge-off.”
Phipps’ comments wouldn’t surprise homeowners who have tried to avoid foreclosure through loan modifications only to meet with resistance from lenders. Mortgage servicers’ willingness to modify loans in general has been “erratic,” according to Alan White, an assistant law professor at Valparaiso University in Valparaiso, Ind. He told lawmakers at the hearing that of the 105,000 mortgages he had examined, 4,300 were modified between July 2007 and July 2008. “Some [servicers] modified 50 percent of their loans; others, zero,” he tells Builder.
Theories abound—and not all of them benign—about banks’ apparent reluctance to modify or resell certain mortgages. One plausible explanation, though, is that the volume of bad loans has swamped the banking system. “The model for subprime lending was based on delinquencies not getting higher than 5 percent, but some pools are 50 percent delinquent,” notes White. The FDIC estimates 4.5 percent of all mortgages and 27 percent of all subprime adjustable-rate loans were “seriously delinquent” as of June. Phipps says that 24 percent of Rhode Island’s single-family homes were REOs in August.
It hasn’t helped that lenders have reduced their staffs dramatically, so finding someone knowledgeable to talk to is a challenge. “I used to deal with a good kid at Deutsche Bank, which is notoriously difficult to work with, but he got fired,” says Dan Mulligan, a partner with the San Francisco law firm Jenkins, Mulligan, and Gabriel, which specializes in consumer litigation against banks.
The securitization of home mortgages has clogged the resale process too. As mortgages were sliced, diced, and repackaged for sale to investors, the paper trail for the promissory notes on those loans often got lost in the shuffle. Retrieving those notes can be arduous, says Melissa Huelsman, a Seattle-based attorney. One of her clients spent nearly a year in lawsuits to extricate herself from two mortgages and exorbitant fees, during which one servicer “didn’t even know who the owner of the loan was,” recalls Huelsman.
Lenders’ rigidity seems to be playing a role in all of this. White observes that banks have consistently refused to reduce the principal of loans he’s looked at. Other sources point to the inexperience of banks’ appraisers, who are assessing houses for well above their current market values. “The fact that all banks under our coverage have unrealistic HPA [house price appreciation] assumptions will, in our opinion, lead to a material and protracted writedown and capital pressure scenario for banks well into 2009,” writes Meredith Whitney, executive director of equity research for Oppenheimer. Banks are doing all they can, and then some, to minimize their losses. The New York Times reported that JPMorgan Chase wants short sellers to sign a note for the full balance due with interest. That news article focused on one California couple trying to short sell their $300,000 house for $220,000. CitiMortgage would approve the sale only if the owners paid $166 per month for the next 20 years. By the time the owners made a counteroffer to the bank, their buyer had backed out.
Phipps recounts a similar situation where his clients put their home, which they bought for $223,000, up for sale for $200,000. They received a $183,000 offer that was in limbo for six months, he says, until the bank’s “out-of-town appraiser” insisted the house was worth between $200,000 and $210,000 and rejected the offer. “The house next door resold for $193,000, which told me the offer was legitimate,” says Phipps. In another client’s case, it took an appraiser 90 days to say no to a $280,000 cash offer the client received for his $300,000 house, which ultimately went into foreclosure and sold at auction for $259,000.
These anecdotes would ring true to Hafid, who got married in July 2007 and wanted to move out of his two-bedroom condo in Alexandria, Va., into a three-bedroom townhouse with a basement. One foreclosed home he looked at last January is owned by Countrywide and listed for $245,000. His broker approached the bank’s agent, who said he had six other offers and jacked up the price to $320,000. But in July, Hafid noticed the same home had come back onto the market for $245,000. He signed a contract to buy another Countrywide-owned home listed at $235,000. “Then, we didn’t hear from the agent again for months.” Hafid’s broker called the bank directly, “but they never called back.” Later, the agent said Countrywide wanted $270,000. “So we said, ‘Put that in writing,’ so we had a concrete number to deal with.” Hafid’s counteroffer was $260,000, but as of September he couldn’t say whether the house was even on the market.
Hafid was still looking in late September to buy a home from a bank or a short seller, but the search left him flummoxed. “I’m very surprised that banks, which are sitting on thousands of properties, wouldn’t want to move them as quickly as possible.”