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The banking industry asserts that it is not the culprit in the foreclosure crisis plaguing Massachusetts. But while local banks were not big players in the subprime meltdown, banks were certainly the prime buyers of risky mortgages.
And now they’re increasingly paying for it with large write-downs on foreclosed properties.
An investigation by Banker & Tradesman into the fate of thousands of Bay State properties taken in foreclosure shows that large banking institutions – not stand-alone mortgage companies – hold the lion’s share of foreclosed homes. And as those investors eventually dispose of their foreclosure portfolios, they’re taking an average loss of almost $45,000 on every property they sell.
Using foreclosure deed and other sales data tracked by The Warren Group, the newspaper’s parent company, Banker & Tradesman looked at all properties that were transferred in foreclosure through the six months from September 2007 through February of this year. Then Banker & Tradesman looked at what happened to those properties over the next six months, through August of this year.
Of the nearly 4,400 homes, condos and apartment buildings sold at foreclosure auction during that time, lenders and investors took title to almost 4,200 of them. And six months to a year after taking over the properties, they still have more than 1,900 of them sitting on their books.
Deal Busters
While they were often not the originating lender, banks are frequently the foreclosing entity, since they own the mortgages underlying the problem properties. Deutsche Bank alone accounted for 17.4 percent, or 765 properties, of the Massachusetts foreclosure deeds between September and February. US Bank and Wells Fargo Bank were both double-digit foreclosers, too, at 12.1 percent and 10.7 percent, respectively.
Massachusetts employs a three-part foreclosure process. In part one, the lender serves notice to the borrower that it is instigating foreclosure. Secondly, the lender schedules a foreclosure auction date. During the weeks and months that the first two parts take, the borrower has numerous opportunities to settle the debt with the lender. If those negotiations fail, the auction takes place and the property is sold, and is recorded as a foreclosure deed.
But there are few deals to be had at the property auction. In 95 percent of the auctions, the lender bids the full amount of the outstanding mortgage and takes title to the building. Of the 4,400 foreclosure deeds reviewed by Banker & Tradesman, just over 200 of them went to third-party buyers.
But that doesn’t mean that buyers looking to acquire foreclosed homes can’t find a good deal. It just means they have to wait until the lender has taken title.
National secondary-market buyer Fannie Mae, for example, took possession of 286 properties in the six-month period under review. It’s since sold nearly 60 percent of those, but at average of $33,200 less than the outstanding mortgage amount. US Bank has moved 65 percent of its 535 foreclosure properties, but it needed to shave almost $60,000 on average off the mortgage balance.
The lenders likely had little choice. The roughly 2,300 properties sold out of their Real Estate Owned portfolios was the equivalent of 8 percent of all residential properties sold in Massachusetts for the first six months of 2008.
Losses on condos and especially on multi-family homes were far greater – with lenders losing an average $33,012 on every condo re-sold, $65,562 on two-family properties and nearly $100,000 on three-families, statewide.
Looser Lenders
Linda Kody is a real estate broker and co-owner of Kody & Co. in North Andover, which specializes in maintaining and marketing foreclosed properties. She said in the past three to four months, she’s noticed lenders more interested in alternatives to foreclosure, such as short sales or modifying existing homeowners’ loans.
“There’s been a lot of talk, but [lately] we’ve seen lenders really proactive about trying to help homeowners stay in their homes,” she said.
Lenders are coming to terms with the fact that anything but foreclosure is better financially for them, she said – not to mention the economy, the community and the homeowners.
Private mortgage insurance companies have also started encouraging lenders to work things out with the homeowners, she added.
Kody said lenders do better financially after short sales than foreclosures, even though they lose money on both.
While a short sale is by definition the sale of a property for less than the amount owed on the mortgage, the costs of foreclosing upon and maintaining a property usually exceed the amount lost in such a sale, she said.
Short sales require agreement on a sale price between several parties, including the buyer, first and (if applicable) second mortgagees, loan investors on securitized loans, and mortgage insurers – and thus often take six or more months to complete, by which time some buyers lose interest, Kody said. But she’s noticed the timelines getting shorter, and more lenders considering short sales.
