Why Banks Aren’t Selling Their California Foreclosures
In the month of May, a record 111,824 homes in California were scheduled to go to foreclosure sales but only 17,871 actually went to auction. The discrepancy between the scheduled and actual homes at auction elicited comments from industry watchers like ““The data actually shows that lenders are doing everything possible to delay foreclosure. The reality is that we have very few homeowners being foreclosed on when viewed as a percentage of those scheduled to be foreclosed on, in default, delinquent, or upside down in their mortgage.”
To paint the lenders as “good guys”, trying to hold off the inevitable is probably giving them too much credit. There are several factors at work, keeping properties from being foreclosed and from going on the auction block. The factors include:
* Bids that are nowhere near the outstanding loan amount for the homes at auction – In May the average property bid came in at 59% of the loan amount. That’s a huge haircut to take, especially across an entire portfolio. A lender gets those kinds of bids, says “No Thanks” and takes the property back to put into inventory, an open market sale, or a public or private auction at a later date.
* Sales Infrastructure – Auctioning off 17,000 properties is a lot to ask. Imagine trying to auction over 111,000 of them.
* Supply/Demand – Having 111,000 properties on the market isn’t going to help prices.
* The elimination of marking to market – As a band-aid to the hemorrhaging banking industry, Congress eliminated the requirement of marking to market on mortgage loans. This allows banks to carry loans on their books at basically fictitious price levels to bolster their overall capital structure. By selling properties at deep discounts to the outstanding loan amounts, the losses would be booked, requiring the lender to make the loss official. Lenders took back 88% of homes that when to auction, meaning that they got decent bids on 1 property in 8.
* Lenders still must answer to their mortgage investors – Carrying a loan at 90% of face value on the books and then selling a property at 50% of the loan value can be a rude awakening for an investor. Bankers are trying to avoid conversations like that whenever they can so sales at deep discounts are being delayed for another day.
Homeowners should not get complacent, thinking that their bank is going to support them in while they’re missing mortgage payments. At this point in the cycle, while the lenders are walking a fine line between flooding the market with properties and upsetting their investors, there might be some benefits bestowed to homeowners in the form of delayed foreclosure sales but that situation can change quickly. Those that are struggling with, or behind on payments should get legal representation to start the work on modifying their loans now. The good guy image that the lenders are being credited with at present could be abandoned as quickly as a change in the weather.

Contact Feldman Law Center for your Loan Modification