OK foreclosures are increasing, but it's not quite a Tsunami yet. Right now the tide is rising but it's nothing to get too shook up about, unless you're in one one of the lender categories described below.
I'm a little worried about how some lenders are approaching the pending foreclosure boomlet. They should already have developed a disposition strategy for those REO (Real Estate Owned) assets that may be coming back. Yet, in my recent discussions with the "gatekeepers" (first line of phone defense) about foreclosures at various local lenders, many of them don't have a clue as to what to do. Nor, does it appear do they want to know!
When I've asked: "so, what do you do with your foreclosures?" I've gotten responses that range from: "we advertise them in the newspaper..." to "that's illegal I can't disclose that." In the former case when I asked who to speak with about their foreclosures, I was told to "email us, and ask for "Mortgage Representative." When I asked what the email address was, I was told, "you can find it online."
In the latter case, where it was intimated I was asking for "illegal" information, I indicated I was not looking for anything that wasn't recorded in the registry of deeds, and in fact, I was only looking for the representative of the lender who handled the foreclosures; I was told: " we don't have any." I then asked, "so you never have any foreclosures?" The reply was "nope!" I ended the conversation, because I knew that conversation was fruitless.
That's not a very pro-active stance in handling depositors' assets in my opinion. I'd hate to own stock in either one of these lenders. With that kind of attitude, it's no wonder banks lose more than they should on foreclosed properties. They handle the problem in a reactive manner rather than a proactive one. I would have expected they at least would have wanted to chat about it and pick my brain for free.
The typical scenario is that lenders often react when they get some foreclosures coming through the door. Then, they'll scramble and pick some employee's cousin who has a real estate license and had 4 transactions last year. Then, the new "Assistant REO Workout Manager" will try to micro-manage what he or she knows little about with an agent who is marginal at best, but wants to make the new client that represents 2 listings (50% of annual production) happy. Do you think these assets have any chance to be marketed to full potential under this scenario?
Do you know what a $50,000 loss on ONE PROPERTY calculates out to in offsetting income? Let's say the bank's funds are costing them 4% on average, and they are loaning their funds out at 6.5% on average. That means they make a 2.5% margin (gross profit). That $50,000 loss divided by 2.5% represents $2,000,000 in loans that need to be made to make up for this ONE REO property loss. But, there's more! Because you need to add in the regular overhead costs into the equation, the effect is even greater. What if you had 10? Let's see, 10 times $50,000 equals $500,000, which represents $20 MILLION in loans to offset the losses from these 10. That's a major hit for nearly any lender to take. It may even cause a few "career changes."
I once had a 5 branch Savings and Loan client who got 31 foreclosures in one year. They listed them all exclusively with my firm. We sold them all within one year. We also helped them develop a future strategy so that they wouldn't likely get into that situation again. They never have.
Lenders need to be thinking of the NEAR future and take steps NOW about their potential REOs. If you snooze, you lose.
Chris Michaud
chris@acceptancegroup.com
http://www.acceptancegroup.com/
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