Bad news for lenders

I’ve been out today with buyers looking at houses and we paid particular attention to houses that are “underwater” – asking less than the owners owe on them. Our unanimous conclusion was that these weren’t worth anything except, perhaps, their rental value. Bad locations, shoddy construction – you tell me how a four-year-old house can already have rot and leaking pipes – and ridiculous prices. I don’t think anyone will find these particular houses are worth tying up money in. Even at, say, $900,000, that’s a lot of money to sink into a clearly depreciating asset, and for what?

There’s a reason these houses haven’t sold and I think there’s a reason they aren’t going to sell any time soon. I’m curious to see how long the banks can continue to carry them at loan value. Much longer and I think it will constitute fraud on their shareholders and the F.D.I.C.

4 Comments

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4 responses to “Bad news for lenders

  1. Cos Cobber

    While I don’t disagree about location issues, those are permanent, I think you might be overstating the rot issues. Of course a 4 year old home that has seen nothing but renters and has an underwater mortgage will be in need of some sprucing. That has to be expected. You can’t expect the bankrupt builder to be putting “good” money in after bad on maintenance…not when the bank is about to own it. You also need to differentiate between structural issues and the occasional flaw. Even a lexus (or let me bring it down to your level, a honda) can be in need of a repair, it doesn’t necessarily mean the car is garbage, ready for the scrap heap.

  2. Anonymous

    Can’t fix bad land or location

    Need to do a buy vs build value analysis in terms of both nominal cost and time/hassles/opportunity costs; sometimes easier to start from scratch rather than chase flaws in a poorly-built and/or decayed used house….much like buying a new car rather than diligencing a used car….and used houses are mysteriously not much cheaper than equivalent new houses, unlike cars

  3. HG

    “I’m curious to see how long the banks can continue to carry them at loan value. Much longer and I think it will constitute fraud on their shareholders and the F.D.I.C.”

    According to the WSJ, Colonial, a bank down in Alabama, is probably being seized by regulators right about now (I assume the regulators actually show up Friday morning, but they seem to issue the press release after the stock market closes). In your previous post you mention Patriot, where non-accrual loans are about 16% of total loans; for comparison, Colonial’s ratio is 12% (I guess you could argue every bank has differences so might not be comparable, but still…).

    The FDIC has a nice, helpful section of their website that lists houses and other property they own…right now I think only two properties in Connecticut, but maybe more are coming?

  4. Accolay

    If Riverside is a Honda, what is Cos Cob? Regardless of the anology, I agree–but buyers would be more willing to purchase a home and fix up the flaws if prices were reasonable. I’m not going to put money into a house after paying 2007 prices like sellers seem to think I should.