The trouble with foreclosure auctions

My friend Jonathan Wilcox has had the listing for 24 Mahr Avenue for a long time but no one wanted it. Today there was a foreclosure auction and I hear that all sorts of buyers appeared, all with certified checks, but the lender, faced with direct evidence of what the market was willing and able to pay, rejected all bids and bought it back for itself at the amount it was owed. So now it’s a bank-owned property and will eventually sell for far less than the loan, but that’s probably a year away.

Maybe there’s a legal reason for paying in the amount owed, although I am unaware of it. My suspicion is that lenders are still operating under old rules of procedure, where houses were worth more, not less than the amount owed. Either way, what a waste of time for everyone involved. Short sales are maybe, sometimes worth the effort, and bank-owned properties (REOs) are worth pursuing, but foreclosure auctions? Forget it.

23 Comments

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23 responses to “The trouble with foreclosure auctions

  1. Fly Girl

    Is this the same house you talked about in November last year?????? It went under in that short amount of time?
    http://christopherfountain.com/2009/11/02/maher-avenue-sale-reported/

    You said: “Decent house and its sale price of $1.850 million is well above the assessment of $1.430 but you have to wonder what the original broker was thinking when she listed it 1 1/2 years ago for $3.175.”

    • Different house, Fly Girl – this one is a tear-down. Someone bought it with either the intention of doing that or completely renovating it but walked away from the project long ago.

  2. John Maher's Farm

    If we understand your logic and jargon, you’re saying the bank loaned more than the house is now worth at auction, but that auctions don’t produce true market value.

    We arrived home on Maher on 11:50 am and found the street crowded and nearly impassable with either eager bidders or curious bottom-feeders.

    So there was certainly interest. But like other Maher Ave sellers, we’re content to wait a few years. Only time will tell the wisdom of that patience.

    • No, John Mahr, I am saying that an auction like this does produce true market value – it’s the idiot bank that chose to reject that, and now has a property on its hands that it will have to maintain and pay taxes on until it finally unloads it months from now. I think that, as home owner on the street, you are wise not to sell now in this depressed market. Mahr is a great street, will always be attractive and will surely at least hold its value and probably recover at least some of the value it lost since 2007. But you get to live there and enjoy the property – a bank isn’t, or shouldn’t be, in the business of owning vacant houses, so what makes sense for you, the homeowner, does not make sense for a bank.
      Or that’s my logic, anyway – the bank obviously disagrees.

  3. duff

    Oh, plenty of people wanted it, just not at 1,180,000.

    Bank debt is 1.278. What could possibly be their strategy in not accepting what today’s market was willing to bear?

  4. Fred2

    “What could possibly be their strategy in not accepting what today’s market was willing to bear?”

    Given the shenanigans of the past few years, the answer is that there are a lot of idiots in the banking world, and lot of people covering their bottoms with an “extend & pretend” strategy.

    Presumably on the basis that maybe the horse will learn to sing.

    Seriously, I used to work beside a place west of Hartford. Lovely industrial property, was vacant for years. My employer tried to buy it and offered reasonable market valuation, so they could expand. No sale, so we built new across the street.

    Reason? The owner was a fund that had bought at the top of the market and prefered to pay taxes than admit their valuation was waaay too high. Morons.

  5. Chinatown

    The Wilcox’s had great property on the sound 25 years ago. Grew up with Joe… True visionaries.

  6. out looking in

    again, the mystery may be explained by the extent of the capital impairment to the bank’s balance sheet and possible lack of sufficient regulatory capital…extend and pretend IS rational to many engaged on the “sell side”…just like in the internet bubble and the Chuck Prince “dance while the music is playing” days- if your fund underperformed (or bank) you were fired (lost assets) or roasted for being idiot (I-banks)..from their point of view, they were acting rationally- according to their reward system in place…totally FU&^Ked up, but it is what it is…that’s why intelligent investors/economists (not an oxymoron- they do exist) are livid when capital is “misallocated”…

  7. armonk

    The bank bids the amount of the outstanding mortgage to chop off all other liens. Some, like property taxes, municipal utilities, IRS (in some cases) do remain. Second mortgages, mechanics liens, etc., are gone.

    Now the bank owns the property clear of other liens without recognizing a gain or loss.

    There may also be some tax advantage with regards to the interest that was owed but not paid.
    That was part of the outstanding indebtedness and now part of the banks cost basis.

  8. Jane

    Thank you for that explanation.

  9. Old School Grump

    Off topic, but see the newspaper Sunday supplement “Parade” today to see what Lewis Ranieri is up to.

  10. out looking in

    HOPE SPRINGS ETERNAL CHRIS!!

  11. Anon E. Moose

    CF,

    In other circles, it’s called the “E-Bay Appraisal”. You list something with a reserve that you know it won’t sell for, and see where the bids come in. In this case the reverve is the bank bid up to par.

    Now the Bank knows what the vultures (he says endearingly) will pay for the place. They can carry it on their books at par as long as the regulators will let them, and still have a strong indication of its market value.

  12. foobar

    armonk is correct. If the bank has not found an approved short sale beforehand, they first need to take full possession, which they do at foreclosure auction. Of course, if someone were to have bid higher than the loan balance, they would have owned it. Look for the house to be back on the market in 30 days or less

  13. duff

    Seems logical and likely that the bank will go back to the highest bidder (1,170,000) now that they have taken full possession and make a deal.

  14. out looking in

    with all due respect, you are all missing the big picture- they may not be able to sell because of capital adequacy issius…unless it is at or very near the the mortage balance amount carried on the books

  15. duff

    OLI, mortgage balance – $1,278,632, no other liens. Highest bid at auction $1,170,000. $108,632 shortfall.

  16. out looking in

    sorry duff- trading and blogging at the same time- guess where my priorities are?
    agree- for less than 10% – worth a punt- they should hope to do as well on their other properties