Mammoth Foreclosures 8.0. Nightmares Abound and More Twisted Operation

My original slogan of “expect the unexpected” in the foreclosure and REO realm has recently moved in more twisted directions. While the slow turn of distressed properties continues with owners continuing to occupy properties for REALLY extended periods without making payments, now some of the banks and lenders are actually making it more difficult for qualified buyers to purchase their REOs. The only explanation is some corporate brainiac has the idea that these “new” processes will result in real “cost savings.” What it proves is the old saying “it it ain’t broke, don’t fix it.”

There is no doubt there was a deliberate summer/pre-election foreclosure lull. The fix was in. Some in the REO industry referred to as “halftime.” But the break brought some changes to the industry. Most of the participants were re-evaluated for performance, and some were terminated. New agreements were established. There is continued reliance on short sales as a more viable method to dispose of these distressed properties. That is, if the owner is now a willing participant; extended squatting is increasingly popular, and the word-on-the-street is that the “relocation assistance” checks can be substantial, and there may be no difference in future credit scores between a short sale and a foreclosure. (In fact, those with foreclosures on their records in this last cycle are already qualifying for new mortgages.) None of this was really expected, was it?

The newest and most laughable twist is the increasing reliance by some banks to dump their assets onto auction websites. It is a painfully slow and convoluted process. They have ignored the concept of “the momentum of the deal,” and that is especially true in resort areas. The property is listed in the local MLS but the bidding all occurs online. And the bank has their “number” which is typically unrealistic. And most “auctions” ultimately fail and the property ends up back in the regular MLS and the open market. Some brainiac forgot the value of a motivated, hands-on, service-oriented salesperson working with the potential buyer at the point-of-sale. Instead, it is more “efficient” to let the buyer bid on it like some “take-it-or-leave-it” collectable on eBay. Without the negotiating interaction between the buyer’s agent and the asset manager, the buyer most likely walks away or becomes a sucker for the bank’s price (and my following rant on BPOs will tell you why the pricing may be faulty).

So here is what becomes even more laughable about these auctions. Most of these asset managers are in India. They are just about as clueless as any other “programmed” person answering the phone in Bangalore or Mumbai. Except they don’t answer the phone, just emails. One recent transaction had a frustrated loan officer ranting via email to all of these lovely Indian names. The buyer threatened to engage his attorney. But how in the hell do effect anything when the asset managers are half-a-world away and are culturally untouched by any of it? The buyer better have tons of patience. When the word gets how frustrating and painful these transactions are……And even worse, some of these banks have turned to cut-rate escrow companies to interface with the Indian asset managers, and the word “nightmare” can become real.

The next corporate brainiac move was to consolidate the “asset preservation” component of the REOs. See, once the property is vacant, somebody needs to essentially manage the property until a new buyer has closed escrow. The listing agent is the lead contact but somebody has to do the grunt work. In the last few years this has worked pretty well. Local contractors did most of this work; trash-outs, repairs, cleaning, snow removal, etc. Now the “bottom line” guys have people driving from Temecula to do snow removal in Mammoth. Really. And they don’t even own the right tools; like snow shovels, snowblowers, etc. Ultimately, the work doesn’t get completed. And no offense, but the guys from Temecula aren’t real sharp on frozen plumbing issues either.

And it gets worse. I’ve got an REO listing that is on the market that has lots of rotting food in it. Rotting food for months (obviously, I’m not letting potential buyers go in the unit). The “field” guys in charge of this property are coming from Redding (because the bank thinks Redding is so close to Mammoth). But they don’t even have chains for their vehicles. And when they do get here there is four feet of solid snowpack in the driveway. A year ago I could have had this property cleaned-up by now by good local people and probably have it in escrow and close to closing. But now it is virtually unsellable. But this is modern corporate “cost savings.” Good thing this isn’t the winter of 2011, the roof would be caved in by now. So much for the modern state of “asset preservation.”

So the banks fixed what wasn’t broken and the process of bringing an REO property to the market has become a nightmare. So the agents need patience too.The problem is the buyers will get turned off (and maybe even some listing agents). The perceived benefit to the institutional bottom line will end up costing the process another fortune (no worries, the Fed is there to backfill the bank’s coffers). But in an “expect the unexpected” environment, what else should I have expected? Stupid me. Discouraging and alienating qualified and motivated buyers makes perfect sense.

So now let’s talk BPOs, or broker price opinions. The evolution has twisted wildly over the past five years. These are what we used to call a comparative market analysis. These are mini appraisals completed by agents. They can be quite detailed and most lenders have their own formats and guidelines. Today, these BPOs have become a big problem, so follow me if you can. Right now there are thousands of BPOs flying all over cyberspace. The volume is almost madness. And the whole system has truly degenerated. When this real estate down cycle began a few years ago, the REO listing agents had to complete BPOs on properties; some they were going to list, and some they potentially were going to list. The BPOs served as the local “eyes and ears” for their distressed assets. Those BPOs were likely completed quite accurately. But as more properties became distressed (in volume), the lenders starting ordering more and more BPOs. Some of these were simply “drive-by” BPOs (meaning the agent wasn’t required to go in the property; that helps for accuracy). But as more and more of these BPOs started flooding the industry something dramatic happened. The task for completing the common BPOs ended up in the hands of the less successful agents (every agent HATES doing BPOs, myself included). Those agents needed the $50-100 they would earn (and wait for the check) to pay their bills.

But then the short sale mania began. The lenders increasingly began relying on the BPOs for short sale valuations. More flooding of BPOs into the industry. So the lenders increasingly relied on the valuations of the least successful/experienced agents in the industry. And the agents who were doing BPOs got burned out. (I tell agents BPOs are a great way to “know” the local valuations, and they are, but they are like going to calculus class.) So the more burned-out agents became, the BPOs ended up in the hands of lesser and lesser experienced and knowledgeable people. Now for REO agents, they still get “graded” on their BPOs so accuracy is critical, but when nothing is at stake the work can get very sloppy and inaccurate. And here we are. We have people being paid $10/hour now compiling BPOs. And they know nothing of the market. And they are becoming the critical determiner of real estate values in this market. Recently, I had one of these BPO producers called me about one of my recent sales. She was doing a BPO…”I’ve never been to Mammoth….I just moved back to California.” And the bank is relying on this information to value their asset…. So the next time you see some really stupid (high) price on an REO asset when it is listed, odds are somebody like that did the BPO that the asset manager thought was valid. The banks could spend another few hundred dollars and get a real appraisal. But that wouldn’t make sense, they probably need to carry the property on their books for a few more months (or years).

Meanwhile, many other interesting facets….many of the owner/loan modifiers from 2008-11 are now heading into real default. There is no hope for regaining any equity and reality is they can’t make the payments anyway. The majority of these are local residents. At least they still have their fancy truck, snowmobiles and tournament water ski boat….And everybody who now loses their property to foreclosure is clued-in on how to play the “cash-for-keys” (or “relocation assistance”) game. It used to be they were grateful to get a few thousand bucks, now they want to negotiate for more money, more time, sell their furniture to the bank, etc. And some think they are actually in the driver’s seat to re-purchase the property (after not making payments for 40 months)…….What a country. And even worse, now they want to negotiate on how much crap they can leave behind; giant (worthless)TVs, pets, and a potpourri of other albatrosses. We even have one REO property where the former owner simply rented the property to a quality tenant prior to eviction. That happened while the asset manager in India was trying to figure out the next step. So now the bank has a tenant and the former owner is collecting the rent. Liquidating that asset won’t happen anytime soon. The file appears to be lost on somebody’s desk. And the buyers will line-up to purchase this property when it comes to the market.

And as 2013 proceeds (and twists and turns), see potential short sellers become more reluctant to even bother with selling. “Extend and pretend” has newer meaning. Short selling and foreclosure appear to have similar credit impact in today’s world. Two to four years of squatting can provide cash flow for life’s other necessities (and vacations). So why not just stretch it out and capitalize to the maximum? Truly, these are becoming “life decisions” for many (and I’ve witnessed the “shock” of having to pay rent after eviction). Moral hazard is out the window for most….They didn’t plug all of this into the game of Monopoly when we were kids, so who could be properly prepared? So for now, continue to expect the unexpected.

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