Addressing the Shadow Inventory of New Foreclosures.

I’ve had many conversations with realtors and REO contractors who felt they were being lied to about the new wave of foreclosures that was supposed to come this year. Months went by and still overall productivity seemed to be diminishing rather than increasing. Many have left the industry because their work load dried up. They got frustrated and moved on to something else.

It would help those who are in the industry to keep certain things in mind as we discuss the process of foreclosure. The best vantage point on this issue is to see it through the eyes of the lender. That is because the loan and the unfortunate foreclosure finds its source at their doorstep.

Before you give up, think about the following reasons for the delay. Hopefully it will encourage you to know that while your porfolio has all but vanished, it will change.

The Pipes Are Clogged

There is the thought that lenders are holding back the inventory in an attempt to preserve the market. The logic is that dumping too many onto the market at once would diminish values even further and thereby cause more damage to the market by driving prices lower in an already historically low market. If we have experienced a short decrease in activity this year, it was not because the housing market was improving. It was because the pipes are clogged. The same thing happens when any system has overloaded. Its hard to regulate, to organize, to be efficient in general. Mortgage lenders are running a process akin to that which you might find in a triage unit.

 A real estate field service company I worked for previously was thrown into a triage situation when some of its major competitors filed for bankruptcy. The lenders who had been outsourcing work to the competitor now turned its attention to the company I worked for. Though obviously there was a good deal of excitement in acquiring such a large, fresh wave of work,  a sudden shock of new work had its potential hazards. People were being interviewed like crazy to fill newly created slots. Associates were tripping over each other to give attention to existing work which created a breakdown in overall productivity. And, there was the logistics of coming in midstream to orders previously managed by the competitors. This meant shifting to manual to correct mistakes, to translate notes which the competitor made for themselves. The most serious threat was that we would be over-zealous to acquire new work and take on too much at once.

There are lots of times when, being on the service end, I can see a breakdown in the process. Just this week my company was asked to interview a delinquent homeowner. When we arrived, the homeowner was cooperative, but frustrated. She had spoke over the phone with her loan provider the day before we interviewed her. Before this, she stated that she’d spoken with the loan provider several times and the process of communicating her reasons for being late and her forecast of when she could get caught up was met with repeated rudeness. It seemed by the way customer service treated her that no notes were being taken. From the top down, the current shadow inventory of nationwide foreclosures has created a breakdown in the process.

Lenders Are Caught Holding the Bag

Lenders could be deferring sales to put off having to acknowledge the actual extent of their losses. A foreclosure is generally a statement of loss for the lender. That is why you have to walk on water to get a home loan these days. As lenders attempt to give adequate attention to their distressed assets, they are being forced to take strong preemptive measures so they can lower the risk of another foreclosure. Makes sense. It would serve the REO contractor well to know and keep in mind when dealing directly with mortgage lending institutions that it is these institutions that are taking the hit. The homeowner can file bankruptcy and just walk away from the asset. After the dust settles, the lender who gave the loan is holding the bag. They are put in a role they were not designed to fulfill – the property manager. Then, they pay more out of pocket to have contractors put the home in a marketable condition. The contractor who works directly with the lender is in a position to make more money, and is given to freedom to bid fairly for any list of services to be performed. It would explain why many of the bids we give seem to be sat on and ignored. The lender who has to take back a $400,000 asset and then is forced to entertain the idea of erecting a $100,000 retaining wall just so the place can be up to code has the most unwanted responsibility. It would stand to reason that the lender would delay because of such an unwanted added task. It’s like having a teenager who wrecks your precious car and then, to add insult to injury, you are forced to pay for the repairs. Who wants to do that?

A Bubble is Created

Banks might be strategically holding back some foreclosures so prices don’t fall as fast. At this point, more distressed assets are being created than newly constructed homes being sold. It’s eery how cheap some homes are being sold in my area. Just last month, I was asked to bid for repairs and/or completion of two triplexes which had been vandalized. Every window was broken out. If there was any drywall hanging anywhere it had a large hole in it. Construction debris everywhere. Once the bid was submitted, the realtor explained that their mortgage lending client had decided to sell the units as-is instead – for $50,000! While the location was not fantastic by any stretch of the imagination, the architectural didn’t scream government housing. I thought about the opportunity available for an investor who could finish the properties and then lease. Common sense says that when you create a market where used products are sold in great shape for a lower price this could create a trend. The trend occurs when everyone starts to realize they could sacrifice buying something used if it means they can still get what they want. That’s what is happening in the housing market. Everyone looks through the foreclosure listings first to see if they can make a smart purchase. Buy a four bedroom brick house looking over the lake in a safe neighborhood. So what if it’s a foreclosure. It looks great! It would stand to reason that lenders would sit on an enormous volume of foreclosures hitting at once. The fear is that an even larger bubble will be created.

The best service you can provide as a realtor or an REO contractor is to see the distressed property through your client’s (the lender) eyes.


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