Wednesday, March 4, 2009

Interesting stats

I have been tracking lender's bid vs. sale price for FHA loans in Iowa for a little while, and the numbers are interesting.

The calculation:
The sale price to a new buyer after the sheriff's sale divided by the amount bid by the lender at the sheriff's sale as a percentage.

The data:
The amount bid by the lender at the sheriff's sale is essentially the money the lender has lost, between the principal balance of the loan, accrued interest, taxes and insurance paid by the lender, and costs of the foreclosure. The sale price to a new buyer is the actual price paid by someone who is buying the property after the foreclosure has gone through and the property has gone back on the market.

The results:
The price paid by the new buyer is a little more than half of what the lender bid at the sheriff's sale. For seventy-six properties analyzed, the drop is 48.28%. There were some amazing outlyers:
$58,000 bid - $8,000 sales price
$44,000 bid - $5,000 sales price
$45,000 bid - $3,000 sales price
$80,000 bid - $21,000 sales price
$115,000 bid - $42,000 sales price

The average number of days between the sheriff's sale and the date of the accepted contract is 291--sneaking up on a year. This does not include the time it takes to foreclose, which can be an additional two to twelve months.

Granted, this is a relatively small sample (however, the standard deviation is 0.1656, so the difference is certainly statistically significant), but what is the cause of incredible loss of value? Three possibilities come to mind:
  1. The lenders loaned way more than the property was worth;
  2. The foreclosure process takes too long, and allows the properties to remain vacant for such long period of time that they significantly deteriorate;
  3. Something about the property being vacant and/or foreclosed somehow stigmatizes the property, and makes many buyers avoid them.

Any other ideas, or better yet, suggestions?

1 comment:

Short Sale Des Moines said...

Here is an real life example:

Homeowner Defaults on a $110k mortgage.

1.) Takes the servicer 2 years to foreclose on the home. Lets say $1,000 + $100 (late fee) + $100 (servicing fee) = $1,200 x 24 months = $28,800.
2.) Attorney fees= $3,000
3.) Property Preservation/ Field asset service (mowing, lock changes, etc( = $2,000

Grand Total: $33,800 + $110,000 (0riginal loan) = $143,800 (total debt owner & amount bid at sheriff sale).

Homeowner had an offer on the home for $76,000 from a short sale buyer. House gets valued by local agent who also does REO's (foreclosed homes Real Estate Owned by the bank already) who tells the servicer it is worth $111,000.

Servicer denies Short Sale for homeowner. Three months after the sale, the investor (the real person who had money in the game, not the servicer who just was collecting payments) gets the property back.

They list it with the agent who appraised the property for $110,000, but now they list it for $69,900 and it sells for $67,000 netting the investor $63,000.

Where does the fault lay? We servicers make money for servicing. Companies like Ocwen derived 17% of their entire gross profits from servicing last year. This means they have a vested interest in dragging out foreclosures and not approving work outs. The bank sends out REO agents to appraise the properties who are trying to get the listing. So, they appraise the property high hoping to get the listing, but submarining the homeowners chance for a short sale, because the bank has an over valued asset.

The Reality is that the house was probably worth somewhere in between the $110,000 owed and the $76k offered. Once the house gets to REO, it automatically goes down in value 15-20% for being stigmatized. Also things happen like the homeowner stops paying their utility bills and the sump pump stops running flooding the basement and causing mold, etc, etc.

Hope that helps.