Julie brought up the mark-to-market accounting requirement for banks.
I don’t think the banks worry much about marking to market. Of the 43 Countrywide/B of A listings I’ve sold, I can’t think of one of the foreclosed mortgages that was actually owned by them. CFC was selling their paper on Wall Street as private-label MBS, and those owners may have some requirement – but B of A is just the servicer on the majority of CFC paper.
Without the accounting requirements, the servicers might keep kicking down the road forever the 17,247 San Diego County properties in default.
Here is another example of can-kicking. The FDIC just agreed to sell two portfolios of loans with a combined unpaid balance of $3.05 billion to Lennar Corporation.
MIAMI, Feb. 10 /PRNewswire-FirstCall/ — Lennar Corporation, one of the nation’s largest homebuilders, today announced the closing of two structured transactions with the Federal Deposit Insurance Corporation (“FDIC”).
The transactions represent the purchase of two portfolios of loans with a combined unpaid balance of $3.05 billion. A subsidiary of Lennar, Rialto Capital Advisors, will conduct the day-to-day management and workout of the portfolios. Lennar acquired indirectly 40% managing member interests in the limited liability companies created to hold the loans for approximately $243 million (net of working capital and transaction costs), including up to $5 million to be contributed by the Rialto management team. The FDIC is retaining the remaining 60% equity interest and is providing $627 million of non-recourse financing at 0% interest for 7 years. The transactions include approximately 5,500 distressed residential and commercial real estate loans from 22 failed bank receiverships.
My point is that here are another 5,500 loans that should be foreclosed on, but instead they are being shuffled off for additional processing.
For those of us who are seeking more REO inventory, it appears that we may be in for a long wait.
“For those of us who are seeking more REO inventory, it appears that we may be in for a long wait.”
You’re likely 100% correct on this one. This is gov/banking corruption in the extreme. I always thought saving and working hard would make a difference. (First you get the money, then you get the power, then you get the wormen) But you can’t win at a game that’s stacked this much against you.
What I find amazing is that I’m in no means poor. I could afford to buy an overpriced house if I wanted to. But how are people making the average SD salary or even an hourly wage supposed to buy a house? The ONLY option I can see is crazy/stupid financing and a monthly nut that takes over 50-60% of your income.
And what about all the Deadbeat “Free-Renters”? Are they just going to continue doing what they’re doing while banks continue to bury their head in the sand?
The FDIC is not in the business of operating a loan servicing company. It’s in the business of liquidating the assets it acquires at the price that represents the best overall return to the government.
These loans were assets of the failed banks taken over by the FDIC. This particular package was probably comprised of loans on unfinished subdivisions, apartments, and/or commercial projects. The FDIC sold the package to the party that would put the unfinished projects to their highest and best use – a builder that would build them out and sell them. They therefore got the best possible price, as these packages are sold at auction to the highest bidder.
Lennar will now have to foreclose or get deeds in lieu to move forward with these projects. They may even work with the owners if it makes financial sense to do so. In the meantime, the proceeds from the loan package sale go back into the FDIC coffers for the next takeover of a failed bank.
I don’t see it as so bad. This will help prevent my home value from going down much more.
Another Investor-That makes sense-I doubt that a homebuilder like Lennar wants a bunch of loans on existing houses. So this doesn’t really effect the market, except that possibly some stalled, half-finished projects might get finished now.
Lennar is probably buying those loans at 40-60% of face value (maybe less). They will be in a position to work out “short payoffs” with the property owners and or Principal Reductions and still make a profit. I have a friend that had a $200K unsecured Bus Line through a local bank that went back to the FDIC when the bank got taken over. He had $200K tapped-out on his line and the investor quickly took a cash payoff of $120K.
So.. let’s do the arithmetic. Lennar paid about 250 million for 40% of 3 billion in loans. So… that means, basically, the purchase price of these loans is about 21 cents on the dollar. That is lot of room for workouts, foreclosures, modifications, principal balance reductions, etc. AND still make money for the FDIC and Lennar.
I just finished reading the Dow/Jones version of the Lennar deal. . .in one way, this might be the “beginning of the end” of kicking the can, because the FDIC likely sold this package at pennies on the dollar (40 cents?), and Lennar can put many of these back on the market at reduced prices and still make a profit. Large structured deals like this show some movement in the markets. Now if someone bought the paper on those 17,252 San Diego properties at 40 cents on the dollar (yes I know they are all different lenders), we could sell them off cheap, and start the process moving.
The result either way – “extend and pretent” or “sell fast for a huge discount” is the same – lower housing values. If we all took a quick hit, things would get back to “normal” much faster.
Here is a deadbeat update for shadash:
I am sure that the Lennar deal included significant subdivision and commercial paper which has been massively hit relative to SFR paper.
Example: We bid $1mm on a commercial loan in Phoenix for newly constructed office building. Problem was the loan outstanding was $8mm!!! That is 12.5 cents/$.
Example 2: Finished lots purchased for $8k each….loan was $65k each (not counting developer equity on top of that). Again 12c/$.
Therefore, a lot of that paper was worthless today and some was worth 70c…add a liquidity discount and then a bulk discount for the very few who can/will play in that game and it seems like a relatively ‘fair’ deal if you have that expertise and cash and guts.
Commercial/Subdivisions are Lennar’s specialty so it must be loaded that direction for it to have fallen to them vs. a more traditional institution.
I just like seeing a purely public company jump in vs. a regulated ‘state owned’ bank with fed window access being shoehorned in.
Great insights clearfund and Another Investor.
Got to love Lennar. Took CalPers for almost a billion on the Newhall Ranch project and now getting deals from the government.
While I agree the banks don’t hold these someone does. While they to may not have to mark to fair value, the companies that do hold the loans in default likely bought the loans to get an income stream — think Pension fund that needs income so it can pay money that is owed to the pensionees (sp?). At some point if enough of the MBS holdings have sufficient impairment (home debtors not paying a mortgage) these pension funds will not be able to pay thoes to whom it owes money. When that happens, kicking the can down the road will stop — so the question is how long it will take.
And I agree that in terms of prices pick your poison. Either get the banks to move these and get a quick but short final downward spike in prices, or hunker down and look to a slow downward spiral over the next 5 to 10 years. Bottom line prices can only be supported if people have the desire and ABILITIY (income) to afford to pay the mortgages supporting the prices. Incomes are not going up, free money is gone so prices really can’t go up over the long term (maybe a spike this spring but eventually they must return to a normal ratio to income).
“While I agree the banks don’t hold these someone does.”
The Treasury and the Fed buy all the garage MBS (mortgage backed securities) from banks through TARP and printed money. The Fed has stated that it will stop purchasing MBS in March (yea right) and they will hold all the assets until a later date slowly releasing them back to the market.
This will draw out the economic recession we’re currently going through another 10-15 years. Rewarding those that acted financially reckless and punishing those that are financially responsible.
If none of the bailouts ever occurred its likely that the economy would already be recovering.
I fear that shadash is right about this sort of thing delaying real recovery for a long time. The banking and regulatory response to the financial situation in this country sounds a lot like Japan’s response to the collapse of real estate prices there years ago. Their economy still has not fully recovered.
Banks do not own mortgages the government does. Half of the mortgage dollars in this country are FNM and FRE. The Federal Reserve has bought $1.25T of these loans. Yes the government is in favor of kicking the can down the road. Can you think of a better way to buy votes than letting people live in homes for free?