Another story demonstrating how free enterprise is being squeezed:
California is taking steps to avoid a repeat of the conversion of thousands of single-family homes from ownership to rental properties as occurred during the Great Recession. In late September, the state’s governor Gavin Newson signed a bill that will give tenants, affordable housing groups and local governmentsthe first crack at buying foreclosed homes.
As homes were foreclosed by the millions following the housing crisis, Wall Street stepped in and investors, according to Zillow, gobbled up over 5 million homes, turning them into rental properties. They were bought as individual homes, via bulk sales of lender real estate owned (REO), or as distressed loans upon which the investors later foreclosed.
It was expected that these houses would return to owner-occupied status once home prices recovered and the investors, largely big hedge funds, could realize a profit. Instead they have found ways to manage the geographically dispersed properties and continue to hold hundreds of thousands of them.
This has been problematic. While the investor purchases helped put a floor under home prices at a time when there was little appetite for buying distressed properties, it has continued to reduce the inventory of available homes for sale. There have also been many complaints of tenant abuses and deferred maintenance. Many of these were spotlighted last March in a New York Times Magazine article, “A $60 Billion Housing Grab by Wall Street” by Francesco Mari. We summarized her work here.
The California legislation, SB1079, was the brainchild of an activist Oakland group, Moms 4 Housing. It bars sellers of foreclosed homes from bundling them at auction for sale to a single buyer. In addition, it will allow tenants, families, local governments, affordable housing nonprofits and community land trusts 45 days to beat the best auction bid to buy the property. It also creates fines of as much as $2,000 per day for failure to properly maintain properties.
So far, the COVID-19 pandemic has not resulted in massive foreclosures due both to mortgage forbearance programs and a foreclosure moratorium put in place by the U.S. Congress’s Cares Act. Still mortgage delinquencies are rising, and weekly first-time unemployment claims have remained above 800,000 since March. Most forbearance plans are due to expire by next March lacking further government action.
This house has a history – it was once the family compound for Alaska Airlines! It was foreclosed in 1994 when the lender received no bids and took it back for the balance owed of $6,372,931 – and they sold it for $3,350,000 six months later. It was then resold for $4,000,000 in 2001.
At the height of the market in 2007, the former owners of this property took out a mortgage for $8,500,000, but the lender foreclosed in 2014. They finally sold it for $2,437,500 a year ago, and those new owners just flipped it for $2,995,000 or $3,750,000 depending on the data source. This time it was marketed and sold as a vacant lot with approved plans.
Readers have wondered about the story of the billion-dollar property being bought for $100,000. It was the lender (who was the previous owner) who got the property back, and who is now in position to make a tidy profit on their original $45 million mortgage:
On Tuesday, it sold for a mere $100,000 at a foreclosure auction, a fraction of the $200-million loan outstanding on the property.
A markdown of 99.99%, of course, comes with some fine print. Any other buyer would have been on the hook to repay that loan — and this buyer has to eat that loss.
That’s because the buyer is the estate of late Herbalife founder Mark Hughes, which previously owned the property. The estate set this current saga into motion by selling it to Atlanta investor Chip Dickens in 2004.
Dickens borrowed around $45 million from the Hughes estate to buy the property, and that debt has since ballooned to roughly $200 million with interest and fees. Three years ago, Dickens transferred ownership to a limited liability company controlled by his partner on the project, Victor Franco Noval.
Noval is the son of convicted felon Victorino Noval, who pleaded guilty to mail fraud and tax evasion in 1997 and was sentenced to federal prison in 2003.
Unable to pay the debts, their limited liability company, Secured Capital Partners, tried — and failed — to declare Chapter 11 bankruptcy last month, which led the Hughes estate to force a foreclosure auction to either sell the property in hopes of recouping its losses or buy it back, likely losing the $200 million they were owed in the process.
With less than 24 hours to go in the REO auction, it looks like the seller got a little antsy and decided to push the bidding closer to their $1,499,900 list price. Will there be a flurry of activity right at the finish line? We’ll see!
Wells Fargo foreclosed on this Carmel Valley home in November. It had been listed on the MLS for the previous 12 months, and it looked like the agent had been trying to process a short sale (it was marked ‘contingent’).
She had it listed for $1,500,000.
Her clients paid $1,650,000 in 2007, and financed $1,137,500 with World Savings. Times were tough for many, and these folks got their notice of default filed in August, 2010. It doesn’t look like they made any payments since.
Wells Fargo’s amount at the trustee’s sale was $1,365,016, which is typically the amount owed. So the former owners got a couple of hundred thousand dollars in relief, but waved bye-bye to their down payment of $512,500.
Wells Fargo then listed the house for sale in January for $1,499,000, and has now sent it to an online auction. The bidding started yesterday, and will remain open until Tuesday:
The auction website also notes that it needs to be a cash purchase, though it’s not mentioned in the MLS listing. The buyer has to pay a 5% buyer’s premium on top of the purchase price, and I assume they want you to close escrow with the occupants inside?
What will somebody pay for the home, under those conditions?
The current bid is $1,199,920, though note sure if that is actually a real offer or just the minimum bid.
Neighbors of the late San Diego Padres great Tony Gwynn noticed something strange happening in their upscale Poway neighborhood about two weeks ago.
Last summer, the Gwynn family lost their home to foreclosure and it’s been vacant ever since. But suddenly in late December, neighbors told the Sheriff’s Department that they had noticed people coming and going frequently from the fenced-off multimillion-dollar residence. One neighbor spotted barrels being loaded into the garage, leading to speculation that a methamphetamine lab might be setting up.
Now, officials with the property management firm responsible for the bank-owned property have confirmed that the man living on the property was squatting illegally in the residence and have begun civil eviction proceedings against him.
Valued at about $2.3 million, the house went into foreclosure in June and is now owned by a New York bank and managed by Ocwen Financial Corp. in Florida. Ocwen spokesman John Lovallo confirmed that it has taken action to evict the man.
Our YoY home sales are in decline, and it makes you think, ‘Here we go again”.
We know that sales are the precursor, and historically prices are the last to go. But with so many different variables this time around, could it actually be different this time?
Let’s consider the changes:
During the last two local declines (1992-1996 and 2007-2009), banks were the main culprits. They were visibly foreclosing and dumping homes, which affected the whole marketplace. Regular home sellers were burdened with the lower comps, and had to give them away if they wanted to move.
But now they’ve changed the accounting rules for banks, and they don’t have to dump everything they own. In fact, they can do whatever they want now.
Remember this McMansion in Carlsbad?
BofA first began the foreclosure process in 2011, but didn’t get around to actually foreclosing until July, 2017 – six years later! Then they off-loaded it to an investor in March, without having to put it on the open market. Bernanke told bankers in 2011 not doing anything that would harm the economy, and they took him up on it!
I think it’s safe to say that no matter how bad any future recessions might get, we don’t have to worry about a flood of foreclosures ever again.
Ok, so if the banks don’t/won’t foreclose and dump, then what about the institutional investors? They are smarter and more nimble – certainly they will be selling once they sense the top!
Not so fast – according to the WSJ, investor buying is on the upswing:
Wall Street is betting that more well-off Americans will want to be renters.
Financiers who loaded up on homes after the housing bust for pennies on the dollar are buying yet more—despite home prices in many markets being at all-time highs.
Their wager: High prices, higher mortgage rates and skimpy inventory are making homeownership harder. Well-to-do families who might have bought a single-family home in another era are willing to rent a house now, especially if it means access to a good school system.
The number of homes purchased by major investors in 2017 was at least 29,000, up 60% from the previous year, estimates Amherst Capital Management LLC, a real-estate investment firm that made nearly 5,000 of those purchases.
This year, investors have raised billions of dollars from bond buyers, pension funds and even wealthy Chinese individuals to purchase more homes. They have been particularly aggressive buyers in places like Atlanta, Phoenix, and other metro areas with good schools and faster-growing economies.
Cash to acquire and renovate homes has become so abundant lately that some rental investors can’t spend it fast enough. Without enough homes to buy, some investors are now building their own in popular residential markets like Miami and Nashville, Tenn.—upending a traditional pattern of Americans buying starter homes and moving up.
“The American dream no longer includes homeownership,” said Jordan Kavana, chief executive of Transcendent Investment Management LLC, a south Florida firm that has been a big acquirer of rental homes. “You will earn your equity in other ways, not your home.”
The big-time Wall Street investors are betting on the affluent taking over the real estate market, and turning the country into a renter’s society. It may only affect 10% to 20% of the market for now, but that might be enough to keep it all propped up.
Local flippers and ibuyers are providing another floor. Any homeowner that will sell for 10% under value today will have a host of choices to pick from. If you play it right, and have a great realtor help you, it could turn it into a retail sale quite easily!
The biggest threat? While there are still people underwater, today’s market has to be the most equity-rich in history. If sellers had to dump in order to sell, they could – and still make a profit.
But for there to be an extended trend of declining prices, there would need to be a series of sellers in the same neighborhood that were all in the same boat. For now, we only see an occasional dump, and it doesn’t need to be more than 10% off to attract a crowd.
With the vast majority of recent buyers having to qualify for their mortgage, and use a regular down payment in order to buy their house, you have to like the prospects of them fighting to hold on to it, no matter what. Back in the last bust, too many people got in with little or no down payment, and got stuck with exotic financing that exploded on them. Those days are gone.
We’re most likely going to live in Stagnant City, with fewer sales in most areas. But it’s not the end of the world.
Now that the big investors have virtually stopped buying homes, a legislator wants to find a way to regulate them.
Typically the term “institutional investor” refers to private investment firms that buy dozens of residential properties with the explicit aim of generating a steady income stream through rentals. Often they invest the money of wealthy individuals and public pension funds, like those established for California state workers and teachers.
The best example is Blackstone, a publicly traded Wall Street firm that barrelled into the country’s single-family home market in the depths of the Great Recession in the late 2000s. Through its residential investment-focused subsidiary, Invitation Homes, Blackstone is now the largest owner of single-family homes nationwide. In California, they own about 13,000 homes.
But firms such as Blackstone have stopped buying wide swaths of California homes. According to the real estate data firm ATTOM Data Solutions, which defines institutional investors as entities that buy 10 or more homes in a given year, institutional investors accounted for less than 2 percent of the state’s single-family home and condo sales in 2017.
That’s a pretty steep drop from as recently as 2012, when institutional investors accounted for about 7 percent of sales.
Why the decline? California no longer has a glut of cheap houses that can be easily gobbled up in foreclosure auctions. A sustained economic recovery and a lack of construction of new housing has sent housing prices skyrocketing. It’s now too expensive for institutional investors to buy lots of California homes. Blackstone’s Invitation Homes bought only 82 California houses last year.
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