In reading various bubble blogs, it seems that when a house goes REO, the banks are very stubborn in dropping the asking price. Like the FB/former-owners, they too are hoping a GF will come along to bail them out on the property. So, does anyone know what a typical bank’s strategy and process is to figure out when and by how much to drop the price?
From the outside, it seems that a bank could keep the price unchanged for a considerable amount of time by using the healthy part of their business to subsidize the negative cash flow REOs (i.e., maintenance costs, taxes, fees, etc.). Assuming that it’s a large lender, it would take ages for a bunch of non-performing REOs to impact the income and cash flow statements to where the stockholders would see any material negative impacts.
Furthermore, the bank would be dead-set on price reductions if it resulted in a loss since they’d have to take the hit on the balance sheet, which (if big enough over time) would hit the stock price and perhaps increase regulatory capital needs.
As such, it seems that banks are incented to let the houses sit for a long, long time and only aggressively cut prices if they feel the REO portfolio is getting out-of-control. The only catch would be regulations that might force them to regularly adjust the balance sheet value of the REOs to reflect market conditions (i.e., mark-to-market).
Does, anyone have insights on this hypothesis? How did it work in the S&L Crisis/RTC days? Thanks!
The REO portfolios are already out-of control, and foreclosures are just starting to tick up dramatically. As you can realize, their losses on portfolios are going through the roof. One change I see happening is that the risk department, not the REO department, are going to be setting the sales price in line with their estimates of market value. Property valuation areas should be reporting to the CFO area, not the servicing area. There has been competing interests in these banks, with trade desks asking to overrule appraisals and set the price to make their deals, as well as incentives for REO salespeople who end up colluding with investors, all of whom are in CYA with the losses. The CFO and the auditors want to know what the market value is, so mark-to-market, while a difficult information processing task, is exactly where they are going.
REO that are closed in under 30 days are suspicious because money was probably left on the table. What is worse is to see a property with 500 days on market, where they accept an offer from the same investor who made a much larger offer a year ago. That is why independent values are so important to a company, yet are so elusive. What is the value of an unsold property? Reminds me of Shroedinger’s Cat. You can’t know for sure the loss or profit until you sell the box.
I also agree with you doubledogdare. I have several clients who I have nothing but REO, Foreclosure, and short as keywords for thier searches. In all of these cases the pricing on these homes is still at a frustrating level. Additionally we see some VERY long market times for these properties as well… It is hard to be patient.
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