Monday, June 11, 2007

Below The "Upset Price"

A report from MSNBC. "Brett Golden, 31, was one of the few bidders at a recent foreclosure auction to walk out with a purchase: a 2.5-story, 1,352-square-foot house in Queens, N.Y., that he got for $365,000. The previous owner had bought it in June 2005 for $415,000. Once Golden and his father, who together run a 50-year-old family business of buying and flipping foreclosed properties, are done fixing this place, they hope to sell it for about $480,000, netting up to $80,000 after expenses."

"Buying the house wouldn't have made sense but for a small detail: The mortgage lender, HSBC, put it up for auction for $90,000 less than it was owed. In other words, it went below the 'upset price' of the property. The upset price, also called the judgment amount, is what the bank is owed on the property, usually the sum of the outstanding mortgage and any interest and fees accumulated since the start of the foreclosure process. Normally, lenders put up houses for auction with bids starting at the upset price in order to recoup their costs."

"But as foreclosures increase, some banks are beginning to reconsider their required bids. 'In the past few months, I'm starting to see banks come down on upset prices,' Golden says."

"For many real estate investors or simply folks looking for a cheaper home to live in, finding a deal in foreclosures has become increasingly difficult. A lot of the homeowners now in foreclosure have drained the equities in their homes with multiple refinancings, have mortgages for more than 100% of the property value or simply bought at the height of the market."

"The banks, after all, know how much these houses are worth. Before a house is put up for foreclosure auction, it's usually appraised. And though banks weren't as diligent with appraisals when the market was booming, that's starting to change, says Brian Tracz, a New York real estate attorney specializing in foreclosures."

"'For the last five years, the banks blindly bid their judgment amount to recoup their loss,' Tracz says. 'Now I think you're going to start seeing banks bidding less if the appraised values don't justify the judgment amount.'"

"To be sure, this trend is in an early stage and has yet to be seen in many parts of the country. In Florida's Miami-Dade County, for example, where almost 25,000 properties went into foreclosure in 2006, banks haven't gone below their upset prices, according to Richard Housey, a real estate investor who specializes in pre-foreclosures and attends the county's twice-weekly auctions. 'That's been a real problem for investors,' he says."

"In the Chicago area, lenders are not only starting to go below the upset prices on properties, but they're also becoming more flexible with so-called short sales, says Jane Garvey, the president of the Chicago Creative Investors Association, a local network of real estate investors."

"In all, whether a lender will sell below a property's upset price largely depends on where the property is located, says Jay Brinkmann, the vice president of research and economics at the Mortgage Bankers Association, an industry group. If lenders expect real estate prices to go down in a particular area, they might decide to put properties on the market now to cut their potential losses. If they expect prices to remain steady, they may hold on to the properties for better prices later on."

"Take the Los Angeles area. Lenders are beginning to sell below the upset prices on properties in Los Angeles County. But that's not happening in nearby Orange and Ventura counties, where prices are steadier, says Larry Loik, the founder of the Real Estate Investor Network in California."

"Needless to say, the concept of selling below upset prices isn't new. It was particularly common in the housing crash of the early 1990s, when lenders faced a glut of hard-to-move properties, says Jonathan Miller, the president of Miller Samuel Real Estate Appraisers in New York. But now, Miller doesn't expect such discounts to become nearly as widespread."

"'Lenders have become much more sophisticated in terms of avoiding foreclosures,' he says. 'One thing they learned in the last housing downturn is it's extremely expensive in terms of managing properties.' Instead, banks will now focus on helping homeowners prevent foreclosure, he says."

But that may be more difficult if the lender that originated the mortgage sold it to investors in the form of mortgage securities, a particularly likely scenario in the subprime market, where foreclosures are now most common."

"When a bank sells a loan to investors, it has less flexibility to negotiate a settlement with the borrower, such as refinancing at better terms or repackaging the loan so that any delinquent payments are tacked on to the remaining loan balance, says the Mortgage Bankers Association's Brinkmann. Once the property is in foreclosure, on the other hand, the lender might have fewer such limitations, he says."


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