I am watching a property with a scheduled sale date of 5/26 – opening bid posted by Recontrust is $300K over market value of the home, and $50K more than the foreclosing loan. Could this be an error, or what would be the advantage of the lender doing this?
Hi JGR,
In the scenario you’ve described above … this is most likely a “full debt bid” (can’t be more) … meaning the lender does not want to “discount” and has instructed the trustee (Reconstruct in your example), to post the “opening bid” for the full amount owed to the lender. For example … a deed of trust (DOT) going to sale at the courthouse steps might have originally been for $300,000. After a number of months in default, that debt will rise and when it has finally come the trustee sale stage, the lender will publish a Notice of Trustee Sale (NTS). That NTS will include the full debt owed. This “published bid” amount will be captured and tracked in Foreclosure Radar (two places > when you click on NTS/Auction under Open Loans & Foreclosures and in the Foreclosure Profile Report). In my example … let’s say by the time the NTS is published, the $300,000 loan has now ballooned up to $325,423.75 (just to pick a number out of the air). That $325,423.75 is the amount that the lender could opt to sell the DOT at the steps (full debt owed). However, many auctions get postponed and that debt grows. Hence, by the time the property is actually auctioned at the steps, the “published bid” debt might have grown by many thousands of dollars. Lenders can of course opt to “discount” and auction the property far below the full debt owed. In the case you’ve described ("50,000 more than the foreclosing loan) ... this increased amount is almost certainly due to mounting debt caused by continued non-payment.
Why would a lender, with an underwater property, NOT opt to “discount” (opening bid) and thereby entice 3rd party investors to take the problem off of their hands??? Many reasons … some good … some bad … some ugly. I’ll leave that for another post.
Following up on the above … why might a lender post an “opening bid” at the full debt owed (aka a “full debt bid”) versus posting at a deep enough discount to entice 3rd party investors? There can be many reasons … Most lenders have asset management teams that review macro analysis of the economy and real estate market and they must also consider internal issues: e.g. lender?s balance sheet, memo of the week from executive management > ?scale down REO inventory this month but don?t discount below certain parameters? etc. When it comes to individual properties (micro analysis) they will often get a broker’s price opinion (BPO) on the subject property to determine its current market value. The lender?s asset manager decisions are also affected by their exposure on the subject property. If the loans outstanding by that (foreclosing) lender on that property are less than the market value of the property, then the lender will certainly be less inclined to discount ? why should they discount the opening bid when they can make more money by taking the property back as an REO and potentially selling it for a profit. Conversely, if the lender is underwater on the property (same relative position as the homeowner), they MAY have more motivation to discount ? or simply kick the can down the road perpetually and never post an opening bid (but, that?s a different topic).
Some lenders are more prone to discount their DOTs below current market value. Other lenders may be more inclined to post bids at a retail MLS price (no room for a flip). Also keep in mind that some lenders have received some PMI (private mortgage insurance) payments due to investor default, and this can affect their bias towards discounting. Sometimes the ?bias? (formula for discounts) is affected by senior management?s macro views of the economy and real estate market + the firm?s current balance-sheet and ability to withstand any storm. If the near-to-long-term view is positive, then the lender may be more biased towards a warehousing (REO hold) of property in the hopes of better market conditions 6, 9, 12 months down the road.
Sidebar: In the not too distant past, many lenders were having the majority of their PMI claims summarily denied (e.g. claim rejected due to banks? negligent underwriting practices ? many lenders performed underwriting in-house for external mortgage insurers). That trend may be changing as the banks staff up to fight PMI claim rejections and get paid on their PMI. < Thanks to Michelle for this insight.
Sometimes it seems evident that lenders decisions NOT to discount make no sense ? at least to the outside observer. I?ve seen plenty of properties that went bank-owned due to an inadequate (not deep enough discount) opening bid at the steps ? only to see the very same properties (now REOs) listed on MLS at prices FAR (20% to 30%) below the opening bid. It seems illogical to take a property REO and incur rehab, maintenance and marketing expenses when the property could easily have been sold at the trustee sale (courthouse steps). Yet, what seems irrational to the outside observer may make sound financial sense to the lender ? at least one would hope they are making good financial decisions ? we don?t need another taxpayer bailout.