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2009-02-03 18:05:15

Will Acorns Solve This Crisis?

It seems the lenders of the world have no choice, but to chase their tails. Whether you prefer a domino theory or remain partial to that glass house with a rock-throwing contest, the parallel is clear.

On the one hand, unprecedented waves of foreclosed properties have overwhelmed these investors. They’ve become homeowners on a grand scale. Since a distressed property will not fit through the ATM machine and the holding costs are astronomical, they have little choice, but to sell these houses off--and quickly.
Mr. Lender sends an e-mail to his asset management company, along with the message, "Unload this turkey now! I need to cut my losses, while there’s still time to apply for more government money."
Sure, it makes sense that a quick sale will reduce the inventory and bring us one step closer to the end, but I see it differently. More like the 'Ice Age®' character, Scrat chasing the acorn. He cornered the slippery nut on the ledge of a huge glacier, and though he knew it was an impossible situation, still grabbed for it. In the meantime, while stuck on that huge mountain of ice, a leak sprung, which he quickly blocked with a primitive paw. Then another leak, blocked with another paw, so on and so forth, till he ran out of body parts to stop the inevitable meltdown of said glacier.
So the asset manager gets an "REO (Real Estate Owned by the lender) Specialist," which typically means a Realtor® h/she can bully and then persuade to approach strange houses and convince sometimes hostile occupants that their days are numbered. Not to mention, they must shell out thousands of dollars of their own money for trash-outs, repairs, re-keying and other expenses. Of course, the lender will pay the agent back; check’s in the mail?
The home is promptly listed at a ridiculously low price, which is sure to attract attention and often times will bring multiple offers. Escrow closes and the surrounding residents all get together to plan a housewarming BBQ for the new neighbors. "Wait a minute," says next-door Bob. "I bought my house two years ago for $340,000 and it's the same floor plan. These guys only paid $199,000. What does that mean to my market value? And my loan adjusts next month."
Flash back to Scrat. Looks like a new leak has sprung. Yes, the bank nabbed its acorn, albeit a smaller one. Meanwhile, their other investment is right next-door, and they hold a first deed of trust and fully used equity line of credit that equals far more than the house is worth. "Shhh...." says Mr. Bank. "Maybe they won't notice."
Oh, they noticed all right. To the tune of several million folks walking away from their homes. 
Damned if they do and damned if they don't.
I cannot understand the thinking of these banks. Are they so overwhelmed by the crisis to not see the daylight, because the sun's too bright? Sure, baby steps have been taken with government-sponsored programs, and some of the big players have staffed up their loss mitigation departments, but there is a long way to go. The math speaks for itself.
I have seen a number of potential short sales turned down by the lender, only to have the house foreclose, put back on the market as an REO transaction and fetch far less than the original short sale offer. Not to mention the huge costs associated with the entire foreclosure process (Estimated by some at $30–$50,000).
What am I missing here? Not only has the bank recovered less money from the sale, the additional costs have sunk the profits even more. Sure, some of these transactions may be offset by PMI insurance, and yes, there are certainly frivolous short sale proposals out there. I could fill an entire gigabyte with reasons, rhymes and rhetorical excuses.
My quite biased opinion though, says it’s all about the lack of leadership and the consumer attitude that is affected by such. Has any financial institution come out and said they plan to fix the problem and then progressed beyond mere words? Other than a few token moves, it seems most take the approach of Scrat, attempting to plug the ever-growing series of leaks. It’s obvious the glacier is melting, and fast.
Come on lenders, step outside the boardroom for a moment and examine the problem for what it is. Maybe start with the math, and hmmm…end with the math. If you continue to take these houses and sell them for pennies on the dollar, not only will you continue massive free fall losses to your company and shareholders, you will also erode the value of your other investments.
How about this for an option….keep people in their homes.
Could you look at the distressed homeowners as human, rather than pariahs to be disposed of? Maybe create a program for suddenly unemployed folks? How about an across-the-board program to adjust those interest rates—perhaps with conditions of equity sharing? Ever thought about trading that lost equity with a silent junior lien? Oops, that means you would share in the risk. Wait, aren’t you already doing that?
You may be surprised what a bit of good faith may do. More than 30 years ago, the Grameen Bank was founded in Bangladesh, with the intent of lending monies to impoverished people. The project was initially ridiculed, until it was proven that most of the loans were paid back as agreed. In fact, this organization won the Nobel Peace Prize in 2006. For lending cash to distressed people. Go figure.
What does that say about human nature?
To me, it is no surprise at all. Treat people with respect and dignity and chances are, they will reciprocate. We Americans are famous for bragging about how we have learned from our mistakes and the mistakes of others. Maybe once in a while we can learn from success? Maybe?
Look up the word “partner” in the dictionary. Okay, I know that won’t happen, so here is the definition: “a person who takes part in an undertaking with another or others, esp. in a business or company with shared risks and profits.”
Can we add that word to the contract?
Lets work with those homeowners who have not yet been delinquent on their payments, but have a rate adjustment coming or perhaps a pending financial problem. Do you have to wait till their credit is destroyed? Many of the lenders won’t give you the time of day, until you are 60 days behind. Jeez, we’re supposed to be in the worst economic crises since the Great Depression. Gimmee’ a friggin’ break!
“That is so naïve Mike. The problem is much more complicated than that. By the way, where’s your flag pin?”
Don’t get me started. Look at history. Why do you think so much attention has been placed on that most subjective measurement of all, consumer confidence? We are a society of living, breathing humans, not numbers and statistics.
I challenge the financial institutions with this article. If we can speed the attitudes along, I’d bet a change would come sooner than we think. Now that we have an administration to hype us with visions of change and reform, it’s time to jump on board.
Mike Butson is a real estate practiioner and a RealTown Blog member. He specializes in real estate fianance and marketing. Check out his RealTown Blog.

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