I’m not old enough to stand here and tell you that I really remember the real estate crash of the late 80’s and early 90’s, but I did live through it and my family felt some significant effects from the constraint on credit and lending institution decision making during that time. Needless to say, not a pleasant experience. Now that I’m in the industry and my day-to-day revolves around working with people in situations where time is extraordinarily important I’m continually amazed by folks who ask me if I’m excited about the crashing real estate market…my answer “no way” usually shocks people. “But your business must be doing great”, they say. My business isn’t bad right now, but a crashing real estate market and constraint on credit is not good for anyone. George Sanders article below is a good case in point. To me the situation he outlines is about bureaucracy and mismanagement. The people tasked with working out trouble loans are unfortunately poorly trained for the job. They aren’t given the authority to make a decision about accepting a 20% discount on appraised value (don’t get me started about “appraised value”). So property’s languish, owner’s credit is crushed and the market continues downward. Some lenders do a very good job and analyzing the market and making timely and appropriate decisions - they’re usually staffed with veterans at the top, are relatively autonomous and know the markets within which they’re working. Unfortunately, as Mr. Sanders alludes too, many are too removed from the actual collateral and market.
WSJ Article:
Lack of Salvage Skills Hurts Home Lenders
By GEORGE ANDERS
September 19, 2007
To make an American mortgage executive wince, just say “Stockton.”
Last month, RealtyTrac.com, an online property marketplace, cited the central California city as the nation’s foreclosure capital, with 8,169 foreclosure notices filed in its metropolitan area during the first half of this year — one for every 27 households. A 26-month backlog of Stockton homes is for sale. Buyers are scarce; prices are skidding.
That’s bad news for the mortgage industry, which could use some pointers on coping with adversity. Some shakeout in the housing market was inevitable. But as defaults and foreclosures mount nationwide, there are signs home lenders are responding in ways that aren’t making the rout any easier on themselves.
For the past 15 years, the mortgage industry has focused mostly on developing better ways to make, sell off and service home loans. Those “front end” efforts have fueled tremendous growth. All the while, the industry has largely neglected the “back end,” the grim but vital task of salvaging loans that go sour.
Jerry Abbott sees the consequences of that neglect every day. His Stockton real-estate brokerage seeks buyers for foreclosed homes. Many of his sales are at a 10% to 15% discount to already-weak market prices. Legal costs associated with foreclosure eat up more of the proceeds. Lenders take a big hit, but at least they recover something.
To Mr. Abbott’s chagrin, many lenders don’t grasp the futility of holding out for boom-time prices in a collapsing market.
Lenders trying to sell a foreclosed home for $250,000 often don’t react pragmatically by cutting a deal when a bidder offers $230,000; instead they might counter with a token — and potentially insulting — price reduction of $1,000. In such situations, Mr. Abbott says, homes don’t sell for ages, and when they do, they fetch far lower prices.
Click here for complete article
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