Discounted mortgage notes could help stop US foreclosures

Discounted mortgage notes could help stop US foreclosures

 

(CHICAGO) Where politicians and bankers see vexing liabilities in defaulted mortgages and foreclosures, Robert Lee sees opportunities as he picks up the pieces of the housing bust.

 

His company, Foreclosure Trackers Inc, which he co-founded with president David Phelps, is based in Huntington Beach, California, in a bank office building where some of the first sub-prime loans were created. Buying defaulted mortgages at a discount, Mr Lee encourages and enables owners to stay in their properties and avoid foreclosure. His company buys the loans, not the homes, then employs a ‘work- out, not kick-out’ approach in working with homeowners.

 

Unless a comprehensive federal bailout reduces foreclosures, areas with the highest defaults will continue to show dramatic price declines as more properties fall into the hands of lenders and courts. The idea of discounting notes to reflect realistic market values may be the key to getting the market on its feet.

 

Yet you won’t see Lee running bus tours of neighbourhoods burgeoning with repossessed homes or short sales (for less than the mortgage balance). Foreclosure Trackers is buying first-mortgage notes, not homes at bank auctions.

 

While, at first blush, it seems to make sense to buy foreclosed properties at huge discounts, ‘the lack of equity in these homes makes this a risky investment’, Mr Lee said. Foreclosures may look like bargains, but they could be investment sinkholes in the worst markets where prices continue to drop.

 

With roughly US$3.5 trillion in homeowner equity wiped out since the spring of 2006 and foreclosures reaching the highest level since the Great Depression, a time of reckoning is here. The US government should enable a massive writedown of these losses so that everyone can move on.

 

Mr Lee has been investing in foreclosures for 12 years and defaulted mortgages since 2003, when the boom was taking off. He gives free seminars to would-be investors on buying mortgages.

 

Buying loans on which borrowers have been in arrears on payments, sometimes more than a year behind, Mr Lee concentrates on first mortgages. Using capital from private funds, he buys these loans directly from banks, loan servicers and sub-prime lenders at substantial discounts.

 

Since he’s buying in areas where equity has been ravaged by the housing bust, he fixes the current value of the property through a realistic, detailed ‘broker price opinion’. Say he finds a property with a US$750,000 mortgage, but his broker opinion determines that the property is worth only US$510,000 in the current market. He offers $255,000 for the note.

 

If his bid is accepted, Mr Lee becomes the owner of the mortgage. He then contacts the homeowner and offers to cut the principal owed to US$408,000 ‘on the condition the homeowner is able to refinance with another lender within 60 days’. If the borrower can refinance, the new lender pays off Mr Lee’s outstanding mortgage lien, netting him a profit of US$153,000.

 

What if refinancing isn’t an option? Mr Lee may offer a loan modification, reducing the principal and interest payments. He also provides services to improve credit scores so that borrowers can eventually refinance. Through his efforts in working directly with homeowners, he says less than 15 per cent of defaulted first mortgages end up in foreclosure.

 

There is no shortage of properties in default or foreclosure in California, joining Arizona, Nevada, Florida, Michigan and Ohio as a state with the most bank-owned properties.

 

Banks aren’t able to deal efficiently with the unfortunate bumper crop of non-performing loans.

 

‘Lenders are not in the collections, real-estate, construction or property-management business,’ Mr Lee says. ‘They’re in the lending business.’ Banks and policymakers are stymied by the current wave of foreclosures. Far too many borrowers don’t qualify for refinancing due to tighter credit. Equity values have dropped like hailstones in numerous markets, so new mortgages may make little financial sense to lenders.

 

Many homes have never been occupied by owners or have been boarded up or damaged. Some mortgages were obtained fraudulently.

 

It can be even more complicated to locate, acquire and discount the notes, since only properties are typically advertised for sale. It’s also essential to obtain the true market value of a home. Mr Lee relies upon appraisals that give him a down-to-earth ‘quick sale’ price, something you may not get from the average real-estate agent.

 

As Congress and regulators perform damage control to save homeowners and mortgage giants Freddie Mac and Fannie Mae, they will need to do some painful math. Home prices were grossly inflated during the bubble. A massive reappraisal of equity needs to happen. It’s time to revalue the American Dream. — Bloomberg

 

Source:  Business Times