How does this work?

[Big Country]

Foreclosures

 

NEW YORK (Reuters) - Sheriff Leo McGuire presides over foreclosure auctions in Bergen County, New Jersey, where the bidding for a home reached $1.2 million last June -- a record for one of the wealthiest counties in the nation.

 

Homes sold on the auction block for as much as $852,000 this month -- more than quadruple the median home price in the United States. County officials believe they are close to setting another record soon.

 

In Troy, Michigan, Dorothy Guzek, a credit counselor since 1988, has also seen the changing face of foreclosure.

 

Her clients, while predominantly poor and minorities, increasingly are neither. Nowadays, homeowners holding professional careers with six-figure salaries regularly drop by her office. More and more they come from upscale Michigan communities such as Independence and Clarkston -- once the summer retreat for Henry Ford, founder of Ford Motor Co.

 

"Because of the financing that was possible, so many people bought the bigger house, the million-dollar house with the bowling alley or the tennis court outside," says Guzek, who works for GreenPath Debt Solutions, a nonprofit service based in Farmington Hills, Michigan. "People across all income brackets are having financial hardship."

 

For those on the frontlines of the growing U.S. mortgage crisis, these are the early signs that the explosion of subprime loans made to mostly poorer borrowers is reaching higher ground. The damage is hitting homes financed through jumbo loans for more than $400,000 and so-called Alt-A loans that are a notch above subprime and a step below prime.

 

Americans already are facing foreclosure at a record pace, according to the Mortgage Bankers Association. Lenders started foreclosure actions against more than one in every 200 U.S. mortgage borrowers in the last quarter of 2006.

 

About 2.2 million foreclosures due to bad mortgage loans may cost U.S. homeowners $164 billion, mostly from lost home equity, according to the Center for Responsible Lending, a Durham, North Carolina-based research group.

 

In the last three months, the percentage of foreclosures for U.S. homes valued at more than $750,000 has climbed to 2.5 percent, the highest since early 2005, when RealtyTrac, a online marketplace for foreclosed properties, began tracking data. The overall rate of foreclosures also is on pace to increase by a third this year.

 

"Everyone's looking at subprime. The rock they aren't looking under are the adjustable rate mortgages and teaser rates and low money-down loans," said Mark Kiesel, a portfolio manager for Pacific Investment Management Co., the world's biggest bond manager. "It's going to affect prime as well."

 

Kiesel said he sold his Newport Beach, California, home for more than $1 million in May last year after the property appreciated more than 20 percent in two years. He believes delinquencies and defaults will rise, weighing down most of the housing market.

 

California, with 3,384 foreclosures of higher-scale homes since December, is leading the nation, followed by Florida and New York, according to RealtyTrac. The MBA doesn't track foreclosure data by home value.

 

ICEBERG

 

Josh Rosner, managing director at investment research firm Graham Fisher & Co., says the growing numbers of foreclosures outside the subprime market is just the start.

 

"To define the problem as a subprime problem is short-sighted," Rosner said. "It's really seeing the tip of the iceberg as the iceberg."

 

Compounding the risk is the nature of homebuyers of higher-end homes, says Rosner. About 40 percent of homes bought last year were second homes or investment properties. Speculative buyers may be more at risk, he said.

 

Standard & Poor's said on a conference call on Thursday that foreclosure rates are likely to surpass levels last seen during the 2001 recession.

 

"That giant ATM you've been living in has just shut down," said David Wyss, chief economist at S&P in New York. "Consumers are in debt and we've been living beyond our means for some time."

 

CDOs

 

The latest foreclosure data also may spell trouble for Wall Street, where pools of bonds may be susceptible to nonperforming

 

loans that underpin debt vehicles known as collateralized debt obligations.

 

CDOs group debt based on credit quality and are similar to mutual funds in packaging securities to help diversify risk. In CDOs, the strongest debt is at the top of the capital structure, helping to smooth out any drag on performance from weaker debt, such as subprime loans.

 

Just as more expensive homes are beginning to fall through the cracks, the fear is higher-rated bonds within CDO structures may be vulnerable.

 

The declining performance of subprime loans have resulted in CDOs losing about $20 billion in market value, according to investment bank Lehman Brothers.

 

UBS Securities said in a report last month that rising delinquencies may cause losses within some subprime mortgage bonds rated as high as the "A" category.

 

FRAUD-FUELED

 

At the Justice Center in Hackensack, New Jersey, on Friday, the wood-paneled room is filled with about 40 people and the auction is routine. The first property on the sales sheet lists a Korean homeowner with $509,000 of outstanding debt. There are no bidders. Deutsche Bank, holder of the busted loan, buys the property with a quick $100 bid.

 

Sheriff McGuire calls the process "one of the most distasteful parts of my position." He places most of the blame on bankers who allowed questionable lending practices.

 

"This might not have happened if not for these new type of loans," McGuire said, minutes before the auction. The loans also have helped millions of Americans purchase new homes, he concedes.

 

"The banks took a chance on the future, and the homeowners took a chance so there's enough blame to go around," McGuire said. Still, "the banks and lenders have largely set them up for this downfall."

 

Adding to the grief, mortgage scams and con artists trying to take advantage of distressed homeowners abound, boosting foreclosure rates, county workers said.

 

"It's not the American Dream anymore," said Fran Napolitano, a county clerk in Hackensack. "It's 'who can I stab next."'

 

In Detroit's suburbs, hit hard by the U.S. auto industry downturn and financial troubles at General Motors Corp. and Ford Motor Co., the story strikes home each day for GreenPath's Guzek.

 

"It's sad. It's just an awful feeling," she said. "You hope that you can come up with a financial plan to help people remain in their homes, but sometimes it's not the best thing for them."

 

These days, her calendar of eight counseling sessions a day, 40 a week, remains full. Increasingly, she offers different advice than devising financial plans to save her clients' homes.

 

"If they can't afford it, sometimes the best thing for them is to walk away," Guzek said

 

I'm really curious about the bolded section... why would no one bid more than the $100? Is it that you pay what you bid plus assume the outstanding debt, in this case the $509,000?

 

Does anyone have any experience with this?

[dmarc117]

i have attended a few. if no one bids on the property, the financial institution that holds the mortgage gets the property. usually they will read of the properties that are up for sale and the starting bid(which is usually what is left of the mortgage and some legal fees tacked on),then give you an hour or so to get money, usually you need a cashiers check. then they go thru the properties again and the bidding begins. most props dont sell and the bank is stuck with them. in michigan, the foreclosed party has a year(sometimes less depending on the property) to make good on the loan regardless if it was sold or not. this is called the redemption period. so if you were to buy a property at a foreclosure there, you would have to wait a year before u flipped it. you dont get the title until after the year is up.

Edited March 29, 2007 by dmarc117

[Big Red]

If you have a mortgage, the bank, not you, own the home. When the default occurs, the bank really just wants to sell it and get what it can back.

 

Usually, there is a reserve price. My in-laws next door neighbor went through this. A date was set for forclosure, and 10 days before an auction we held. They got nice bids, but not high enough for the reserver. The owner then some how found a way to get enough cash and get caught up.

[Azazello1313]

I'm really curious about the bolded section... why would no one bid more than the $100? Is it that you pay what you bid plus assume the outstanding debt, in this case the $509,000?

 

 

i think that's correct. you're bidding on the property which is still subject to that $500K lien. you have to pay that off.

[MrTed46]

This game cheats

[Yukon Cornelius]

This game cheats

 

 

and its a sin to steal

[muck]

i think that's correct. you're bidding on the property which is still subject to that $500K lien. you have to pay that off.

 

I'm pretty sure this is not necessarily correct.

 

Each state is different. And, sometimes, practices differ county-to-county.

[Azazello1313]

I'm pretty sure this is not necessarily correct.

 

Each state is different. And, sometimes, practices differ county-to-county.

 

 

i don't think it's generally possible to buy a property with a mortgage lien against it and have that lien disappear. they have to be paid off if you want to own the property free and clear. if you have other info i'd love to see it.

[dmarc117]

i don't think it's generally possible to buy a property with a mortgage lien against it and have that lien disappear. they have to be paid off if you want to own the property free and clear. if you have other info i'd love to see it.

 

 

 

i have to agree with az....if there is any lien, mortgage or tax, that needs to be paid off 1st.

[muck]

...unless of course you're buying a tax lien or tax deed from the county itself...

[Azazello1313]

...unless of course you're buying a tax lien or tax deed from the county itself...

 

 

perhaps that is something that could be waived in certain instances, but this question was about a mortgage lien held by deutsche bank.

[dmarc117]

perhaps that is something that could be waived in certain instances, but this question was about a mortgage lien held by deutsche bank.

 

 

deutsche bank already had the loan so the 100 was probably for the fees of the sale. if someone else were to bid and win, they would have to pay off the 509k loan to deutsche bank. thus the starting bid probably wouldve been 509100. unless deutsche was willing to take a loss, they could auction it for less.

[Dutch Oven]

I am doubtful as to the accuracy of this story. At a public foreclosure sale, the bank usually bids the amount of the outstanding debt on the home to buy it back and then resell it. If a private party buys the home, they are not subject to the debt, the bank will have a deficiency judgment against the defaulting party. That being said, generally you don't buy a property for less than the debt owed on it because that is always the bank's opening bid. They don't want to have to mess with a deficiency judgment.

 

Edit to add: At least that's how it is in Arkansas.

Edited March 30, 2007 by Dutch Oven

[muck]

In the event the county sells the tax lien, the bank will have to eventually pay the lien (which means the tax lien buyer will get a profit), or the bank will lose the entire amount of the mortgage as the lien holder stands infront of the mortgage. The only thing that gest in front of a state/county tax lien is the IRS.

[Piles]

I am doubtful as to the accuracy of this story. At a public foreclosure sale, the bank usually bids the amount of the outstanding debt on the home to buy it back and then resell it. If a private party buys the home, they are not subject to the debt, the bank will have a deficiency judgment against the defaulting party. That being said, generally you don't buy a property for less than the debt owed on it because that is always the bank's opening bid. They don't want to have to mess with a deficiency judgment.

 

Edit to add: At least that's how it is in Arkansas.

 

 

 

Ding Ding Ding - We have a winner!!! Bank will ALWAYS bid the amount owed. If you want to really do well with foreclosures you have to get the house BEFORE it becomes a REO....

[proninja]

Ding Ding Ding - We have a winner!!! Bank will ALWAYS bid the amount owed. If you want to really do well with foreclosures you have to get the house BEFORE it becomes a REO....

Actually no, they won't. Not at all. I look at 30 or so homes going to auction weekly, and I've seen some with mortgages/tax liens/liens well over what the home is worth. The bank is typically just trying to minimize their losses, as they don't want to own real estate at all. Now, the bank will obviously bid at times, but it's far from a guarantee.