Lessons from the Pros

Foreclosure Update and Guidelines for the Novice Auction Goer

Within the last couple of weeks, the Obama administration released its assessment of its Anti-foreclosure program. The results were minimal. Here are some of the cold hard facts:

• Of the approximately 1 million financially-distressed homeowners who’ve been given mortgage payment reductions through the three month "trial" under the HAMP (Home Affordable Modification Program), only 116,000 have ended up with permanent loan modifications.
• 60,000 borrowers who entered the trial payment plan were kicked out of the program for a variety of reasons.
• HAMP program was created to help three to four million homeowners; it hasn’t helped a fraction of those homeowners.
• 57 percent of those who were helped are still unemployed or underemployed, so they aren’t out of the woods yet.

Some surprising statistics came out this week in the MBA (Mortgage Brokers Association) report. For the first time since the first quarter of 2007, there has been a decline in delinquencies. They went from 9.64% in the 3rd quarter to 9.47% in the 4th. The 4th quarter usually sees a spike in delinquencies because of holiday bills and higher heating cost. This is not a huge decline but it’s something to keep our eye on. We know that there is a shadow inventory of homes that at some point in time the banks will have to release, but this might indicate that the inventory might grow slower.

But if you are still inclined to go bargain hunting at foreclosure auctions, here are a few things to look out for and a few guidelines I teach.

For example, Miami-Dade, FL has a new online auction system that started with the mission of quickly moving a block of foreclosed properties while opening up the process to novice investors and potential home buyers.

This is not a simple business. If done correctly, you could research hundreds of properties a month and only end up buying one or two. Alain Lantiqua, a seasoned investor who likes the new online system, says, "You gotta know what you’re doing. And if you don’t, you’re going to lose a lot of money; people are losing hundreds of thousands of dollars a day."

Here are a few classic examples of mistakes made by novices.

Sehan Thompson, a Fort Lauderdale businessman, admits he made a beginner’s mistake when he bid $9,100 for a North Miami Beach condo with an assessed value upward of $140,000. Less than 24 hours after submitting his winning bid, he discovered that what he had actually bid on was the right to buy a $9,000 condo lien.

Samuel Sontag, a New Yorker, bid $95,600 for the right to pay off a $13,000 Miami Beach condo association lien. After wiring $95,600 to the county for what he thought was a clear title to a one-bedroom condo, Sontag got a call from a Sarasota woman who told him that Indy Mac Federal Bank had a superior lien on the property and there was an outstanding $265,000 mortgage.

You must know what you’re doing. Here are two rules to follow if you want to compete and protect yourself at foreclosure auctions:

I. Do your homework: I could go on extensively about this topic, but here are the key things to check for:

• Mortgage position
• Municipal liens
• Title issues/defects
• Zoning regulations
• Condition of the property
• HOA lawsuits or liens
• Environmental issues
• Neighborhood
• Local market conditions

These are in addition to doing property evaluation. Run both the comparables and the numbers on the deal (like I teach in class). The more information and data you have, the more confident you’ll be with the deal and in bidding.

II. Check for Postponements: It’s very common in the foreclosure process these days that a property scheduled for sale can be postponed to a "future date". Below are some of the causes:

• The bank accepts a purchase contract. In today’s environment, this is often a short sale that the debtor has been trying to get the bank to accept.
• The debtor files for bankruptcy protection. This process automatically suspends any collection efforts (including foreclosure) until relief is obtained by the lender of the "automatic stay" (the automatic stay directs creditors to cease their collection activities immediately).
• The debtor has made a good faith effort to cure the default and negotiated a forbearance agreement with the lender.
• Error or omission has occurred somewhere in the foreclosure process.
• Lender has sold the note and/or mortgage.
• The debtor requests a loan modification and under HAMP, the participating servicer is obliged to evaluate the request.

The key here is having the right tools and knowledge to give you confidence in the deal.

Next week I’ll finish my series on demographic trends.

Great Fortune!

- Diana Hill