STUPID BANKS !

Unless you have been living under a rock for the past several years, you are probably aware of how absurdly banks and mortgage lenders operated between 2002 and 2007. In short... the banks were stupid and now hundreds have gone out of business with many more barely hanging on.

As the foreclosure crisis has played out, one thing that has remained constant is the banks. They are STILL stupid! The very same banks and management teams that cluelessly raced into this mess are now blindly flailing away at trying to deal with the huge volume of foreclosures and they are doing a miserable job.

I worked with one property manager at a large mortgage lender whose job is managing and liquidating foreclosed homes. His typical caseload during normal times would run 12 – 15 homes. This is the number of homes he is able to effectively manage and sell at realistic market prices. At the time I was attempting to buy one of the homes he managed, he had over 300 houses he was tasked with liquidating and more were being assigned to him every day. The scale of this problem is such that the lenders are simply unable to effectively manage all of these foreclosed homes.

 The process has become very familiar at this point. The mortgage lender funds a fraudulent loan. This loan rapidly goes to foreclosure and ends up on the desk of a property manager. This manager spends a few minutes (all he has) reviewing the details of the foreclosed loan and discovers that the home was valued at $300K when the loan was funded. So he lists the property for sale with a foreclosure specialist real estate agent for $275K. This agent (who probably has 100 similar listings) has an assistant put a lock box on the home, shoot a picture from the street and put the home into the multiple listing system. Neither the property manager nor the real estate agent ever actually inspects the home.

 All of the utilities at the home are turned off. The yard is not maintained and rapidly goes wild. As the home sits vacant for month after month, it is vandalized repeatedly. Bums break into the home and steal all of the copper plumbing and electrical wiring. The outside heating and air-conditioning compressor is ripped apart for the copper wiring. The windows are broken and anything of value inside is stolen. Meanwhile the property manager lowers the price every month or so…  $225K,  then $150K, then to $100K…$75K….$60K and finally the remains of the home are consigned to an auction company where it is sold for $35K. If the lender had effectively managed this sales process from the start the home might have sold for a realistic price of $120K.

 Current market factors are working to ensure that these distressed homes suffer price devaluation far beyond what should occur. Values are definitely overshooting to the downside. The key factor in this is the combination of extremely poor property management and frozen credit markets.

 Most of these foreclosed homes are not secured and are allowed to suffer severe degradations in condition. A home that is in bad condition or that needs more than $5,000 in repairs does not qualify for GSE conforming nor FHA loan programs. So if someone wants to purchase these homes their only option is to pay cash. This factor alone immediately removes 90% of potential buyers.

 Another factor is that lending standards in general have gotten tighter than they have been at any time in the last 60 years. The mortgage lending markets have not responded to the foreclosure crisis by returning lending standards to where they were before the recent boom. Instead, lending guidelines have tightened up far beyond anything that has existed since WWII. Today, if you wish to purchase a home you must have A++ credit, excellent income and a solid down payment.

 The combination of these two key factors has worked to make financing the purchase of these foreclosed homes impossible. If someone wants to purchase such a home, it is a cash only proposition. This removes the overwhelming majority of people who live in the area from being able to purchase the foreclosed properties. They simply do not have the cash.

 It is this overshooting to the downside in the market correction that is creating clear opportunities. Homes in the neighborhoods I am targeting can now be purchased for less than they were bringing 20 years ago. The number of people looking to rent a home is increasing, as people are unable to purchase due to the credit crunch and due to the shortage of rental homes caused by the huge numbers of bank owned homes. Homes are renting for far more than 1% of value on a monthly basis and fully renovated homes can be purchased for less than the materials costs alone of building the same home new!