Investors' foreclosure appetite grows, headaches arise

NEW YORK Fri Feb 18, 2011 5:25pm EST

Police tape marked as a Foreclosure Free Zone is seen outside the foreclosed home of Marie Elie in Elmont, New York, April 9, 2009. REUTERS/Shannon Stapleton

Police tape marked as a Foreclosure Free Zone is seen outside the foreclosed home of Marie Elie in Elmont, New York, April 9, 2009.

Credit: Reuters/Shannon Stapleton

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NEW YORK (Reuters) - Investors are flocking to home foreclosure sales in California and other states where banks have rescheduled auctions postponed last year to fix loan servicing flaws.

But often their intentions to purchase the distressed properties are still stymied by disagreements over a fair price or as auctions are simply canceled.

In California, bank-set "opening bids" won 14,068 properties from auctions last month, a 51 percent rise over December, ForeclosureRadar.com said in a report this week. Investor purchases rose more than 50 percent to 3,272, but were dwarfed by the 12,279 auctions canceled, it said.

"There's just not a lot of inventory" made available, said Sadie Gurley, a managing partner with New York-based GreenLake Investment Partners, a new entry into the field of investors seeking to profit from the "shadow inventory" building up on bank books.

"It's like a funnel," she said.

The trend is similar in other high foreclosure states, such as Arizona and Nevada, according to ForeclosureRadar.com.

Distressed property sales have accounted for a significant share of the housing market, rising to 36 percent in December from 32 percent a year earlier, according to the National Association of Realtors. The purchases can be made by investors or banks, which have ramped up "short sales" in which they agree to sell a home below the balance on the mortgage.

Investors -- who typically aim to buy, fix and re-sell the houses -- are lining up as banks restart foreclosures from moratoriums imposed last year to review faulty processes, such as "robo-signing" of court affidavits or other document issues.

Revelations of shoddy servicing further muddied the foreclosure process, which to investors is key to cleaning up excess inventory and aiding housing's recovery.

Banks have limited sales to others by keeping their opening bids above what the local markets will bear, investors said.

On average, in California, investors are paying 25 percent below market value when winning the auction, versus a 15 percent premium bid of banks that take properties into their "real-estate owned," or REO, portfolios, said Sean O'Toole, chief executive officer of ForeclosureRadar.com.

"In California, the average foreclosure is $150,000 upside down in the mortgage, so if the bank doesn't drop the bid from the amount owed, there's no chance the investor is going to purchase it," O'Toole said.

Many others are canceled as banks redouble efforts to modify loans, conduct a short sale or if they find problems with documentation, he added.

In January, more than 12,000 were canceled in California alone, up from December but down from a year earlier.

At Bank of America Corp, the largest U.S. mortgage-servicing company, postponements will continue as it works on loan modifications, a spokeswoman said.

O'Toole believes the banks are holding onto properties to avoid write-downs, or sometimes to extend servicing fee revenue.

It all adds up to a "measured strategy" by banks compared with dumping the homes on the market, said Bruce Norris, president of The Norris Group, in Riverside, California. For those properties priced attractively to investors, competition is fierce, he said.

Banks will drop opening bids -- sometimes just hours ahead of auction -- springing investors into action to check out the property. These are crucial moments for investors, since margins as tight as 17 percent are easily eroded by necessary repairs or costly delays if the home is still occupied, which it is most of the time, Norris said.

Former owners are hanging on "more often because of all the news articles about robo-signing and maybe the lender didn't have the right to foreclose," he said, adding "unscrupulous" lawyers are giving owners a greater sense of entitlement.

Even so, he expects inventory to rise for the next six months as the system plays "catch up" from the slowdown in the second half of 2010, he said.

"Banks are figuring out that having REO is much more expensive," he said. "That's why they modify first, short-sale second and then reduce bids at a trustee sale. All those options net the bank more than REO."

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