Saturday, June 02, 2007

The REO Auction Heimlich Maneuver

This is our third update using semi logarithmic paper plotting California Foreclosures. It looks like the train to hell, is on schedule. The number of foreclosures is increasing at a steady geometric rate, and we are in the prime buying season for real estate. That gets a little scary when you realize that home purchases taper off after school starts. So that factor could exacerbate the problem. We are presently at 34,000 foreclosures (sounds like a pilot giving and altitude report) and if it keeps up at the present rate, it doesn't look good, come November. Double click on the chart for a larger, more depressing, image

---------------------------Data courtesy of

There is a little whisper running around about the hedge fund insurance for these mortgages. They might not have to cover loan fraud. Looks like the underwriters for these loans have found a loophole.

People are slow to realize what is happening (auction wise). The bank takes title to the property at the foreclosure auction. (who's going to bid at that price?) We know that it's not going to move as an REO real estate listing. So what happens next? The banks in an area get together and have an auction to clear out their REO's. They've had two in the last month, one in LA and the other in San Diego I believe.

20,000 to 30,000 foreclosure houses will have to be sold in California in the next year, a majority will be REO bank auctions. No Realtor involved, as is, cash on the barrel head. What's not realized is that this auction party has only just begun. That's a lot of houses to sell in a down market; the price has to be right. The buyer can't do a "No Doc." You might want to write your Congressman and request that they put Realtors on the Endangered Species List. Don't be shocked if you get a letter back saying they will look into it.

Banks are just managing the property for the lien holders, whoever and where ever they are. The real pain for the debt holders has not set in yet. If we have a full year of REO auctions, prices are going to drop off a cliff.

San Diego currently has 21,300 real estate listing. The Realtors claim that's about 9 months of inventory. San Diego banks alone, either have to move their 4,600 REO's at auction or there will be 25,900 real estate listings. If you examine the graph, this is the only solid approach to the problem. They have to keep up with the new stuff coming in.

The lien holder has new problems. The tax based price for the REO is the foreclosure sale amount (full retail if it was a 100% loan). Now as a new land owner, they have property taxes to pay, of 1% per year. The lien holder loaned the money expecting a 6% return, gets no return and is dunned for taxes and maintenance. Talk about feeling used and abused, I thought that only happened when you got married.


Anonymous said...

Jim, is that 34,000 foreclosures in California, or San Diego? I'm guessing all of California. What is San Diego currently?

Jim in San Marcos said...


Thanks for pointing out my error, I corrected it. I'm collecting figures on three different things. California, San Diego County and San Marcos.

I used a figure of 4,600 REO's for San Diego County. There are some arguments that suggest that the figures could be misleading. If there is a first and a second mortgage on a house, conceivably there could be two foreclosure actions listed for one house. What we are really looking at is an indicator that suggest that the problem is going from bad to worse.

Jim in San Marcos said...

To explain a little on this graph, It originally came out Dec 21, 2006 titled Bankers Nightmare.

The three lines represent the high low and middle guesstimates.

The second one was posted April, 3 2007 titled Bankers Nightmare Revisited

So it's been around a while