On a foreclosed home, who negotiates the price on behalf of the mortgage owner(s)?
Let's say, a home goes through foreclosure. Its related mortgage was pooled and securitized among thousands of others. Now, the home is for sale. The real estate broker incentive is to set a low price to turnover the property quickly. That's because for a broker time is money.
So, who negotiates the price and protect the fragmented owners interest (MBS investors). Is it the servicer of the mortgage? But, because of his own operating cost he also would have an incentive to sell quickly at a low price. How about the securitization bond trustee. Does the trustee step in and negotiate with the broker what price is deemed acceptable to the MBS investors?
You can see it is kind of a gnarly question. If you have a clear understanding of this process, please educate me.
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Alison R
author, "Diary of A Real Estate Rookie"
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The reason the answers are coming in fuzzy here is that this process is governed by state law, and will vary state-to-state. Some of the funds generated through the foreclosure process, for instance, belong not to the lender or to the investors, but to the original, though delinquent, borrower.
You're also assuming that this hypothetical foreclosed home has only one lien on it, a primary mortgage, but usually by the time a house hits the skids there are competing claimants with degrees of subordination.
However, in general, many of the homes that go into foreclosure may have been bought with government-supported loans, and they government will pay off whoever is holding that mortgage(s), and then those homes will go back to HUD. If you want to buy a HUD home, hit their website: www.hud.gov
If the lender is private, then they will try to sell the home, usually by using an internal department (you may see these lender-owned homes referred to as REO, or Real Estate Owned, homes).
It is also possible that the home gets sold at a foreclosure auction, but that's a last resort. When I went to a foreclosure auction in Jersey a couple of years ago, I think there were a dozen homes on the agenda and then only one actually came up.
The final thing to watch -- and again, this varies so much state-to-state -- is that a foreclosed home may not be "sold for good." Often the delinquent borrower has a period of time to get their finances together and repurchase the home from the foreclosure buyer -- these redemption rights can last for years. I have no first-hand experience with a redemption, but since the original owner is paying off the liens, I assume that money goes to the lender, and the lender does whatever it does with money per its agreement with its investors.
I have a chapter on foreclosures in my new book, but I assume the go-to author on this subect is either Thomas Lucier or Robert Irwin.
ali
author, "Diary of a Real Estate Rookie"
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Doug C
Chief Compliance Officer at Beacon Capital Partners
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It is the servicer of the mortgage. The trustee does not get involved. Thye are generally limited to merely passing funds through to the investors/certificate holders.
The mortgage servicers typically have several levels. Distressed loans and foreclosures are typically handled by the special servicer. Typically, the special servicer also holds some of the last tranches of the securitized debt. They are motivated to get a good price quickly because they absorb some of the loss.
Real estate brokers are not motivated to get the highest price but are motived to get a higher price. (It sounds like you have read Freakonomics). They will price the property to move quickly, but that is one of the goals of the servicer. Most foreclosed properties are in poor shape, empty and prone to rapid deterioration. The foreclosed owners had not motivation to leave the property in good shape. The lender needs to get it sold quickly and get whatever cash they can get for the property.
Guy,
Usually it will be the servicer acting as per the instructions of the investors (whomever they may be) and the leeway granted to him under his mandate.
All parties involved have an interest to to get the highest price possible under the circumstances which means that everybody knows that in the foreclosure/trustee sale the revenue generated will be the lowest.
Having said that, both servicer and broker have an intererest to maximize sales price, however that price is almost always somewhat lower than market price and lower than the balance of the loan but inevitably much higher than any price that will be achieved in a foreclosure sale.
Now as to the rights of the various MBS investors, the money they will get depends on the mortgage they hold (1st, 2nd etc.) and on the terms of securtiazation documents.
Hope this helps
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Ray M
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I do not have detailed first hand experience but in a foreclosure sales attended by friends have indicated that the objective is to unload the property as fast as possible, as you state.
Not sure MBS investors get much say.
Gary K
Multifamily Property Manager
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Gary K suggests this expert on this topic:
The MBS investors get no say in the sale. The lender responsible for servicing the loan makes all the decisions and just sends the money, whatever amount that is, to the MBS investors. All they do is cash the check. The real estate broker just negotiates with the servicing lender. At a foreclosure auction there is no negotiating, it is a true auction, the servicing lender merely gets to set the initial bid, which may or may not equal the balance due on the loan, including forclosure fees.
I have personal experience with this.
Larry Brown
Keith O
Principal., Business Consulting & Diversity Strategies, Keith Otto & Associates. L.P.
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Typically the process is transparent to the MBS investor and the SB trustee. In rare cases the SB trustee has either (1) a contractual or (2) a good faith obligations to help mitigate losses. In this case they employ teams of whole loan traders to complete swaps of loans out of the loan pools and trade these troubled assets to other investors.
However, due the growth in the industry most of the MBS pools are so large that individual losses have little effect on total pool performance. Thus, these distressed asset sales are handled by the REO department of the mortgage servicer.
The mortgage servicer has full discretion to negotiate and sell the property based on market conditions.
Guy,
The process that I've seen is as follows:
The property is sold either by the lender directly through an agent or sold at auction. The funds are then pooled and the owners of the mortgage are paid a fractional share of their investments as received.
The investors are usually left at the mercy of the market. Right now in Metro Atlanta, single family home foreclosures are being sold at 60--70% of prices approx one year ago.
Shawn C
Senior Financial Analyst at Blackhawk Network
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I have a foggy understanding, but I believe that the bank just sells it outside of the real estate agent process. I think it depends on the bank's liquidity and their desparation to turn the property to how low the price will drop.
Specifics will depend on the state of the mortgagor, or the language of the mortgage agreement regarding controlling state law; but in general, whatever funds exist after the (anticipated) auction will go to the mortgage holder, then other lien holders (if any) then if any is left over, it goes to the mortgagor.
As such, the scenario that you propose does not provide any profit to the fragmented owners (who have no say in what goes on) and more likely it will be a loss re. that particular property.
