About a week ago, I got this message from a reader:
I heard a rumor from a very well placed source that BOFA will foreclose 500,000 houses over the next 10 months. They plan to move these houses very aggressively; they will go to auction 90 days from foreclosure if they are not sold by then. Someone else, very highly placed in Fanny Mae, confirmed this and said there are at least that many again in the rest of the banking system.
Now I will be honest, I have no idea whether this is true, and when I ran it by my investors buddies, the reaction I got was incredulity “Why would BofA want to shoot itself in the foot?” was typical.
But what does “BofA” mean in the message? Is it “BofA as lender who holds the mortgages on its books” or is it “BofA as servicer, who profits handsomely from foreclosures?” Remember, the rationale for buying Countrywide was to get hold of its servicing operation. And there has a good deal of evidence that regulators are tolerating some lax valuations on mortgages. Moreover, more aggressive liquidations might be seen, at least initially, as a plus by investors. Recall when banks first started taking subprime-related writedowns, the assumption was they were putting the losses behind them. And ironically, it seemed that with each quarter, the writeoffs kept getting bigger, yet the party line each time was, “Ah yes, they have really cleaned house, now haven’t they?”
Today, I got this message from a contact in Texas:
When I went to the bankruptcy / foreclosure auctions here a few weeks ago I found out that the whole thing is a charade. Bank of America (for instance) auctions off houses that have gone into foreclosure for the amount owed plus any carrying costs which usually makes the auction price higher than what was owed. A pre-bid was submitted by Bank of America Home Loan Servicing (the rename for Countrywide) in the exact amount of the auction minimum (mortgage owed plus carrying costs). No one else bids so the house is “sold” by Bank of America to Bank of America Home Loan Servicing. In essence, the property is simply transferred from one division to another so that clear title is established. But this is counted as an existing home sale which artificially inflates existing home sales numbers. This is what was happening for most of the 102 BAC mortgages and the 130 Wells Fargo mortgages. For the house I “rent” where the original mortgage was with Countrywide (and then transferred to B of A when B of A bought the property) this is simply a process for getting the house off of B of A’s books and back on Countrywide’s books (now BAC Home Loan Servicing). As I said, it is all charade or smoke-and-mirrors or a shell game.
Later Bank of America Home Loan Servicing will contact a realtor who will eventually put the house on the market for sale. Let’s say that the auction price was $200,000 but the house is now worth only $150,000. Of course when this house is sold by the realtor it is again counted as an existing home sale.
Note that the second strategy applies ONLY to homes already foreclosed upon; it does not establish an intent (or reason) to step up foreclosures. But the fact that the second process will artificially boost existing home sales is worth watching.
Update 11/18, 2:30 AM. Wish I had seen this reader message sooner, it explains this situation:
Intersting story on your blog today regarding BofA foreclosure pipeline. Makes sense that they would try and blow out the REO properties into the current bid, as servicer they’ve been advancing scheduled principal and interest on these dead mortgages into the REMIC trusts for prob 1-2 years now. Once they liquidate a property they are repaid those advances first, and any remaining monies goes back into the trust to pay down the notes. 2 years of P&I (remeber, the “I” they are advancing is very high, 7-9%) plus foreclosure costs could easily encompass the sale proceeds of an REO property (esp a SoCal subprime shitbox), so they are highly incentivized to recoup their money. The interesting part about this is that it causes subprime mortgage loss severities (from the point of view of the mortgage bond holders) to approach 100%. The only winners are the subordinate bonds, who got 1-2 years of credit IO flows and have yet to be written down. There has also been a lot of secured financing to servicers lately, where the securitiy for the loan is the P&I advances that are technically still owed to them. At some point I expect mass capitulation as these servicers will simply be forced to liquidate the REO properties in order to get their advances repaid (and in turn repay their financing). Principal modifications don’t work for servicers, as they need to generate cold hard cash. Distressed sale is their only option given the advances they are owed. I really feel bad for the folks that used the first-time homebuyer credit to try and “catch the falling knife”, they’ll prob be underwater this time next year.