Are we witnessing the greatest example of collusion in US, if not world history right before our very eyes?
col-lu-sion [kuh-loo-zhuhn] – noun …a secret agreement, esp. for fraudulent or treacherous purposes; conspiracy: Some of his employees were acting in collusion to rob him.
Currently, the number of bank-owned/REO properties on the market is estimated to comprise only 30 percent if not only 5 percent of the total foreclosed property (REO) inventory on banks’/financial institutions’ books. The remainder of the REO inventory is being held back from being sold by the banks/investors who own them.
But why?
An immediate sale of all properties on the open market would crush the housing market. An increase in inventory of that amount and at that rate would create a Buyer’s Market like we’ve never seen before. Market values would plummet. This would cause even more home owners to say, “Screw it!” and let their homes go into foreclosure. That would cause market values to plummet even further and the US economy could potentially collapse.
Even if the US economy could take it overall, this scenario would, at the very least, crush banks and lenders. Every property that is on their books would be worth less and less as market values plummet. This would decrease the value of those institutions even further. Without much, if any TARP money to bail them out, some banks would be faced with Chapter 13 bankruptcy. To add salt to the wound, banks/lenders could be staring at yet another wave of foreclosures from home owners that bought in the last few years, many of whom only put down 3.5% percent using FHA financing.
The way for banks/lenders to avoid this scenario is to slowly leak properties on to the market adjusting the valve as they deem fit, which is what is happening as you’re reading this. By releasing only a few at a time and causing a decrease in overall inventory, they are causing the market to start stabilizing. This is happening right now – most likely in your town right before your own eyes.
For example…in the Washington, DC area, inventory is down over 50 percent from last year and almost 70 percent from 2007. Why? Partially because there are more people that can’t afford to sell. But it’s mainly because the number of REO properties on the market has decreased dramatically. There is very little inventory and buyer demand has doubled which has caused prices to stabilize. In some pockets of Northern Virginia, market values have increased by 2, 5 even 10 percent since January 1, 2009 (yes, you read that correctly – I can send you comps/examples if you don’t believe me).
In essence, banks are artifically controlling the housing market and values.
But this can’t be a “one bank” scenario. No one bank has control over the majority of the REO’s in the country. Nor does any one bank have the gift of telepathy or mind control to persuade other banks to not flood the market with their REO’s without their knowledge or consent. Several if not many US (and international) banks/lenders must be on the same page as one another for this to work.
col-lu-sion [kuh-loo-zhuhn] – noun …a secret agreement, esp. for fraudulent or treacherous purposes; conspiracy: Some of his employees were acting in collusion to rob him.
It’s very hard for me to believe that banks are not colluding with each other to save their a$$es by stalling the sale of REOs sitting on their books at this very moment.
But wait, there’s more…
Those within the US government “strongly suggested” a foreclosure moratorium back in October of 2008 and again in the beginning of 2009. This was intended to “help save those who were about to be foreclosed on” by giving them a few months to save up money and get back on their feet with their payments or getting loan modifications. We all know how that turned out…
So what was the real reason they pushed for those foreclosure moratoriums? And why haven’t the foreclosure floodgates opened now that the foreclosure moratoriums have been lifted?
Those foreclosure moratoriums had the exact same affect on the housing market as holding back REOs from being sold – it artificially decreased housing inventory helping cause prices to start stabilizing and get buyers off the fence and into the market (aka artifically controlling the housing market and values).
Here’s another question for you…which came first, the banks holding back REOs from the market or the government’s request for foreclosure moratoriums? Not quite sure because they both started happening at about the same time (must be coincidence).
NAR and many others have fought vehemently to keep banks out of real estate for this and other reasons. Yet, here we are witnessing banks in cahoots with each other with their hands deep inside the real estate cookie jar doing the very thing we were afraid of them doing in the first place. Is it that no one cares or that everyone is turning a blind eye?
Kim Hannemann
June 17, 2009 at 11:56 am
I doubt it’s collusion. They aren’t sharp enough. More likely, I think, is a combination of federal and state moratoria, government jawboning (“let’s try to keep people in their homes”), and corporate bureaucratic overload and bungling – they can’t handle the volume (see short sales). But if I’m wrong and the investors/servicers are keeping foreclosures in the hope that they will get better prices for them by not flooding the market, does that mean they are colluding? Or have they accidentally gotten smart?
Dan Connolly
June 17, 2009 at 2:29 pm
I don’t think it has anything to do with the market. If they revealed how deep their losses are they would fail. They want to keep it looking like they are in the black.
Bob Wilson
June 17, 2009 at 2:48 pm
It’s smart business by the banks to do this. Most markets couldnt absorb the inventory and prices would go off a cliff, so they might as well control the flow.
Is it collusion? I dont think so because I believe it’s more a directive from the Feds – “Don’t kill the market by dumping inventory the way the knuckleheads at the RTC did in the 90s”.
But its more than just that – its a two sided coin with Dan’s point being the other side.
Nashville Grant
February 23, 2010 at 7:23 pm
It’s also slowing the natural market correction that would bring us back to equilibrium much faster than this current bureaucratic mess. Either way, tons of value is lost, you choice on how quickly.
Benn Rosales
June 17, 2009 at 3:05 pm
Well, because there is no collusion doesn’t mean that it isn’t understood by the fed and the banking chairs that it would be catastrophic to dump failed assets onto the market all at once.
It seems logical to create a demand, but I do agree that it seems shady, but I wonder what this post would be about if they did what seemed morally correct in dumping it all at once onto the market- oh there wouldn’t be a post because there would be pandemonium in the world.
In order to determine a starting point of a value you have to create a demand, even if that means controlling output. Opec, and other oil cartels do this every day, and so long as we’re talking about baseline values and not overheated pricing, so be it.
Bob
June 17, 2009 at 3:51 pm
“NAR and many others have fought vehemently to keep banks out of real estate for this and other reasons. Yet, here we are witnessing banks in cahoots with each other with their hands deep inside the real estate cookie jar doing the very thing we were afraid of them doing in the first place. Is it that no one cares or that everyone is turning a blind eye?”
This is apples and oranges. Banks in real estate meant banks acting as brokers. In the present scenario, the banks are the owners of real estate.
Big difference. Where this changes is if the banks argue that they need to broker their own listings, which is what I expect to see.
Thomas Johnson
June 17, 2009 at 4:03 pm
No one bank has control over the majority of the REO’s in the country. Nor does any one bank have the gift of telepathy or mind control to persuade other banks to not flood the market with their REO’s without their knowledge or consent.
Among the major TARP recipients there is one major shareholder: Tim Turbo Tax Geithner. Remember that all TARP funds were distributed with preferred shares as collateral. There is only one owner. US Treasury Dept.
@Bob: They can be bank FSBO!
Matt Stigliano
June 17, 2009 at 4:08 pm
Danilo – Perhaps you’re right. I’m sure they’ve all been panicked and trying to figure out solutions and it’s not as if they don’t talk amongst themselves, so the idea doesn’t seem all that far-fetched. If it is collusion, I’m sure there would no regulator to step up and call it for what it is either.
I just watched a short sale that my buyer put an offer on fall through. The bank decided it didn’t want any of the offers that were made (4), including one above list price for cash. They let it foreclose.
I think we’re facing a bit of a temper-tantrum by banks. My experience and the stories of others tell a tale of banks who just aren’t as interested in clearing the inventory as we all are. Short sales have become a joke to many and allowing consumers to be put in holding patterns as they wait for an answer…any answer…has slowed the buying process down. I’d love to see some stats on how buyers are out there with offers, that just haven’t received answers yet. How long they’ve waited for one and the average amount of offers a buyer makes before actually purchasing a short sale/foreclosure.
To be honest, I’m tired of hearing they’re overworked and understaffed as an excuse. That’s BS. If any company is overworked and understaffed, they do one of two things: a) farm out the work or b) hire new employees (even if just temporary).
I do agree with Kim that many banks are probably holding on for a better tomorrow where they can sell these homes for a better price. Unfortunately, that brings up the question of when things improve, will we be faced with a flood of properties? You know once one bank makes the jump, everyone will follow suit (collusion or not). Of course, that could quickly destroy any gains made by the housing market, which in turn would bring us back to square one. I also think that public perception will remain that foreclosures can be had for a steal, which will only hurt banks when they do begin to release properties at a new higher price.
Solution? Don’t have a full one, but I have some ideas that I’ve been weaving into a post.
Danilo Bogdanovic
June 17, 2009 at 4:38 pm
Kim – I agree that they’re not the brightest. But it’s amazing how smart (or shady) people get when it comes to saving on their last few pennies of worth.
Dan – Isn’t that what the “stress tests” were supposed to reveal? LOL
Bob – You make a great point about the Feds directing things. But if that’s true, then are we looking at a government controlled banking and housing market?
And it’s not quite apples and oranges – banks being brokers is frowned upon because of their potential ability to control the majority of listings in the US thus controlling inventory and market values. That’s what’s happening right now just with REO inventory and without banks having a broker’s license.
Benn – Federal regulators and banking execs probably took lessons from OPEC before implementing this strategy of turning on/turning off the faucet as they deem necessary.
Thomas – “Tim Turbo Tax Geithner” LMAO Can’t wait to see next year’s Turbo Tax ads with Geithner as their spokesperson.
Matt – I and every other agent and short-sale buyer in Northern Virginia is going through the same hell that you are. It’s like the Wild West filled with made-up-on-the-fly rules that apply one day, but not the next.
The way to change it is actually quite simple – get every single short-sale approved BEFORE the property is listed for sale (sales price, seller concessions, etc. – even broker commissions). But that makes too much sense and is too simple for banks to figure out.
Greg Dorros
June 17, 2009 at 5:18 pm
Let’s just take this for what it is… We print money that has no backing, and have for decades. The worth of our dollar lies solely upon our belief in it. Same goes with housing… I don’t actually believe that our Banks have the smarts to collude. Possibly a gov mandate, but even then… guess we will find out in time 🙂 – If Brittney Spears starts dominating CNN again soon I’ll be a believer for sure (she seems to be the “ink” used by the media octopus)
Anyway, some solutions are fairly simple – raise the conforming loan limits (or ease the lending on the Jumbo) and increase investor unit limits on financeable purchases… Lastly, little banks as you may have noticed will turn their properties quickly; the big banks operate inefficiently and are rewarded purely on their financial girth, not their ability to make solid banking decisions. (might be a solution there too).
So much effort has been placed on the first time homebuyer that we have forgotten about the rest of the machine. The first time buyer is great, don’t get me wrong – it’s just one slice of the pie.
Tim Harris
June 17, 2009 at 8:08 pm
GREAT topic. We just posted about this extensively on our blog. TimandJulieHarris.com
I am going to actually AGREE with you. There is clearly an ‘understanding’ between the banks, the fed about the ‘shadow inventory’. Here is a fun fact for you to consider (anyone who thinks the markets are anywhere near bottom and you dislike differing opinions…tune out now)
In California…JUST California…there were 110,000 homeowners who feel 60 days behind..as of this month. But, that is with JUST Wells Fargo and BOA. So, we can assume the number is simply massive…when taking into consideration all the lenders….now, the scary part….thats JUST Cali.
This is in addition to the hundreds of thousands (no one really knows the true ##) of homes the banks have ‘taken back’ yet not listed.
Worst case…banks rush to market with all of these REOs..flood the market…then what happens. Round 3, 4 etc of the housing bust.
Please don’t be angry with this perspective. Its based on real numbers. Use this information to prepare for the worst but, hope (pray) for the best!
Again, excellent topic and thanks for having the courage to post it!
Tim
BawldGuy
June 17, 2009 at 9:00 pm
If I’m the bank, and I own lots of property through foreclosure, under what system of morality ‘should’ I dump it all on the market at once, guaranteeing much lower prices? This of course, is assuming I’m not the Goodwill Bank. 🙂
Missy Caulk
June 18, 2009 at 2:45 am
I don’t know if the banks are smart enough to hold back or not. I do know that in MI a bill is going through out legislature right now to have a moratorium on foreclosures.
We are knee deep in inventory here. Yes, it is the wild wild west, most agents don’t have a clue how to order a package and move forward.
Tim Harris
June 18, 2009 at 2:52 am
Wild west….you said it!
Paula Henry
June 18, 2009 at 3:39 am
The inventory of REO’s has certainly dried up here. Banks don’t know how to sell homes; why else would they hold up a short sale at $40,000 more than REO price and foreclose, then hold the property?
I have to go with the collusion theory. One of the obvious results happening here, is, once a home is listed as REO, it is listed very low, generating multiple offers, pushing the price up.
Bob Wilson
June 18, 2009 at 5:44 am
@Danilo – Our current President is a statist, so the answer is yes.
“why else would they hold up a short sale at $40,000 more than REO price and foreclose, then hold the property? ”
There are a few possible reasons.
More than one lender sold off their loans with default guarantees, in which case the investor could make more money by turning down the short sale (hint: the next time you deal with a CW short sale, ask the negotiator if they are “fully delegated”). Same with loans where mortgage insurance is in play. You would be surprised how many investors came out of pocket to slap on pmi unbeknown to the borrower. Letting the property go can mean more money, as crazy as that sounds.
Another aspect of this is the lack of a concrete Fed policy. Many of these lenders are waiting to see what will come out of Washington with regard to the potential policy of buying toxic assets. There has to be some trade off here for them if the Feds are pushing another moratorium.
Justin Boland
February 11, 2010 at 4:48 pm
@Bob
Indeed, we pretty much already have “a government controlled banking and housing market” — GSE’s are too far in debt to ever go private again, our economic “recovery” is entirely dependent on debt spending as stimulus, and with the Fed considering underwriting and integrating DTCC into it’s empire, we’re looking at a very different landscape in 2010, a much more overt “command economy” stretching into the foreseeable future.
Then again, huge market upheavals create even huger opportunities. Our situation is very similar to the 1974 market that made Michael Milken so powerful.