Why does this foreclosure auction seems so odd?
December 21, 2012 4:01 PM Subscribe
Our house was recently sold at auction due to foreclosure. I'm curious about the details of the sale, specifically the fact that the same bank that owned the mortgage won the auction (bought the house from themselves?) and also that they paid way more than the house is worth.
My wife and I got a mortgage on a house in 2008 that was worth $289,000. It was the very edge of the housing bubble, so within a year, the value of the property had dropped to around $240,000. Also within that year, we had some life events that caused our cashflow to decrease significantly, which resulted in an eventual foreclosure in May of 2011.
In June of 2011, we moved out of the house and into a rental, offering to give the bank a deed in lieu and let them have the property. They refused, and insisted on foreclosing. Then the property sat - vacant - for the next 18 months while the bank did... basically nothing.
They finally put the house up for auction this month (Dec. 2012) and we recently received a letter from the sheriff's department letting us know that the house was indeed sold at auction. But there were two things that I thought were odd:
1) The mortgage holder was listed as the "winner" of the auction. They basically bought the house from themselves. I was curious as to the reason for this, although I assume it is a paperwork issue to help them resolve having a liability on their books. Right?
2) The winning bid was $330,000. This is $40,000 more than we paid for the house, and (I would guess) almost $100,000 more than the house is worth in today's market. Why would they "overpay?" Was this another bookkeeping scheme? If so, wouldn't the extra money - over and above the mortgage owed - default to us since we were technically still the owners of the property until the auction finished?
I don't know how this stuff works and was hoping someone else could fill me in.
This all happened in the Portland, Oregon area if that helps.
My wife and I got a mortgage on a house in 2008 that was worth $289,000. It was the very edge of the housing bubble, so within a year, the value of the property had dropped to around $240,000. Also within that year, we had some life events that caused our cashflow to decrease significantly, which resulted in an eventual foreclosure in May of 2011.
In June of 2011, we moved out of the house and into a rental, offering to give the bank a deed in lieu and let them have the property. They refused, and insisted on foreclosing. Then the property sat - vacant - for the next 18 months while the bank did... basically nothing.
They finally put the house up for auction this month (Dec. 2012) and we recently received a letter from the sheriff's department letting us know that the house was indeed sold at auction. But there were two things that I thought were odd:
1) The mortgage holder was listed as the "winner" of the auction. They basically bought the house from themselves. I was curious as to the reason for this, although I assume it is a paperwork issue to help them resolve having a liability on their books. Right?
2) The winning bid was $330,000. This is $40,000 more than we paid for the house, and (I would guess) almost $100,000 more than the house is worth in today's market. Why would they "overpay?" Was this another bookkeeping scheme? If so, wouldn't the extra money - over and above the mortgage owed - default to us since we were technically still the owners of the property until the auction finished?
I don't know how this stuff works and was hoping someone else could fill me in.
This all happened in the Portland, Oregon area if that helps.
The short answer is that banks don't actually like to sell houses at auction. Auctions are unpredictable, as the result of the auction is dependent on who shows up at the auction. Usually, the people are auction are either looking for something very specific (ie, they are bidding on a specific house) or they are looking for ridiculous bargains (which the bank isn't willing to give them). It doesn't cost the bank much to sit on the property for a while and try to sell it on the bank's terms (ie, higher price) rather than at auction.
In Washington, at least, banks are not allowed to put an initial bid on the house that exceeds the mortgage value of the house. As a result, they tend to make the initial bid be the mortgage value of the house, which no one is willing to pay, since it almost always exceeds the market value of the property. Since you didn't pay the mortgage for 18 months, it is likely that the accrued interest and fees caused the mortgage to (well) exceed the value on the market. Hence, the $330,000 opening and closing bid. The bank gets to keep an "asset" it already had (ie, no immediate cost) and gets to string out the house as long as they want until they can sell it for maximum profit. Some people posit that banks are holding "shadow inventory" to wait out the market until banks can regain their losses on foreclosed properties. Whether or not the strategy will work (or is even happening) is an open question, but banks certainly are able to hold onto houses for a lot longer than homeowners are.
posted by saeculorum at 4:18 PM on December 21, 2012 [9 favorites]
In Washington, at least, banks are not allowed to put an initial bid on the house that exceeds the mortgage value of the house. As a result, they tend to make the initial bid be the mortgage value of the house, which no one is willing to pay, since it almost always exceeds the market value of the property. Since you didn't pay the mortgage for 18 months, it is likely that the accrued interest and fees caused the mortgage to (well) exceed the value on the market. Hence, the $330,000 opening and closing bid. The bank gets to keep an "asset" it already had (ie, no immediate cost) and gets to string out the house as long as they want until they can sell it for maximum profit. Some people posit that banks are holding "shadow inventory" to wait out the market until banks can regain their losses on foreclosed properties. Whether or not the strategy will work (or is even happening) is an open question, but banks certainly are able to hold onto houses for a lot longer than homeowners are.
posted by saeculorum at 4:18 PM on December 21, 2012 [9 favorites]
I don't know what I'm talking about, but this seems like some sort of tax dodge. Fake write-down on earnings so they pay less taxes. Multiply your $40K times the however many houses they own and it would probably be a huge write-down.
posted by cnc at 4:20 PM on December 21, 2012
posted by cnc at 4:20 PM on December 21, 2012
If no one makes a bid which is at least the amount of the mortgage obligation (plus the added costs and fees), the bank will bid that amount and take over ownership. In most states, the bank cannot bid less than that amount and then sue the borrowers for a deficiency.
Then there is a period of time (redemption period) for the borrower to pay off the balance and regain ownership.
After the redemption period, the bank is free to sell the property, for more or for less than the mortgage obligation. Very often, it will be willing to entertain offers for 20%, 30%, or more under the mortgage obligation. That is where bargains can be found.
posted by yclipse at 4:51 PM on December 21, 2012
Then there is a period of time (redemption period) for the borrower to pay off the balance and regain ownership.
After the redemption period, the bank is free to sell the property, for more or for less than the mortgage obligation. Very often, it will be willing to entertain offers for 20%, 30%, or more under the mortgage obligation. That is where bargains can be found.
posted by yclipse at 4:51 PM on December 21, 2012
In Washington, at least, banks are not allowed to put an initial bid on the house that exceeds the mortgage value of the house. As a result, they tend to make the initial bid be the mortgage value of the house, which no one is willing to pay, since it almost always exceeds the market value of the property.
This is true. They are also allowed to add the costs they accrued for the foreclosure, which are pretty significant even if the homeowner doesn't dispute the foreclosure. (My knowledge is Washington-specific, but I imagine Oregon's laws are similar). The bank set the opening bid at $330,000, which is at or below the balance of the loan plus costs, and nobody bid higher than that at the sale. We can only speculate why the bank would rather hold on to the house for now instead of selling it at a lower price.
posted by Safiya at 5:57 PM on December 21, 2012
This is true. They are also allowed to add the costs they accrued for the foreclosure, which are pretty significant even if the homeowner doesn't dispute the foreclosure. (My knowledge is Washington-specific, but I imagine Oregon's laws are similar). The bank set the opening bid at $330,000, which is at or below the balance of the loan plus costs, and nobody bid higher than that at the sale. We can only speculate why the bank would rather hold on to the house for now instead of selling it at a lower price.
posted by Safiya at 5:57 PM on December 21, 2012
It is completely normal for the bank to be the buyer of its own mortgaged property at auction.
The auction's legal purpose (the court is handling it) is to make whole the plaintiff in the special type of civil lawsuit known as a foreclosure. The bank -- in almost all cases this will be true -- sued for the shortfall in what it was paid and what it lent out. This has no direct relationship to the VALUE of the property.
(True story: A nemesis of my mother here in town got herself foreclosed on. Couldn't happen to a nastier person. She let the foreclosure proceed to auction and then (her specialty) tried to interfere with the auction in bogus and disruptive ways. The deputy sheriff was able to shut her up, though -- until the auction took place and the bank bought it, for $16,000. She had thought the auction price would be the market value of the property, not this 1/3 or 1/4 of the money that she probably could have found a way to raise. She then threw a one-woman riot and got herself arrested (not the first time). Anyway, a lesson in making sure to read the documents.)
The bank very likely does not PREFER to be the buyer as they are not in the business of accumulating property, but in these times of high foreclosures they often end up that way.
I don't know what I'm talking about, but this seems like some sort of tax dodge. Fake write-down on earnings so they pay less taxes.
Actually it's completely legal. Yes, they do get to write down the loss, but only at sale. One of the problematic features of the market the last few years was banks unwilling to take that final sale because it would mean an unhealthy net write-down on the quarterly balance sheet. Make of that what you will, but it's one of many tax things that are just part of the business.
Why would they "overpay?"
Think about it. Who is getting overpaid here? The bank is "buying" the title but the bank is also "selling" the mortgage. The money goes from one column to the other and doesn't really leave the building, so to speak.
a paperwork issue to help them resolve having a liability on their books
Well, they resolved the liability by calling in the mortgage. They may still end up with a deficiency between the ultimate sale price and the money they paid, which in some states can be a civil lawsuit against the former owners (and can conversely be counted as income by the feds, a bad surprise for some who lost their house only to have to pay taxes on the forgiven amount; a new law eliminates many but not all of these instances). But yes, they called in the loan and collected the collateral and now want to get their money back by selling it, to put it in the simplest possible terms. Just think of the house as a boat or some other object and it will make more sense.
If necessary, play a round of Monopoly and mortgage one of your properties, then pretend you can't pay it. Step 1: The bank gives you money. Step 2: You pay the bank until you can't. Step 3: Bank demands property instead of you paying them. Bing, bang, boom.
If so, wouldn't the extra money - over and above the mortgage owed - default to us since we were technically still the owners of the property until the auction finished?
*sigh* Wouldn't that be nice? No, as noted, there really isn't any extra money, and you essentially paid the bank what you owed on the mortgage by handing over the collateral. What I would worry about is Oregon law on deficiencies and whether you will get a 1099 for any forgiven amounts. Your lawyer should be able to advise you on these points.
posted by dhartung at 12:45 AM on December 23, 2012 [1 favorite]
The auction's legal purpose (the court is handling it) is to make whole the plaintiff in the special type of civil lawsuit known as a foreclosure. The bank -- in almost all cases this will be true -- sued for the shortfall in what it was paid and what it lent out. This has no direct relationship to the VALUE of the property.
(True story: A nemesis of my mother here in town got herself foreclosed on. Couldn't happen to a nastier person. She let the foreclosure proceed to auction and then (her specialty) tried to interfere with the auction in bogus and disruptive ways. The deputy sheriff was able to shut her up, though -- until the auction took place and the bank bought it, for $16,000. She had thought the auction price would be the market value of the property, not this 1/3 or 1/4 of the money that she probably could have found a way to raise. She then threw a one-woman riot and got herself arrested (not the first time). Anyway, a lesson in making sure to read the documents.)
The bank very likely does not PREFER to be the buyer as they are not in the business of accumulating property, but in these times of high foreclosures they often end up that way.
I don't know what I'm talking about, but this seems like some sort of tax dodge. Fake write-down on earnings so they pay less taxes.
Actually it's completely legal. Yes, they do get to write down the loss, but only at sale. One of the problematic features of the market the last few years was banks unwilling to take that final sale because it would mean an unhealthy net write-down on the quarterly balance sheet. Make of that what you will, but it's one of many tax things that are just part of the business.
Why would they "overpay?"
Think about it. Who is getting overpaid here? The bank is "buying" the title but the bank is also "selling" the mortgage. The money goes from one column to the other and doesn't really leave the building, so to speak.
a paperwork issue to help them resolve having a liability on their books
Well, they resolved the liability by calling in the mortgage. They may still end up with a deficiency between the ultimate sale price and the money they paid, which in some states can be a civil lawsuit against the former owners (and can conversely be counted as income by the feds, a bad surprise for some who lost their house only to have to pay taxes on the forgiven amount; a new law eliminates many but not all of these instances). But yes, they called in the loan and collected the collateral and now want to get their money back by selling it, to put it in the simplest possible terms. Just think of the house as a boat or some other object and it will make more sense.
If necessary, play a round of Monopoly and mortgage one of your properties, then pretend you can't pay it. Step 1: The bank gives you money. Step 2: You pay the bank until you can't. Step 3: Bank demands property instead of you paying them. Bing, bang, boom.
If so, wouldn't the extra money - over and above the mortgage owed - default to us since we were technically still the owners of the property until the auction finished?
*sigh* Wouldn't that be nice? No, as noted, there really isn't any extra money, and you essentially paid the bank what you owed on the mortgage by handing over the collateral. What I would worry about is Oregon law on deficiencies and whether you will get a 1099 for any forgiven amounts. Your lawyer should be able to advise you on these points.
posted by dhartung at 12:45 AM on December 23, 2012 [1 favorite]
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posted by foodgeek at 4:12 PM on December 21, 2012