by Larry Hotz, Senior Editor
|Hidden Camera: Actual auction by the Douglas County Public Trustee of another property in the same auction. The auctioneer knows most of the the investor bidders. All bids are cash only.|
Why would a bank ever let a property go to foreclosure when they could settle the issue and seemingly lose less money during the short sale process? What I experienced is that a bank can make more money at the public trough by letting the Federal Deposit Insurance Corporation give it a windfall profit. The Bank only gets the profit at taxpayer expense when it actually forecloses. So, home mortgages originated By IndyMac Bank are being forced into foreclosure by the federal government.
Of course, there are other possible answers and different circumstances. But, this experience really opened my eyes to how the federal bank bailout program is wasting tons of federal money and holding back short sales while it forces some folks into foreclosure.
Let’s start from the beginning. I’ve been working with a delightful couple moving here from New York State. We had been looking at homes in the Castle Pines area for some time. In July, I found them a great bargain on a home for sale.
The home had just come on the market and being offered as a short sale. We contracted for the home at full price, $460,000. That was still a fantastic bargain for the neighborhood because the home appeared to worth over $500,000.
Over the next several weeks, I worked closely with the listing agent who was trying to convince the bank to approve a short payoff on the loan. The bank was IndyMac. It already had appointed a local attorney to handle the foreclosure process. That’s normal in any short sale because the bank doesn’t yet have an offer to accept less on their loan. If it does receive a short sale offer, the bank can often save the expense and hassle of the foreclosure process. And, the bank can often recoup more of its loan by avoiding the public foreclosure sale.
Well, that’s the way it often works. But, not always. What we didn’t know was that there were financial arrangements the bank had with the federal government that would put this property into certain foreclosure.
We weren’t aware that the FDIC had seized all operations of IndyMac Bank and then sold all of the bank’s assets to a holding company called One West Bank. One West Bank isn’t a bank in all. It was created for the sole purpose of buying the assets of IndyMac. And, they bought them at a substantial discount from the FDIC.
This new holding-company bank planned to make a profit on those discounted assets that they purchased cheaply from the federal government. We found out later that they had paid only 70% of the loan’s value on first position mortgages.
That doesn’t sound too bad does it? After all, it’s the way the system is designed to work. When a bank gets in trouble the FDIC steps in seizes the assets and finds a buyer. They sell those assets at a discounted rate to the buyer and the buyer is able to make a reasonable profit.
But it turned out there was a lot more to the story. You see, One West Bank also had an agreement with the FDIC that the federal government would cover 80% of the actual loss on the sale of any asset if, and only if, that loan went to foreclosure. One West Bank made a guaranteed profit if the property was foreclosed. Short sales didn’t count. If the bank allowed the sort sale, it would not be covered for “guaranteed loss protection” by the FDIC. But, we didn’t know these dirty details: http://iamfacingforeclosure.com/blog/2009/12/01/anatomy-of-a-government-abetteded-fraud-why-indymaconewest-always-forecloses/
So, the short sale for my clients’ property was never approved. We waited and we waited for the short sale approval that would never come.
We didn’t just wait around doing nothing. My client actually went down to the Douglas County Courthouse a couple of times to inquire about how the foreclosure process was proceeding. We presumed that there would never be foreclosure sale when the ban got around to approving our short sale. Bur, during one visit in person, my client was told that the property would come up for foreclosure auction the following week.
I, then of course, called the listing broker to let her know that this property was going to foreclosure sale. Our short sale was in jeopardy of being lost in one swift action. She began a series of frantic phone calls to the Seller and the Bank. Finally, the foreclosure sale was postponed.
We thought: “This is a good sign. The bank must have postponed the foreclosure because they’re going to approve the short sale. That would make good sense. After all, foreclosures are expensive and only cash bidders can participate in the foreclosure so the proceeds are likely to be less.”
Ultimately this reasoning did not prevail because the new holding company would only make a guaranteed profit if the property were taken to the foreclosure sale. So, a few weeks later the property did go to the public foreclosure sale. Guess who also went to the public trustee sale?
Original Bank Loan: $536,000
Potential Short Sale Proceeds
Buyer’s Contract $460,000
Closing Costs <$28,000>
Net Proceeds To Bank $432,000
Bank’s Loss on Short Sale $104,000
Price At Foreclosure Sale $434,000
Foreclosure Expenses Est. <$ 12,000>
Bank’s Foreclosure Proceeds $422,000
Bank “Loss” at Foreclosure $114,000
FDIC Compensation To Bank
Original Note $536,000
Bank’s Foreclosure Proceeds $422,000
Loss Computation $114,000
95% (Est.) of Loss $108,300
Bank’s Profit From Foreclosure
Bank’s Foreclosure Proceeds $422,000
Note Purchased for 70% $375,200
Bank’s Foreclosure Profit $ 46,800
FDIC Loss Compensation $108,300
Total Foreclosure Profit $155,100
|Profit drove the bank to foreclose rather than sell the home by a short sale.|
My clients and I arrived early at the Douglas County Courthouse. There were a couple dozen people milling in the lobby waiting for the foreclosure auction. These were mostly savvy investors who attended these auctions every week. Each person who was going to bid had brought a cashiers check because these sales are only conducted with cash. It wasn’t likely that an owner occupant is going to bid. These were all pros except for my clients who were also going to bid.
They brought a cashiers check and submitted it to the to the clerk prior to the auction. We were led into a comfortable conference room with a couple dozen chairs around tables placed into one large rectangle. Eventually the auctioneer came out and sat down at the head of the table. He explained very clearly and comfortably exactly how the process would work for the dozen or so properties that would be sold at the auction that day.
The auctioneer was soft-spoken as he slowly auctioned off the first couple of properties. It wasn’t like going to the Douglas County livestock auction with loud voices. That’s where the auctioneer would be yelling and talking faster than I can think. The whole process was very demure and civilized.
“Our home” came up third on the agenda. It was fairly clear this was the home was to attract the most attention in the entire auction. There were four bidders who slowly took their time and made considered offers. Finally, the bidding stopped at $434,000. That’s right, the property sold for less land than short sale contract price of $460,000. My clients were successful that day in obtaining “The Certificate of Purchase”.
They didn’t receive a deed at the foreclosure sale. They only received the Certificate of Purchase. That’s because junior lien holders in the State of Colorado have nine days to redeem the property by paying The Certificate holder the amount of money they had paid at the auction.
I had done the necessary research. I knew who the junior lien holders were. My clients and I were able to devise a strategy whereby they were unable to redeem the property. So, ultimately my clients won. They purchased the property for less money at the foreclosure sale then they would have in the short sale process.
But who lost? That would be the taxpayers who lost. The taxpayers lost the discounted value of the loan in sale to One West Bank. That was about $169,500 less than the loan value. And, the FDIC also covered 95% of the lost from the original value of the note. The loss was $131,000 plus foreclosure costs for a total loss of about $141,000. That makes the total loss to the taxpayers was about $300,000.
If the property had been approved for the short sale while IndyMac Bank still owned the loan, the loss would have only been $104,000 plus sales costs or a total of $132,000.
How much did One West Bank profit? They bought the home for about $375,200. So, the bank a profit of $46,800 initially at the foreclosure sale. But, The FDIC paid them about 95% of the loss based on the original value of the note. That was approximately another $108,300. So, the Bank made about $155,100 profit on the transaction in the end.
That’s the government bailout in action. It’s the law of unintended consequences. The homeowner lost the home at foreclosure sale and suffered a huge credit ding. My clients got an even better deal than they originally bargained. But, the federal government lost more than $160,000 more than it really had to. If the FDIC took the property to the short sale, taxpayers would have saved that $160,000.
“The average buyer has no business going to these foreclosure actions”, Said my client Joe afterward.” I knew about foreclosures from buying some in New York but even I didn’t know Colorado and Douglas County laws. My advice to an average buyer is, if you are going to bid at a foreclosure auction, take along a professional like Larry. If you are alone,you won’t know what you have to know to play with the Big Boys.”