FDIC Pays Bank To Foreclose

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

Foreclosure Proceeds

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.”

Comments

  1. Dennis Martin says

    Larry, Great article. I knew sometning was going with the banks , because I have had similar situations with clients.Thanks for taking the time to explain. The banks are the ONLY parties who are making money. The homeowner is getting Nothing, they are not getting any needed and deserving help. Our govt in action saving the banks with tax payers money. Everyone should be MAD AS HELL!! Again the American citizen getting screwed by Wall street.
    Thank You
    Dennis

  2. says

    What a great article Larry. I see you haven’t lost your touch. So because Indy Mac was under control of FDIC this was possible. Makes you wonder why Bank of America hasn’t figures out how to scam taxpayers in this manner. They scam us every other way.

  3. says

    Great article! As someone deeply involved with short sale negotiations I can vouch for the veracity of the situation exposed in the article . . . great job!

  4. says

    The reason simple: The bank or investor who own the loan are NOT the ones servicing the loan. The servicing entity (mortgage company or bank) has no interest in loosing their revenue and negotiating a sale.

  5. says

    Great job For your clients Larry!

    It is maddening how the U. S. Citizens are being taken to the cleaners. It makes me wonder which politician is related to One West Bank! This market is so very wrong.

  6. sdbri says

    On bubbleinfo it’s been noted the FDIC doesn’t pay a penny to One West unless losses exceed $2.5 billion. So while the taxpayers could be fleeced someday, it doesn’t work as described here. The actual coverage by taxpayers will be from 0% to the low double digits. Quite possibly 0%.

  7. Jim Cline says

    The short sale would not have resulted in a NET to the bank of $460k. Assuming a reduced commission of only 5%, the bank would have had a net of $437,000. The bidding stopped at ONLY $434,000?? So the bank sold the property immediately, for cash, with no holding risk for $3000 less than your short sale offer that would have had inspection periods & other associated risks that could lead to a fall through? Sounds very reasonable to me.

  8. Joe G says

    Way to go Larry in exposing the how the government wastes our money. Nice job saving your client some cash by finding them a great deal

  9. says

    I have been doing a lot of short sales and thankfully this has not happened to me or my clients. I do know the possibility exists. Of course there are many that do not know that this kind of thing happens every day. It is a shame that it is allowed to work this way! I have had to explain to a few Realtors who have been puzzled by this same situation and why it occurs.

  10. Zorro says

    they force people to lose their houses going to all foreclosure procedure , because after that they would buy people’s properties at the minimum price. They are destroying people’s credits and lives. I think they have doing that on purpose, having their own plans with our properties.

  11. says

    If you want to get even angrier at this situation, take a look at who owns One West Bank. Some of the same politicians and bankers who contributed to the collapse of the financial industry. After all, most of them did need another financial windfall so they could continue their ride on the gravy train called “The Duped Once Again American Public.”

  12. says

    To make matters even worse, suppose the foreclosure sale went for only $322,000 and you logically thought the bank would lose an extra $100,000. You would be sadly incorrect. Due to the FDIC bailout provisions the bank’s end profit would only decrease by 5% of the lower sales price, or only $5,000.

    There is absolutely no incentive for the bank to get anything at all for the foreclosed property, other than to prevent a real estate investor or homeowner from getting a really great deal on a property!

  13. says

    I’m happy that all foreclosures are currently stopped. The process is way too complicated and unpredicatable. With this economy and the hope for homeowners plan, the banks and the homeowners should be able to work something out. However i’m pretty pessimistic based on the actions of these banks to this point.

  14. says

    This article explains why banks are foreclosing on homes at a feverish pace. I recently applied for a mortgage modification but I’m afraid to stop paying on my mortgage. The recent news indicates that Chase and other banks are violating their own agreement to forestall on foreclosing on homes. I suspect that I will not qualify for a modification. The Obama administration is talking out of both sides of their mouth, pretending that they are concerned about assisting people in my situation but at the same time paying banks to foreclose. Thank you, for this article. I will pass this on to others who like myself wondered why banks are foreclosing when there are so many unsold homes on the market.

  15. says

    Your point is interesting. I am researching it now.

    For the sake of full disclosure, perhaps you can tell us if you have a dog in this hunt?

    The url your name points to is “The FDIC Responds”. Does that mean that you work for the FDIC? Or, are you employed by a public relations firm who has been hired by the FDIC?

  16. J Smith says

    One of the big wigs at OneWest is a former big wig at the FDIC. His name escapes me at the moment but look into it, the rabbit hole get’s deeper…

  17. says

    Isn’t the reason why a bank chooses to do a foreclosure rather than a short sale is also heavily due to the fact that in a foreclosure proceeding a bank can pursue a deficiency judgment against the borrower for the loss?

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