A better way: mortgage foreclosures are a major challenge for the banking industry; bloated property inventories, skyrocketing costs, crippled liquidity are dragging down balance sheets with no end in sight.

Author:Rogers, Rick
Position:Cover Report: Servicing

How bad is it? No need to spend a lot of time talking about that; you lenders know how bad it is. In November, the Federal Deposit Insurance Corporation (FDIC) labeled 171 institutions as "problem banks," meaning their viability is threatened. That's almost triple the designated 65 problem banks from one year earlier. * One of those banks, Pasadena, California--based Indymac Bancorp, failed while this article was being written. Also now in conservatorship are Fannie Mae and Freddie Mac. These two government-sponsored enterprises (GSEs) own or guarantee about half of all U.S. home mortgages, and their stock prices plunged more than 75 percent before the federal government had to step in and take control of both in September. The magnitude of the problem has not only depressed the banking industry, but has spilled over to depress the commercial real estate market, the U.S. economy and global credit markets. * According to the Mortgage Bankers Association's (MBA's) National Delinquency Survey (NDS) for the third quarter of 2008, the percent of loans that were classified as seriously delinquent reached 5.17 percent. That number is up 222 basis points from third-quarter 2007. The NDS report states: "Since the third quarter of 2007, the seriously delinquent rate increased 497 basis points for prime ARM [adjustable-rate mortgage] loans and 1,321 basis points for subprime ARM loans." * The NDS also found that the percentage of loans in the process of foreclosure set a new record in last year's third quarter. * In a press release announcing third-quarter results, MBA Chief Economist Jay Brinkmann noted, "In the last quarter we saw about 575,000 foreclosure actions started, compared with an estimated 580,000 in the second quarter and 535,000 in the first quarter. At this rate, we are looking at finishing 2008 at about 2.2 million foreclosure actions started. Absent a recession, the 2009 number would likely have fallen by several hundred thousand but the effects of job losses and general economic deterioration make the 2009 outlook worse, particularly if mortgage problems become more widespread."


Much attention has been focused on helping the affected mortgage borrowers, and rightly so. This article, however, is a "how-to" article for the benefit of lenders, outlining how to dramatically improve their performance in managing and selling foreclosed properties.

In response to the mortgage crisis, banks have changed lending practices and lobbied successfully for government assistance, but have taken few major steps to improve their foreclosure practices. This article is a call for such action.

Current industrywide practices are ineffective. Close scrutiny reveals much room for improvement. Such an effort could well save many banks currently headed for that growing "bank failure" list.

Weeks before Indymac's announced failure, I met with Cary Sternberg, its first vice president of home loan servicing and real estate-owned (REO) to discuss the foreclosure crisis. Sternberg is an industry veteran with a positive mental attitude. Asked about the depressed state of the real estate market, he said it was an exciting time for buyers. With home prices depressed and mortgage rates so low, many people could now buy the homes they always wanted but couldn't previously afford, he said.

Asked about Indymac's stock price, which was above $50 a share two years earlier and was then trading for pennies a share, Sternberg said it's a terrific buying opportunity, and if he were still in the market he would be buying all the Indymac stock he could get his hands on.

After talking to Sternberg for an hour, I was ready to "sell the farm" to buy Indymac stock. Fortunately, given the state of the real estate market, I was unable to sell the farm. More about Sternberg later.

Banking's biggest blunders

One can debate the cause of current conditions--e.g., subprime lending, the housing bubble, etc.--but those problems could have been managed if not for what I see as banking's most conspicuous shortcoming: The fact that banks are not very good at selling homes that come back to them as REOs. To be more precise, lenders are terrible at selling homes. They take twice as long and make half as much money as you and I do when we sell our homes. Banks are good at banking and bad at selling homes, because selling homes is not their primary business.

The only mystery is how banks could do it so badly for so long without recognizing their deficiencies and doing something about it.

Do you know the difference between terrible and terrific home marketing? You will when you see it. Read on to see how real estate agents do an atrocious job of marketing foreclosed homes while those same agents do a terrific job of marketing non-foreclosure homes for the general public.

I'll use Countrywide Bank's REO (the institution has since been acquired by Bank of America along with its parent company) as examples. REOs are properties acquired by banks through the foreclosure process. This section is certainly not meant to single out Countrywide for criticism. Marketing practices for REOs by large lenders are surprisingly consistent throughout the industry. After you've seen a few property listings for Countrywide's REOs, you'll be adept at recognizing REO listings from any large lender because they are remarkably similar.

It's estimated that more than 80 percent of today's buyers start their home search online. That makes online advertising vitally important, and a good place to start when comparing marketing quality. Here is what I did to compare REO and non-REO marketing by the same Realtors [R]:

  1. Go to the Web site at www.countrywide.com/purchase/f_reo.asp.

  2. Set the search parameters to your home state, your city or town, and 20 results per page.

  3. Search.

  4. Print one page of addresses.

  5. Go to Realtor.com (www.realtor.com) and find a property on your list.

  6. The typical REO listing on Realtor.com includes one or two property photos, if any; a picture of the real estate agent; a minimal property description with price, number of bedrooms, baths and year built. Print this listing for comparison purposes.

  7. Click on the listing agent picture. That will take you to a list of other properties listed by that agent. Click on one...

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