Friday, December 31, 2010

Foreclosure update

I wrote in this blog entry about a townhouse that I purchased at a recent tax auction.  Here's the followup: 

The banks holding the mortgage took a $210k loss
The first thing that I was surprised at was that the two banks that held a combined first and second mortgage of $210k mortgage on the property didn't redeem the property for the $14k in back taxes due.  If they had, they could have foreclosed on it, and sold it, and come out with maybe $130-140k.  I expected the property to go off the auction, but the lender didn't redeem it.  when you buy a property at tax auction,  tax liens are senior to all others, and so the first and second mortgages on this property got erased.  Sorry Citibank, who apparently held the 1st mortgage, and 1st choice mortgage, who held the 2nd. 

Why didn't the bank redeem the property for the back taxes?
So I wondered why the bank didn't redeem it.  This story helped explain it.   Summary:   the company that funded the mortgage is in bankruptcy, and various people are being sued, and none of them are cooperating with each other.  This property fell through the cracks, and the banks take a big loss.  I'm guessing that citibank bought the assets of the smaller bank. 

Why didn't the previous owner just make the payments?
I asked the previous owner why he didn't pay his mortgage.  I expected something along the lines of I lost my job, or there was a medical emergency or what have you.  the answer was simpler:  They just decided to stop paying.  "We had a first and a second on this property, for a total of about 210k.  This property is worth $180k.  If we paid the back taxes of $14k, we'd be in the hole $44k, and given the market, it would take us 10 years go get back to even, so we decided to let it go." 

What was the previous owners plan? 
My opinion is that I think they were counting on the house going through foreclosure and that it would take 6 months or a year -- the tax auction happened about 2 months after they stopped making the mortgage payment, but they hadn't paid their property taxes in years already.  No idea why they didn't pay those taxes.  Or the bank didn't pay those taxes.


StefRobrts said...

That's really shocking that the banks could drop the ball on that large an amount. But when you bought the house, didn't the amount you paid above the tax lien end up going to the first mortgage? That way they got the benefit of foreclosing without all the messy paperwork, and still got a fair market auction value for the house?

Dean Smith said...

Things like this make me wonder about the whole property ownership system in this country. How many defaults would it take to bring the whole system down?

Nancy Olympia WA said...

Banks loss and your gain. Real estate is still the best investment.

Are you renting to the former owners?

Ruth said...

Hm..what has me scratching my head about this whole thing is this: Why didn't the previous owner pay the taxes? And he was (is?) a mortgage broker?...????(it is interesting..I do wonder...) nonetheless, if you got a good deal, you got a good deal. Now. What about the rent? Your plans for the place?...(nosy, yes.)

Bruce King said...

Stef: the back taxes due were a total of $14k. I paid $101k. the difference of 87k will probably go to the bank that held the first mortgage. The bank that holds the second mortgage gets nothing, the original owner gets both a foreclosure mark on their credit report and no cash.

the market value of the property is probably 150-180k, depending on how long you want to wait, so using the lower end of that, the bank would have paid $14k, and then real estate commissions of 6% on a sale of 150k for a total of $23k. 150k - 23k = 127, less their legal costs. Lets say their foreclosure costs were...20k? they lost $40k.

But here's the deal: this was an absolute auction. the taxes were the minimum, and there was no other reserve. If it had sold for the back taxes only they would have lost everything. If I were a bank shareholder I'd be scared to death of that.

I don't doubt that this was a huge screwup by the bank.

Bruce King said...

Dean: what's interesting about this is that it's done all the time in commercial real estate loans. Here's a couple of examples:

Individuals are expected to stay with their mortgages even when they're underwater tens of thousands of dollars, but businesses that walk away from commmercial buildings are considered to be making the smart move.

Bruce King said...

If the previous owner is employed, and puts down first and last and a small damage deposit, I'll rent to him. Same as I would to any other tenant. if he can't, I won't.

I gave him 30 days in return for signing various releases related to his right of redemption for the property.