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May 4th, 2009 (Modified on May 6th, 2009)

(Update1) Lowballing Foreclosure Auctions?

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Author and educator Jillayne Schlicke attended a bank auction for a foreclosed property in Bellevue, Washington last month. Schlicke noticed, and was thus perplexed, that the bank had set the home’s opening bid below its principal balance. Schlicke wrote that she couldn’t figure out why 25 out of the 92 active sales that day in Bellevue began their auction with prices lower than what was still owed on the home.

Through her own research, Schlicke settled on the following possibilities:

  • Banks have already calculated their losses and decided it’s cheaper to unload the the property than to maintain it.
  • Banks want to keep the inventory on these poor investments minimal.
  • “My theory is that banks are relying on third party information such as a mini appraisal or Broker Price Opinion (BPO) prior to auction.  If the BPO suggests that the outstanding principal balance is so high and out of range as to likely attract no bidders at auction, then the banks have nothing to lose by setting the opening bid closer to or significantly lower than the principal balance owed.  If no one bids at auction, they’re still only out the money they would have been out anyways and on the upside, if the low opening bid attracts investors, then perhaps the bidding will rise closer to the payoff. “

Schlicke wonders if banks publicized this practice more, would they attract more first-time homebuyers, or are they keeping these auctions quiet for a reason? Perhaps banks are more interested in attracting investors, while keeping consumers focused on real estate owned properties.

Note: Some of the readers who commented following Schlicke’s story said this practice was neither random nor purposely kept quiet. Her readers also offered their own opinions to why a bank would set the opening bid below the principal balance. Why do you think?

Update1: An additional reason why banks would be willing to do this was just brought to my attention today by our Vice President Keith Gumbinger: private mortgage insurance. “Since the mortgage insurance already guaranteed the investor anywhere from upwards of 30% of the loan, banks can afford to attract investors with a lower price to begin bidding.”

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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