Professional investors move into flipping foreclosed homes

Squeezing out amateurs, private equity funds and wealthy individuals are buying distressed properties at public auctions, refurbishing them and selling them for quick profits

Bruce Norris, left, of Norris Group, a real estate investment firm in Riverside, and other potential bidders in lawn chairs watch an auction of properties on the steps of the Riverside Historic Courthouse. (Irfan Khan, Los Angeles Times / August 3, 2010

Hoping there are big profits to be made in the aftermath of California's housing collapse, professional investors are flocking to the business of buying foreclosed homes at distressed prices. The investors, primarily private equity funds and groups of wealthy individuals, purchase the homes at public auctions, which are held daily on the steps of local courthouses. They refurbish the properties and try to sell them for quick profits.

Not long ago, the typical home flipper was an amateur tapping a home equity line or savings for an investment property. But professionals have rushed in, partly because of sparse investment opportunities elsewhere.

"In crisis there's opportunity," said Rick Hudson, president of investment firm Prosperity Group Real Estate in Irvine. "Right now there's huge opportunity with flipping houses." Closely watched gauges of professional buying have surged over the last two years.

The number of homes sold at foreclosure auctions statewide increased to 4,336 in April, from 884 in January 2009, according to research firm ForeclosureRadar. It eased back to 3,483 in July as banks offered fewer properties for sale. The auctions are dominated by professional investors who shop with cash (although not usually with actual greenbacks, for practical reasons).

Another measure, the percentage of all homes sold to absentee buyers, paints a similar picture. In the hard-hit Inland Empire, for instance, 30% of all homes sold in April went to absentee buyers -- up from 19% at the end of 2008 and the highest level in at least seven years, according to San Diego research firm MDA DataQuick. It was at 28.2% in July.

The binge of professional buying has helped spark a nascent housing recovery in Southern California because investors have cut significantly into the glut of foreclosed properties after the subprime mortgage meltdown.

Home sales in the six-county region rose 7.2% in June from May and 2.6% from a year earlier, according to MDA DataQuick. In July, overall sales tumbled primarily because of the expiration of federal tax credits, falling 20.6% from the month before in Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties. But the region's median home price of $295,000 was off only 1.7% from June.

The fragile rebound in the broader market contrasts with the behind-the-scenes scramble at foreclosure auctions.

"There's a tremendous amount of capital that is desperate to just buy anything right now," said Gil Priel, principal of a real estate investment firm in Woodland Hills. In some cases, well-financed newcomers are elbowing out smaller investors at auction sales.

"The people who want to go and buy a house to flip, and do one or two, are already exiting the market," said Jan Brzeski, who manages a residential investment fund at Standard Capital in Los Angeles.

The swarm of new investors, however, is making a treacherous and labor-intensive business even tougher. Investors must do their homework on dozens of homes for every one they buy. Legal and other impediments usually prevent them from going into homes prior to buying them, leaving no way to gauge repair costs. And despite being foreclosed on, the original owners often still live in the houses. That forces buyers to pay them to leave, a dynamic known as cash-for-keys.

The influx of new players is pushing up auction prices and squeezing profits. The average discount at auctions -- the difference between a home's sale price and its actual value -- is 21.6%, down from 28% in January 2009, according to ForeclosureRadar.

Last year, Chase Merritt, a Newport Beach private equity fund management firm, notched strong returns from auction sales, said Chad Horning, its chief executive. Chase Merritt bought a property in Costa Mesa in June 2009 for $315,500 and sold it 21/2 months later for $470,000. It bought a Mission Viejo home for $305,371 and sold it within two months for $375,000.

Chase Merritt launched its first foreclosure fund in May 2009 and has started two more funds since then. But "it's literally gone from a business that's very attractive, even lucrative, 12 to 18 months ago to something that almost doesn't make sense," Horning said.

"It's just like the housing bubble," he said. "It's almost like we're in a bubble at the courthouse steps." The scramble was on display recently at an auction at the Norwalk courthouse.

A semicircle of people crowded around auctioneer Elwood Brown. Most were clad in cargo shorts and flip-flops. A few sat in lawn chairs. But their laptops and cellphones, as well as the thousands of dollars' worth of cashier's checks they clutched, marked them as professional investors girding for battle.

Brown took a swig from his oversized water bottle and announced that bidding for a four-bedroom duplex in Hawthorne would start at $179,598.60. The price shot up within seconds as two men and a woman raised one another's bids in $1,000 increments.

"It's at 229, Daryl," a man in a polo shirt and sunglasses whispered intently into his cellphone. "About to close. Do you want it?" He increased his offer, but a rival bidder claimed the home a few seconds later for $237,000.

Competition at the auctions is brutal, said Bruce Norris of Norris Group, a real estate investment firm in Riverside. Norris unwittingly bought a house that was the site of a gruesome double murder. No one else bid -- a rare occurrence that showed others knew the history -- leaving Norris with less cash to bid for other houses.

"It's a very lonely place out there," Norris said.

That's only one of many risks in the foreclosure business. People who've lost their homes through foreclosure sometimes vent their anger by smashing walls, knocking over water heaters or ripping out toilets.

"We've literally had people take $20,000 of cabinetry out and feel perfectly justified doing it," Norris said. The daily auction ritual begins each morning when banks signal which homes they are likely to dispose of that day. That sets off an early-hours scramble as would-be buyers speed through suburban neighborhoods to investigate the homes.

On a recent day, Norris steered his sport utility vehicle into the driveway of a 3,300-square-foot McMansion on a corner lot in Moreno Valley. The front lawn was brown and the backyard was littered with garbage. But the windows were intact and there was no visible damage -- far better than many foreclosures.

Aiming for an all-important look inside, Norris rang the doorbell and delivered the bad news to the teenage boy who answered the door that the home was scheduled to be sold that day. "Do you mind if I poke around a little bit to see what kind of condition it's in?" Norris asked, angling his body to get a glimpse of the living room.

Then another car sped up and a rival buyer hurried up the driveway. She studied the house for a few seconds and craned her neck over the wooden fence protecting the backyard. "This is a dream compared to a lot of them," she said in a satisfied tone as she rushed back to her car.

In the end, no one bought the home. The sale was delayed after the owner filed for bankruptcy protection.

Norris was philosophical, knowing that there were plenty more foreclosures.
"If you miss one," he said, "oh well, tomorrow's another pile."

 

Lack of Sales Leaves Dubai Property Buyers Guessing on Prices
By Zainab Fattah - Jul 21, 2010

Home prices in the sheikhdom have dropped about 50 percent from their peak two years ago.
Photographer: Charles Crowell/Bloomberg

Laborers work on a construction site in Dubai. Photographer:
Charles Crowell/Bloomberg News

A dearth of Dubai home sales and foreclosure auctions is stalling a recovery because buyers aren’t able to gauge how far prices have fallen during the market’s two-year slump.

“There are very few transactions at the moment,” said Craig Plumb, head of Middle East research at broker Jones Lang LaSalle Inc. “We are not going to see the bottom of the market until we see transactions through the foreclosure process.”

Home prices in the sheikhdom have dropped about 50 percent from their peak two years ago and Credit Suisse estimates a further decline of as much as 20 percent. Though at least 70 foreclosure cases have been filed under Dubai’s 2008 mortgage law, none has resulted in the sheikhdom’s first auction, said Jody Waugh, a partner at law firm Al Tamimi & Co.

“People are only going to buy if they believe the price is realistic,” Plumb said. Data provided by the Dubai Land Department is too incomplete to provide a valuable guide to selling prices, he said.

The credit crunch prompted some Dubai property buyers to abandon investments and leave the country while others tried to renegotiate contracts after finding they owed more than their property was worth. Purchases fell about 80 percent in 2009 from the previous year, said Jesse Downs, director of research at Dubai-based Landmark Advisory. They increased 24 percent in the first half of 2010 from a year earlier.

A dozen banks have filed foreclosures, mostly involving residential properties, since London-based Barclays Plc won the first judgment at the end of last year, Waugh said. His firm has secured about 12 rulings under the emirate’s 2008 mortgage law and the same number involving Islamic mortgages.

Months More

The first auction is unlikely to take place before the end of the year, following a “quiet” summer and the holy month of Ramadan set to start in mid-August, according to Deepak Tolani, an analyst at Al Mal Capital.

Auctions “might help us get to the bottom faster since prices are likely to be considerably less than asking prices in the market now,” said J.P. Grobbelaar, director of research and advisory at property consultant Colliers International. “But I don’t believe prices won’t drop below what is achieved at auctions.”

Credit Suisse’s estimate of a 20 percent decline would take average prices to about 837 dirhams ($227) a square foot, based on its June estimate of 1,046 dirhams. Deutsche Bank AG analyst Nabil Ahmed predicted a price of 850 dirhams by the end of 2010. UBS AG analyst Saud Masud sees a drop to about 600 dirhams.

‘Significant Oversupply’

Colliers estimated in a May 9 report that 41,000 new homes would be put on the market by the end of this year. That will lead to “significant oversupply” and downward pressure on prices, regional director Ian Albert said in the report.

Banks that have seized real estate outside of the foreclosure process have been reluctant to put properties up for auction, said Mohammed Sultan Thani, assistant director general at the Land Department. Developers have preferred renegotiating repayment terms with customers to foreclosures.

“The majority of banks are not eager to sell properties through auctions because the prices fetched may drag the market down,” Thani said. “Many prefer to reach deals allowing them to rent the properties for a few years.”

Barclays’s foreclosure case hasn’t been implemented, Dubai- based Faisal Iqbal, head of secured lending for the bank in the United Arab Emirates, said by e-mail. The Land Department “is in control of the sales process on the instructions of the Dubai courts,” he said.

Minimum Prices

Foreclosure sales will only provide a reliable guide if prices are set at a realistic level, said Al Mal’s Tolani. In Dubai’s last auction, which didn’t involve foreclosures, only one of four properties listed was sold, according to Thani of the Land Department. Minimum prices at auctions are usually set by the courts in consultation with the land department, which conducts the sales.

If a property doesn’t sell, the court can reduce the minimum price over subsequent auctions, said Al Tamimi’s Waugh. However, by the time a new auction is scheduled, the market may have slipped further and the decreased price may still be too high to attract a buyer.

“You’re constantly trailing a market that is declining and that most likely won’t result in transactions for a while,” Landmark’s Downs said.

Dubai developers have renegotiated thousands of mortgages and extended payment schedules rather than face defaults that would cut off their cash flow. Though that slowed the decline in prices by limiting distress sales, it has prevented the market from reaching its natural bottom.

Reality Check

“People are holding on as much as they can, refusing to adjust to market realities,” Downs said. “It’s delaying the inevitable. If people accept the reality faster, prices will come down faster and in a way recover faster as well.”

Other property markets hurt by the global financial crisis reached bottom last year and began to recover. U.K. house prices began to slump in November 2007, falling more than 20 percent before starting to rise in March 2009, according to mortgage lender Nationwide Building Society. The S&P Case-Shiller Home Price Index, which tracks residential prices in 20 U.S. cities, began its slide at the start of 2006 and reached a bottom in January 2009.

 

Pending home sales 'fell off a cliff'

By Les Christie, staff writer CNN
July 1, 2010: 11:10 AM ET

According to the National Association of Realtors (NAR), pending home sales fell a whopping 30% in May.  Their index, which measures signed sales contracts but not closed sales, plunged to 77.6 from 110.9 in April.

It's even off 15.9% from a year ago when the nation was barely emerging from the recession.

"The pending home sales report is a disaster," said Mike Larson, a real estate analyst for Weiss Research.  "Sales fell off a cliff after the tax credit expired. It's the biggest monthly decline ever and the index is at its lowest level since NAR began tracking it in 2001."

Lawrence Yun, NAR's chief economist downplayed the damage a bit.
According to him, customers rushed into deals to claim the credit, borrowing from May sales.  Once the economic recovery comes into full swing, housing markets will heat up.

"If jobs come back as expected, the pace of home sales should pick up later this year," said Yun,  "and reach a sustainable level of activity given very favorable affordability conditions."

Those conditions include much lower home prices and extremely favorable mortgage interest rates. The question is when -- or if -- the job market will ever bounce back.

"We're not creating jobs," said Larson. "The housing problems now are being driven by broad economic problems."

 

Housing Market Slows as Buyers Get Picky

By DAVID STREITFELD 
Published: June 16, 2010

Before the recession, people simply looked for a house to buy. Later they got squeamish just thinking about buying. Now they are on a quest for perfection at the perfect price.

A house being built in St. George, Utah. Home construction fell more than 17 percent in May compared with April. Exacting buyers are upending the battered real estate market, agents and other experts say, leading to last-minute demands for multiple concessions, bruised feelings on all sides and many more collapsed deals than usual.

It is a reversal of roles from the boom, when competing buyers were sometimes reduced to writing heartfelt letters saying how much they loved the house and how they promised to eternally worship the memory of the previous owners. These days, it is the buyers who are coldly seeking the absolute best deal while the sellers are left in emotional turmoil.

“We see buyers who must have learned their moves from the World Wrestling Federation,” said Glenn Kelman, chief executive of the online broker Redfin. “They think the final smack-down occurs at the inspection, where the seller will be reluctant to refuse any demand because the alternative is putting the house back on the market as damaged goods.”

Everyone expected the housing market to suffer at least a temporary hangover after the government’s $8,000 tax credit expired, but not necessarily this much. Preliminary data from around the country indicates that the housing market began swooning last month immediately after the credit was no longer available. In some places, sales dropped more than 20 percent from May 2009, when the worst of the financial crisis had subsided.

Builders have been affected too. Construction of new homes in May dropped 17.2 percent from April, the Commerce Department said Wednesday, significantly lower than forecast. Permits for future construction dropped 10 percent, suggesting a cruel summer.

Even the lowest home mortgage rates in decades are not doing much to invite deals. The Mortgage Bankers Association said Wednesday that applications for loans to buy houses were down by a third compared with last year. Applications are back to the level of the mid-1990s, when the country’s housing market was smaller.

Against such a backdrop of misery, buyers are empowered — and are taking full advantage. John Porter Simons, a Seattle software engineer, thought he had a couple willing to pay $340,000 for his house. But they asked for $24,000 worth of work, most of which involved waterproofing the basement. “It was totally irrational,” said Mr. Simons. “My basement has never flooded. I live on a hill.”

He made a counteroffer to their offer, and the buyers walked. The house is now under contract to a new set of buyers, who got a cut in price and $2,500 in electrical work thrown in.

Buyers, of course, say they are merely being smart.

Chris Dunn, an economic consultant in Chicago, saw a house he liked last month for $539,000. He offered $500,000, but then his inspector told him that he would eventually have to replace the windows. The sellers were persuaded to kick in $10,000 more to pay for the work.

“We didn’t feel we were being that aggressive,” said Mr. Dunn. “We had the position, ‘If the seller is willing to come down enough, we will buy this home.’ If they weren’t willing, we would have just moved on. In this market, you have a lot of options.”

In some cases, agents say, sellers literally cannot afford to make concessions. Another $10,000 will push them underwater, which means they will have to arrange the sale through the bank.

“People cashed in on their houses to get money to go on vacation, for a new roof, to send the kids to college,” said Roberta Baldwin, an agent in Montclair, N.J. “They thought it was always going to be worth more.”  Even when a sale can be worked out, it is not uncommon for everyone to walk away feeling more aggrieved than celebratory.

“Buyers feel they’re not appreciated for simply making an offer,” Ms. Baldwin said. “And sellers feel humiliated and even angry. They expected to do better.”

 

Auction could reset prices for the luxury-home market

Minimum bid for 11 Pier Homes will be up to 75 percent off the current asking price

A Baltimore developer will try to jump-start sales of high-end waterfront homes this month by slashing prices as much as 75 percent, a move that could lure more buyers to the region's long-stalled luxury market but also depress values for builders and homeowners.

Eleven properties in Pier Homes at HarborView, where about half the 88 waterfront townhouses finished two years ago have yet to be sold, will go to auction June 28. Minimum bids the developer would accept start as low as $329,000 for a home that's on the market now for $1.2 million up to $665,000 for a home with a current asking price of just under $2 million. The auctioneer plans to announce the terms Wednesday.

Real estate analysts say such a big price reduction would rock the entire high-end market in the Baltimore area, pressing sellers to lower their prices, putting some homeowners under water on their mortgages and potentially encouraging buyers to act.

"It will definitely have a major impact on the rest of the area," said Kenneth Wenhold, director of the Mid-Atlantic region for Metrostudy, a firm that does real estate market research for homebuilders. "It'll lower the bar."

That could be bad news for Chris Gramiccioni. The 38-year-old Justice Department attorney has a townhouse in another section of HarborView that he's trying to sell for $629,900 because he was transferred out of state.

"Oh my goodness," Gramiccioni said when he heard the difference between the current market prices and the minimum bids. "That doesn't help me at all. … I guess I'm going to talk to my wife about adjusting my price."

It's been a rough few years for sellers of luxury homes, particularly at the highest of the high end. Just 17 homes priced at $1 million or more sold in the Baltimore metro area in April out of more than 650 on the market, according to Metropolitan Regional Information Systems. At that rate, it would take more than three years to find buyers for all the rest.

The hot housing market in the first half of the past decade pushed prices skyward and gave homebuilders incentive to push the luxury envelope nationwide. That trend played out in Baltimore, where a developer began converting a hulking grain elevator in Locust Point into a swank high-rise condo project. The Ritz-Carlton brand came to town just up the road, with penthouse condos priced above $5 million apiece.

But slowing sales in 2006 started a chain reaction that rippled upward. Homeowners had a harder time selling and moving into higher-price ranges. Prices began to fall. And the mortgage meltdown pushed up interest rates for large loans, the sort that some well-off buyers need for million-dollar-plus homes.

With more home sales in recent months at the lower end of the market, the luxury category is finally beginning to thaw, Wenhold said. But it remains far from healthy.

Joseph T. "Jody" Landers III, executive vice president at the Greater Baltimore Board of Realtors, said a big price reduction "certainly creates a difficult situation for the people who have purchased before, and could very well set them under water." Falling values also eventually turn into lower property tax collections, a blow for an already financially strapped city.

But filling empty homes means more people to pay income taxes and more neighbors for current residents. "Getting units occupied … is really critical," Landers said. "It helps breathe life into the whole project."

A number of vacation-home builders on the Eastern Shore have turned to auctions to cut their losses and move on. But Wenhold said much of the new-home auction activity has centered on Florida, one of the hardest-hit states in the housing bust. Often those auctions are held after the banks step in.

Jamie Riordan, principal with Lubert-Adler Partners LP, a Philadelphia-based investor that provided equity for the Pier Homes project, said the auction was a joint decision by his company, developer Swirnow and financier Bank of America. Riordan said they wanted to drive buyers to the properties, which range from 3,000 to 3,700 square feet, by cutting prices in time to take advantage of the recent drop in mortgage rates. "We would expect that that will produce significant buyer interest, which may not be satisfied at the auction itself, but which would result in follow-on sales," Riordan said.

The reserve price, the minimum the seller would accept, is frequently kept under wraps. This is one reason buyers should seek only true Absolute Auctions for bidding participation.

That's the wild card for HarborView and everyone else with a stake in local high-end homes — whether the minimum bid will turn into the new market value.

"That's going to generate a lot of interest and buzz," predicted Landers, with the Greater Baltimore Board of Realtors. "Because, c'mon, who wouldn't like to spend $600,000 for a $2 million unit?"

 

FDIC and Starwood, which eventually could seize the property, Concerto, could steal "a treasure chest"

LOS ANGELES—Unlike many real-estate deals across the U.S., developer Sonny Astani's downtown condominium-construction project here wasn't killed by the property market's collapse. The death of the project's lender, however, has left a big mess.

The 56-year-old Mr. Astani says his efforts to finish the project, called Concerto, have been impeded by the FDIC and Starwood, which eventually could result in them seizing the property Concerto could be "a treasure chest for these guys," he says, contending the project, which includes a 30-story condo tower, retail space and a one-acre park, is worth more than the amount of the construction loan.

Corus Construction said Thursday that a tentative agreement has been reached with Mr. Astani that would allow the project to continue and the real-estate developer to retain ownership. Mr. Astani says negotiations have begun and are making progress but that no agreement has been reached.

Clashes between real-estate developers and lenders are common, especially during tough times. But the dispute over Concerto is an example of the litigation and other snarls facing the FDIC as it tries to work through tens of billions of dollars in loans, foreclosed real estate and other assets from failed financial institutions.

Some subcontractors have griped that Corus Construction Venture LLC, the entity formed to manage Corus's loans, has hindered their efforts to get paid. City officials say the delay has cost Los Angeles construction jobs at a time when the struggling local economy needs them.

A spokesman for Corus Construction says the Concerto loan is in default, which Mr. Astani disputes. In court filings, Corus Construction contends that the project is worth less than the amount Mr. Astani owes, accusing him of trying to "play fast and loose" with the loan terms by selling part of the project to raise cash. Corus Construction denies blocking money to subcontractors and has begun paying some of their claims.

More than 230 banks and savings institutions have failed since the start of 2008. Acquirers of seized banks usually take most of their assets, except when the loan portfolio is horribly battered. Of the $7 billion in assets that Corus had when it was taken over by the Office of the Comptroller of the Currency, the FDIC got about $4 billion.

 
Developer Sonny Astani, outside his Concerto condo project in Los Angeles last month, is fighting the FDIC to maintain control of the project.

Hoping to avoid selling loans at fire-sale prices, the FDIC in 2008 launched a plan to bring in private investors. Such investors put in some of their own money, oversee asset dispositions and share proceeds with the FDIC.

The idea is to "capture the expertise and efficiency of the private sector, as well as improvements in market conditions," says James Wigand, an FDIC deputy director. So far, the agency has entered into 13 joint ventures involving more than $15 billion in assets. FDIC officials plan additional partnerships with investment firms. Corus is the biggest public-private loan-workout alliance yet. Mr. Astani's loan was part of a package of assets with a face value of $4.45 billion. The Starwood-led investor group owns 40% of the venture, while the FDIC owns 60%.

Mr. Astani says he has pumped $55 million of his own money into Concerto. In 2007, he got a $190 million loan from Corus to finance construction of the 30-story tower and a seven-story loft building.

By early 2009, though, Corus's financial condition was deteriorating, and the bank faced mounting pressure from regulators. Mr. Astani says he encountered resistance in winning approval to keep the project moving. Last August, he sold the 77 loft units in a one-day auction that raised nearly $29 million. But because of the lousy real-estate market, the sales prices fell far short of the minimum specified in his 2007 loan agreement.

Completion of the loft sales required approval by Corus. But the bank was seized before Mr. Astani got the clearance he needed. Six days after the bank's failure, Mr. Astani put the Concerto project into bankruptcy proceedings in Los Angeles, hoping a judge would sign off on the loft sales and let him use some of the cash to finish the tower.

In an interview, Mr. Astani says he believed the FDIC "would be very happy" with his plan.

The FDIC objected to the move, accusing the developer in an October court filing of trying to "play fast and loose" with the collateral for the loan. The FDIC added that Mr. Astani's financial projections ignored the "grave market and economic conditions" in the downtown Los Angeles real-estate market.

In October, Mr. Astani won permission from a U.S. Bankruptcy Court judge to complete the loft sales and use some of the proceeds to finish the condo tower. To protect the loan, though, the judge ordered the Concerto project to pay $1 million a month to Corus Construction, which also would have to sign off on further spending.

Since then, the FDIC-Starwood partnership has dragged its feet on approving a budget and construction payments, Mr. Astani says. The Corus Construction spokesman says that Mr. Astani provided insufficient information needed for the budget and has "routinely submitted incomplete or improper loan-draw requests."

The FDIC-Starwood venture is offering unpaid subcontractors 95 cents on the dollar for their claims. The offer is an "end run" to undermine support for Mr. Astani among the creditors' committee in the bankruptcy case, contends Ronald Hudson, who claims his wall-installation company is owed $1.6 million for work on Concerto. He says he hasn't been offered a payment.

The Corus Construction spokesman says the offer "simply acknowledges" that subcontractors "deserve to be paid" and isn't aimed at influencing the bankruptcy proceeding. "Several" have accepted the offer, the spokesman adds.

 

Luxury Homes Selling at Auction 

May 6, 2010 | By Aaron Hirschorn

When it comes to luxury homes, many sellers are skipping real estate agentsand the multiple listing services in favor of auctions. According to the National Auctioneers Association, sales of homes at auction grew by more than 47 percent from 2003 to 2008.

Part of the popularity of auctions comes from websites like eBay, where speed, transparency, and price points can work in everyone's favor. Some like the fact that auctions begin with no starting bid, and award multimillion-dollar homes to the highest bidder. The process removes high home prices from taking center stage.

Real estate expert Barbara Corcoran says real estate auctions have been growing in recent years, and now a new trend is emerging with auctions focusing on the luxury home market. Corcoran, the founder of a leading New York real estate firm, says, "There was a stigma of desperation associated with it, and rich people hate desperation."

No longer are auctions just focusing on foreclosures, high priced mansions are selling with buyers having paddle in hand. "An auction is perfectly suited for a down market with an oversupply of houses and buyers who are hesitant to purchase," says Corcoran. "Nothing is more sexy or attractive to a buyer than other people who want the same thing."

And with the overall housing market still in the doldrums, sellers say an auction is doing something different to get their pricey mansions to stand out from the crowd. Typically, the auction process begins with the marketing campaign. Qualified buyers can preview the property by appointment starting five days before auction day.

Interested buyers are required to register by submitting a refundable cashiers or certified check prior to the auction. On auction day, potential buyers must be prepared to write a check for the remainder of the 10 percent deposit. That is, if they hear "sold" with winning bid.  

L.A. Estate That Housed Auction Record Picasso Put on Market 

By Dan Levy

May 4 (Bloomberg) -- The Los Angeles estate where movie stars frolicked beneath a Picasso nude that set a world record at auction today is on the market for $24.95 million, according to the broker.

The listing of Frances and Sidney Brody’s 11,500 square- foot home in the Holmby Hills neighborhood is the first since it was built in 1949, said Linda May,  in a telephone interview. “Nu au Plateau de Sculpteur,” owned by the couple and displayed for decades in their living room, sold for $106.5 million, the highest price paid for an artwork at auction.

“Holmby Hills is where the sophisticated wealth of L.A. lives,” said May, based in Beverly Hills. The Brodys “turned their home into a salon” and were friends of Joan Crawford, Gary Cooper and the Chandler publishing family, she said.

The five-bedroom house sits on 2.3 acres and was designed by architect A. Quincy Jones in a mid-century modern style. It has 10 bathrooms and four staff bedrooms and interior designs and furnishings by William Haines, a favorite of the Hollywood set, May said.

The Brodys were founding benefactors of the Los Angeles County Museum of Art in 1965. Frances, daughter of Chicago advertising executive Albert Lasker, died in November at 93. Sidney Brody, a real estate investor, was a former chairman of the museum and died in 1983. A trust is selling the property.

A guesthouse, pool and tennis court are located on the grounds. The Playboy Mansion is nearby and Walt Disney was once a neighbor, May said.

Peak Price

The price for the Picasso, painted in 1932, exceeded the $104.2 million paid for the artist’s “Garcon a la Pipe” in 2004 and the $103.4 million fetched by Alberto Giacometti’s “Walking Man I” in February.

A 12-foot Henri Matisse ceramic mural that hung in the Brodys’ entry atrium has been donated to the Los Angeles museum, known as LACMA, May said.

The Brody auction was expected to fetch more than $150 million, according to Christie’s, which calls the collection of works by Picasso, Matisse, Giacometti, Henry Moore and others “one of the most valuable single-owner” groupings ever offered.

 

They're practically giving away condos, right?

By GERRY SPRATT
SEATTLEPI.COM STAFF

The new Ruby condos on Eastlake Avenue East in Seattle, shown on Wednesday, March 17, 2010.

Every month, there seems to be another auction. Some high-end condominium complex, likely conceived near the height of the housing bubble and mostly empty since its completion, is up for grabs to the highest bidders.

The latest to throw in the towel is the development at 5th Avenue and Madison Street in downtown Seattle. Later this month, luxury units originally priced between $399,000 and $899,000 will open for bidding at $195,000. Most have reserve prices higher than that, but the properties will no doubt be sold at deep discounts, if they are sold at all.

The list of casualties is long -- Queen Anne High School, Gallery in Belltown, Brix on Capitol Hill, Lumen in Queen Anne, just to name a few. Other high-profile developments have been forced to slash prices. The Four Seasons Private Residences, for example, recently cut prices on unsold units by as much as 47 percent. A one-bedroom, 1½-bathroom condo with city and water views that was originally listed at $4.82 million is now priced at $2.555 million. And the Four Seasons project itself is facing $34 million in liens by contractors.

But what do these auctions and markdowns say about the condo market as a whole? Is now -- as so many real estate agents incant regardless of the market conditions -- a good time to buy? Or are the headlines creating a false impression of affordability?

It depends on how much you plan to spend.

"The situation in the high-end market is lots of cancellations and fall-throughs," said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University. "This is the market segment stealing the headlines, but for most condo buyers and sellers, it doesn't reflect their reality."

So if you're looking for a downtown penthouse and have well over $1 million to spend, then yes, this is a great time to buy. However, the lower end of the market is behaving much like any housing market would be expected to behave. There is a lot of supply out there -- more than 12 months worth. But that doesn't mean drastic markdowns and auctions for the more affordable units.

"Sales are occurring in that range and buyers control the market today," said Edward Krigsman. "It's pure and simple an issue of affordability, and affordable price ranges are moving pretty well." Krigsman said the type of buyer has changed since the real estate market took a downturn. Speculative buyers have been replaced by buyers looking for primary residences. The unbridled spending of investors has been replaced by more careful shopping and intangibles are more important than square footage and views.

"Buyers are asking themselves, 'Is this a community I want to be in for a long time?'" Krigsman said. "Real estate is not as liquid as we once thought it was."

According to the Northwest Multiple Listing Service, the median price for a condominium in Seattle was $290,500 in February. But the NWMLS monthly sample is so small -- 116 closed sales in February -- that the median price is not as useful a barometer for the condo market as it is for single-family homes. And to make things even murkier, the NWMLS doesn't include many new condo developments.

But one statistic is indisputable -- inventory is up. Way up. According to the NWMLS, in February 2006 there were 491 active condo listings in Seattle. Last month, there were 1,306 active listings. That's an increase of 166 percent. It's the most simple of economics -- a glut of supply favors buyers.

"A lot of builders built anticipating demand based on 2004 data," Krigsman said. The condominium market isn't necessarily packed with bargains. In fact, it probably reflects market factors of supply and demand better than it did during the real estate boom.

And what about all those downtown luxury condos sitting empty? They might stay that way for a while. "At a certain point, when things are 30 to 40 percent marked down people start to buy, but that will take 3 to 4 years," Krigsman said.

 

ValueNation: Foreclosures as comps?

Charlie W. Elliott Jr., MAI, SRA

We have all heard complaints concerning appraised values being lower than selling prices in today’s recessionary environment. The buyer wants to buy a property and the lender wants to make a loan, but the appraisal stands in the way. There are a lot of possible reasons for this, and not all situations are the same.

My experience has taught me that, in many such situations, the sales contract is higher than the value of the property; however, this is not always the case. The appraiser can be wrong and, in this challenging market, it is not always an easy task to separate out the meaningful data from the not so meaningful. This is especially true for the appraiser who is relatively new to the business and does not yet have a recession under his or her belt. It is further complicated by the fact that some appraisers have become more cautious, given the many criticisms they, as a group, have faced as a result of the many bank failures, due in part to underwater loans.

In considering the legitimate challenges of appraising property in the current market, there are a number of issues that should be addressed and understood by the appraiser, as well as the lender and the property owner.

First, we have markets with little or no sales. Does this mean that properties do not have value? Does it mean that values are simply less? If so, how much less? What data can, and should, be used, and how should it be used to determine value under these circumstances? It is hardly a project that should be undertaken at home by armchair critics and property owners. Under the best of circumstances, the appraiser will find themselves making value judgments with far less than perfect data. Of the many variables complicating the landscape and muddying the waters, that of the foreclosed property can be the elephant in the living room.

Consider the following hypothetical example. Properties comparable to the subject in the same subdivision sold before the recession for around $400,000. Since the economy tanked, one quarter of the neighboring properties are for sale and none are moving. The least expensive of those for sale is listed for $300,000, and it is getting only a few lookers. There have been only two sales within the past year, and they were both foreclosures that sold at the courthouse steps … one for $200,000 and the other for $250,000. Finally, a buyer takes the bold step of moving back into the conventional market by signing a purchase contract for a home at a price of $300,000. The appraiser appraises the home for $225,000, arguing that the market only supports this value. Is it appropriate to use only the foreclosed properties as the basis for the evaluation?

If this example sounds farfetched; it is not. There are many communities in the United States currently experiencing similar circumstances. Sellers, buyers, brokers, lenders and appraisers are all challenged by this difficult and complex market. Of all those with an involvement in this transaction, the appraiser is likely the most challenged. He or she is confronted with the responsibility of rendering a fair and unbiased opinion of value, and there is very little relevant data from which to base a professional opinion.

For those who say that foreclosures should not be considered, this is simply not true. This data is oftentimes among the only indicators available to the appraiser.

For those who take the position that foreclosures are always comps with equal weight as sales, occurring within the conventional market, they are wrong, too. In this case, the appraisers only data lies within the old comparables at $400,000, current listings as low as $300,000, a sales contract of $300,000 and two foreclosures averaging $225,000. The answer lies somewhere in between the $225,000 and the $400,000, and it is up to the appraiser to determine where the value lies within this range of central tendency.
Just how accurate are foreclosure comparables, and how much weight must they carry? While we will not attempt to resolve the dilemma of placing a value on the hypothetical property, we will attempt to lay to rest the part a foreclosure should play in a value decision by an appraiser.

First, foreclosure properties are often very comparable to many subject properties being sold and requiring appraisals. The appraiser not only is able to use them in determining a value if they are comparables which have sold within a market, he or she has a responsibility to report them and to consider their effect on value.

Second, many foreclosed properties simply do not provide unadjusted value indications that are consistent with the relevant market for subject properties. They are not consistent with market values, and while the appraiser is bound by Uniform Standards of Professional Appraisal Practice (USPAP) to report and consider them, they must be adjusted appropriately, if, and when, used as comparable sales.

When considering foreclosures as comparables within a market, the appraiser must consider how the properties were sold. Were they sold at auction at the courthouse steps, as in the example? Was the buyer able to gain access to the property in an effort to perform a physical inspection? Were they sold by a realtor, representing a bank, after the properties have already passed through to the bank through the auction process? If sold by a realtor for a bank, was adequate time given for normal marketing or did the bank want to sell the properties quick to get them off its books? Also, what was the physical condition of the comparable foreclosures? Were they damaged; had they been repaired; had they been remodeled? Did the buyer have adequate time to obtain financing to support the purchase?

Finally, foreclosure properties are very similar to any other property considered as a comparable. If there were circumstances, such as poor physical condition, lack of inspection access, inadequate loan application time or a compulsion to sell quickly, allowances must be made for these differences. In some cases, the differences may be so significant that the comparable is rendered useless or of little value. In such cases, the sale should be reported, but not included or given weight as a comparable sale.

In other cases, only slight adjustments or no adjustments may be required. Whatever the case, the appraiser is required to consider all comparable sales, occurring around the time the property is sold. Whether the comparable is a foreclosure or a more traditional sale, the appraiser is required to give consideration to the data it provides and use the information appropriately.

If the appraiser uses a foreclosure as a comparable sale, this does not mean that he or she is wrong. It may mean that he or she is just doing his or her job. It may have qualified as a comparable, and may have been the only relevant data from which to render an objective opinion of value.

 

ASPEN — Alpine Bank has retained a New York-based firm to sell a $22.5 million promissory note held by a development company that seeks to build a hotel at the base of Aspen Mountain.

Mission Capital Advisors LLC is a national boutique financial advisory firm that specializes in structuring the sale of commercial mortgage loans. The company is taking bids on the note that secures 2.4 acres on South Aspen Street. The land is owned by Aspen Land Fund II, a subsidiary of Newport Beach, Calif.-based Centurion Partners, which seeks approval to build a 122,000-square-foot hotel-residence project known as the Lodge at Aspen Mountain.

Aspen Land Fund II came out of Chapter 11 bankruptcy last month in an effort to raise capital and renegotiate with the bank to keep the note. John Sarpa, principal at Centurion Partners, declined to comment other than to say that he and his business partners continue to negotiate with Alpine Bank in extending the terms of the note.

It doesn't appear those discussions will last much longer since the deadline for Mission Capital to receive bids is March 23, and the winning bidder is scheduled to be selected March 24. The company's offering memorandum states that the closing date is March 30.

And while Aspen Land Fund continues to negotiate with Alpine Bank, its competition to secure the note has grown now that it's being offered to bidders around the country. Aspen Land Fund's note is part of a $73.5 million mortgage loan portfolio sale that includes loans on four other Aspen properties, as well as one in Snowmass Village and one in Beaver Creek.

The development company's land refinance loan is the largest in the portfolio and is secured by the land on South Aspen Street, which has current development rights for 17 luxury townhomes. The second largest loan is for $15.5 million and is secured by 17 free-market residential lots on 8.6 acres in Snowmass Village. That loan is in default, according to Mission Capital.

Also in the portfolio is a $11 million loan in default on a partially built, 26,414-square-foot mixed-used building that reportedly is the Stage 3 redevelopment in Aspen, as well as a sub-performing $7.8 million construction loan on a unfinished 16,000-square-foot luxury home on Ute Avenue and a $10 million construction loan on a 3,000-square-foot half-duplex in Aspen that is in default.

The majority of the loans were originated with personal guarantees, all of which remain in place, according to Mission Capital's offering memorandum. In February, Denver Judge Howard Tallman lifted bankruptcy protection from Aspen Land Fund after Alpine Bank filed a motion for the case to be dismissed in an effort to collect on the note that the development company owes on.

Aspen Land Fund filed for bankruptcy protection Sept. 25, 2009, in a move to prevent another company from acquiring the land and the development rights on South Aspen Street. The move was in response to Alpine Bank entering into a contract with an unknown third party to sell its loan on the project, even though the firm had been in negotiations to extend the terms of the note. The transaction with the third party never transpired.

Lifting the bankruptcy protection does allow Alpine Bank to foreclose on the property, which also has not occurred.

The bank, through Denver-based law firm Ballard Spahr LLP, had claimed that it is not adequately protected because it says the value of Aspen Land Fund's collateral is nearly $4.5 million less than the debt owed.

The promissory note is secured by a deed of trust, and the vacant property on South Aspen Street is being used as collateral.

The bank recently obtained an appraisal of the vacant property, which as of Nov. 20 listed its value at $19 million, assuming current land-use approvals.

Aspen Land Fund has argued that the property will be worth more if and when the hotel development rights are secured.

Alpine Bank holds as additional security a CD valued at nearly $1.6 million. The value of the property and the CD is roughly $20.6 million.

The property also is encumbered by a $4.9 million junior lien to South Aspen Real Estate LLC, which was financed by Goldman Sachs. Alpine Bank claims Aspen Land Fund is unsecured on that lien as well.

Centurion Partners is scheduled to appear in front of the Aspen City Council in the coming weeks for the first reading of an ordinance that seeks approval to build The Lodge at Aspen Mountain. The majority of a citizen task force in December recommended that the ordinance be approved.

Mission Capital regularly sells bulk loan portfolios and single loan assets collateralized by commercial real estate, land and condominium acquisition, development and construction loans. Since the beginning of the credit crunch, Mission has sold more than $3 billion of commercial mortgage loan sales, according to the company's website.

Sources say that banks are under pressure by the FDIC and other federal regulatory agencies to rid themselves of their under-performing, high-risk real estate loan portfolios.

 

IS THIS ACCEPTABLE ADVERTISING FOR AN ‘ABSOLUTE AUCTION’?

 

January 2010 NAA- Auctioneer Magazine.

 

Recently I saw some ads from a new real estate auction group that said, ‘Absolute auction at any price over $1.6M.’

 

I re-read the NAA Ethics Code and saw that it says an absolute auction is one in which the property is ‘sold to the highest qualified bidder with no limiting conditions or amount.’ It seems to me that using the term ‘absolute auction’ with a minimum requisite is antithetical to our Code of Ethics. I met with the auctioneer responsible for this advertising and he told me that the biggest Auctioneer in his state advised him that this was perfectly legal – and that he had been using it for years! I contend that it is misleading and merely a contrived derivation of ‘reserve.’

 

Nicholas Varzos, Auctioneer ~ Lake Tahoe NV

 

(Ric Souto, of Vail CO. asks the additional related point: “However, if the auction’s Terms and Conditions clearly state that once the minimum bid is made, then the property will be sold to the highest bidder without any additional reservations or conditions, doesn’t this auction become an absolute auction once the minimum bid is made? There seems to be some debate about whether this is appropriate advertising or not.”)

 

ANSWER – Kurt Buchman, Attorney / Author – NAA

 

The above advertisement raises several issues and may be unethical. The advertisement is not an advertisement for the standard absolute auction. Instead, it is an advertisement for a reserve auction with the reserve price set at $1.6 million using absolute auction language. The average consumer after reviewing the language, however, may be confused. The NAA Code of Ethics defines an absolute auction as “[a]n auction where the property is sold to the highest qualified bidder with no limiting conditions or amount. The seller may not bid personally or through an agent.” The NAA definition is unambiguous and clearly defines what constitutes an absolute auction.

 

An auction is either a reserve auction or an auction without reserve. A reserve auction does not become an absolute auction when a bid exceeding the reserve price is submitted by a bidder. Several state legislatures and the NAA have taken the time to meaningfully define the terms ‘absolute auction’, ‘auction without reserve’, and ‘reserve auction’. The NAA defines ‘reserve auction’ as: “[a]n auction in which the seller retains the right to establish a minimum price, to accept or decline any and all bids or to withdraw the property at any time prior to the announcement of the completion of the sale by the auctioneer.” The definition expressly states that the seller has the right to withdraw the property from sale prior to the Auctioneer announcing the completion of the sale. At an absolute auction, for comparison, the seller cannot withdraw the property after calling for bids. Similarly, a bidder can withdraw his or her bid any time before it is accepted. So, Auctioneers should refrain from calling a reserve auction an ‘absolute auction’ after the reserve is met, because it may limit the seller’s authority.

 

The use of the absolute auction language can change the rights of sellers and buyers and mislead the bidding public. …From an ethical point of view, the practice of marketing a ‘reserve auction’ as an ‘absolute auction’ is prohibited under Standard of Practice 1.2. Specifically, the NAA Code of Ethics, Standard of Practice 1.2, states: “The practice of encouraging a client to market a property as ‘absolute’ when in actuality the member has verbally promised to convert the sale to an auction with reserve, or alternatively to cancel the sale if the marketing campaign does not produce an opening bid sufficient to satisfy the intended reserve of the client, is strictly prohibited.”

 

Although this rule does not specifically address the question, it does reflect that only ‘absolute auctions’ should be advertised as absolute.

 

When an auction is only sort of real

When reporter Sean Cole began to investigate housing auctions, he stumbled upon a kind of auction he had never heard of before -- a not-an-absolute auction.

TESS VIGELAND: We talked earlier in the show about how foreclosure rates just keep going up. One side effect is the booming business of foreclosure auctions. Banks hire auction companies to off-load properties that the original owners couldn't pay for. And bidders sign up by the hundreds hoping for a great deal on a house.

Sean Cole recently reported on the trend for us. But then he stumbled across an aspect of these auctions that you'll want to know about if you ever attend one.

---

Sean Cole: So the auction was held in a small ballroom at the Boston Park Plaza Hotel. And this thing happened about midway through that really kind of put a bee in my ball cap. It happened to this kid; I call him a kid. His name is...

Gardiner Bowen: Gardiner Bowen.

Cole: And what do you do.

Gardiner: I'm a real-estate investor.

Cole: I hope you'll forgive me for saying so, you seem very young to be a real-estate investor.

Gardiner: I am.

Cole: How old a guy are you?

Gardiner: I'm 23.

I didn't even know what real-estate investing was when I was 23. And here Gardiner was already a landlord. He was also one of more than 200 bidders at the auction that night, all competing for just 36 properties. But Gardiner had his eye on one in particular -- a rundown, single family house in Bristol, R.I. He'd seen it and told me it needed $60,000 in repairs and was in the middle of nowhere, which he liked.

Cole: Why does that appeal to you?

Gardiner: I rent to college students. And having a house in the middle of nowhere means no neighbors. I'm only going to be bidding on one. That's the only one. Yeah. Keep that between us.

Cole: I will. I will. But after the auction I'm going to see if you... I hope you get it.

Gardiner: I'll let you know after the auction then.

Cole: Please do.

Gardiner: All right.

Auctioneer: Ladies and gentlemen start the bidding at $19,000 and who came in to buy this one now. $19,000 to buy, $25,000.

Ten houses went up on the block before Gardiner's. And I just have to take a moment to say these events are truly entertaining. The auctioneer holds court from this high podium, wearing a tuxedo. Two other guys in tuxedos work the floor egging people on to bid more. And every time a bid card goes up, one of the spotter guys lets out a little yelp and cups the air like he's catching a penny.

Auctioneer: 50. Now 60.

Bidding assistant: Yup!

Auctioneer: 70.

Bidding assistant: Yup.

Bidding assistant: Yup.

Auctioneer: I'm bid $60, $70,000, now $80.

Also the auctioneer doesn't say "Sold!" after the bidding like you'd expect. He says this instead:

Auctioneer: Subject to confirmation sold at $20,000, subject to the sellers confirmation. Let's go to Bristol.

This was Gardiner's house originally valued at $305,000. The bidding started at just $49,000. And went up really quickly.

Auctioneer: Bristol. 49. 50. 60. 60. 70. I'm bid 60 riiiight here $70,000 to buy. 60 riiight here, $70,000 to buy, $80,000 now.

Gardiner didn't want to spend more than 60,000, but he hung in. And in the end, with a bid of $87,500, he landed the house.

Auctioneer: It is history. And subject to seller confirmation your way. Thank you.

Or so he thought. He and his mom were quickly led over to the financing area to the right of the stage. And just as quickly, they came back. Gardiner slumped down in his chair like he'd been punched. His mother, Judy, said, "They wouldn't sell it to us."

Judy Bowen: The bank will not accept the bid.

Gardiner: It has a hidden reserve. So I drove up here, spent the night, paid to get here and still can't buy the property. Even though I won the bid.

Judy: But what does that mean, a hidden reserve? I mean like...

Dan Saccoccio: It's not an absolute auction.

This is the broker Dan Saccoccio. He said absolute auction is an industry term.

Saccoccio: Absolute means it's a real auction and whatever you bid on, that's the price.

Which is what we think of when we think of an auction. But there's another kind, a "subject to lender confirmation" auction.

Chris Longly: With subject to lender confirmation auctions, the bank has a price that must be met.

This is Chris Longly, a spokesman for the National Auctioneers Association.

Longly: And so there is a reserve price set.

Cole: So when the auctioneer, at the end of the bidding, says, "Subject to lender confirmation," that's what he means.

Longly: Absolutely. It is not sold. It is sold, subject to lender confirmation.

Cole: How many foreclosed home auctions are absolute auctions?

Longly: I have not come across any absolute foreclosure auctions yet.

Cole: Is that OK?

Longly: Yeah. You know, our job is to represent our seller. In this case, it is bank. You know, many of these properties are selling, but some are just not getting a price at the auction block that meets the needs of the bank.

Now, lots of auctions have reserve prices; eBay has reserve prices. But at this auction it came as a surprise. At least to Gardiner and me. The company that held the event is Real Estate Disposition Corp., or REDC. And it said the reserve condition is clearly stated in the terms and conditions handed out ahead of time. And it is -- at the bottom of page five. (Actually, REDC hides their reserve terms in teeny-tiny print at the bottom of that page!)

I asked a spokesman, Rick Weinberg, why the auctioneer didn't spell it out verbally into the microphone.

Rick Weinberg: Well, we feel our auctioneers, and people who run the auctions do do that and do a great job.

Cole: You feel that or they do actually do it? 'Cause they didn't do it at the Boston auction. That's the only reason I ask.

Weinberg: Well, they are instructed to say many different things and that is one of them.

To be clear, I recorded almost all of the opening remarks and listened back to all of that tape. There wasn't anything about reserves. Also, if the banks want a certain price for these houses why not set that price as the opening bid? Some of these opening bids were as low as $500, which seems to say, "Look! You can maybe get a house for that much!"

Weinberg: No. No. That's never said. That's never said, and you'll never find it anywhere.

Cole: Yeah, it's kind of implied, though, you know, if I'm looking at a sheet and it says "Opening bid: $1,000." I'm like, "$1,000? Oh my God." Even if it goes up to $40,000 that's still $40,000 for a house.

Weinberg: But then someone has to do their homework and realize it's not an absolute auction.

Cole: How would they know to do that kind of work?

Weinberg: Well, they have to do their homework. They have to do their due diligence.

I talked to the bank that owned the house Gardiner bid on. They didn't want to go on the record, but they said that when you start the bidding low, there's a better chance it'll end up way above the reserve. That's just how auctions work they said.

Auctioneer: Ladies and gentlemen that concludes our sale tonight.

After the auction, Gardiner and his broker and his mom complained to the people in charge. It started as a gentle chat and quickly escalated into what looked like a fairly heated scuffle. The broker asked me not to record that part. And in the end, to its credit, REDC agreed to present Gardiner's offer to the bank.

Trent Ferris: And in this particular case, the young man actually was willing to discuss some other information about the property.

This is the vice president of auctions for the company, Trent Ferris.

Ferris: And while we don't think the seller's going to accept it because it was a subject to...

Cole: You don't think the bank will come down?

Ferris: You know, I don't know. I don't know. That's why we're going to be willing to go ahead and give him the opportunity on it.

I should point out that disputes like this are not common. They do happen and one analyst told me they used to happen a lot more before banks got more realistic about housing prices. Also, REDC only gets paid if the house sells. It makes its money from a 5 percent buyer's premium.

Gardiner: It's in their best interest to help us out and figure out a way to get the information to the bank.

I caught up with Gardiner again as he and his mom were finally filling out forms.

Gardiner: And that's kind of what they explained to us, after they found out I was upset with the way that the system worked.

Cole: So you told them you were upset.

Gardiner: Oh yeah. Just like I told you.

Cole: And how did they react when you told them you were upset?

Bowen: I'm signing papers now.

And a little more than a month later, the deal finally went through. And Gardiner was the proud owner of a rundown house in the middle of nowhere that needed $60,000 worth of work.

In Boston, I'm Sean Cole for Marketplace Money.

 

Why Are Homeowners Idiots?

January 26, 2010 |

Across the country, many homeowners have faced the devastating realization that the homes they own are now worth less than what they owe the bank. We all know this unenviable situation as being "underwater."

The pervasiveness of underwater homeowners is already fairly well known, particularly when it comes to hard-hit areas like Arizona, Nevada, Florida, and California. What is not particularly well known, though, is exactly why most of these battered borrowers are still making good on their monthly payments.

Why don't they walk away?
An interesting quirk of economics is that the dismal science generally assumes that all agents in an economy work in their own best interest. But this doesn't always happen in real life.

The mortgage crisis is a case in point. For many of the underwater homeowners in today's market, paying down their mortgage isn't really in their best financial interest. Particularly in states like Arizona -- where mortgages are nonrecourse, meaning the lender can't go after any of the homeowner's assets other than the property itself -- it makes little sense to continue paying a large mortgage on a devalued house when comparable rental rates are far below the monthly mortgage payment.

The situation had University of Arizona professor Brent White scratching his head, and as a result he wrote a very interesting paper on the subject, which University of Chicago luminary Richard Thaler brought to an even broader audience over the weekend.

Come on, everybody's doing it
Among the conclusions White reached is that borrowers are suffering from "norm asymmetry." That's a jargony term for sure, but it basically means that homeowners are being convinced that the "right thing to do" is to keep paying their mortgage -- even if it's not in their best interest. That stands in stark contrast to the financial giants that make these mortgages, which are free to do whatever they need to in order to maximize profits -- and bonuses.

And who's doing this convincing? For a large part it's the financial companies themselves, folks like Bank of America (NYSE: BAC), Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), and Wells Fargo (NYSE: WFC)

But they're not alone. They've had plenty of help from government officials like Hank Paulson. Back in 2008, Paulson launched a sharp jab against those who would consider walking away from their homes, saying:

And let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator -- and one who is not honoring his obligations.

Which makes perfect sense, since I imagine Paulson never speculated on anything when he was at the helm of trading king Goldman Sachs (NYSE: GS). And, of course, with de facto ownership of the ill-fated Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), the government doesn't stand to gain anything at all from persuading homeowners to act against their own best interest.

During the implosion of the housing market, the government has helped massive financial firms and many homeowners who bought houses they never should have qualified to buy in the first place. Meanwhile, responsible borrowers who bought houses they could afford on traditional fixed-rate loans are made to feel as if they are morally bankrupting themselves if they decide to do what is often highly financially advisable.

Why do we have this "norm asymmetry"? Why would we heap guilt onto this particular group? My guess is that if the powers that be answered honestly, that answer would be "because we can."

Thanks to folks like Brent White, Richard Thaler, and homeowners who are already choosing to move against the grain, though, the stigma of walking away from a severely devalued asset may be waning. If this is the case, the big banks and Uncle Sam need to put away the wagging finger and instead actually deal with the situation in a reasonable and sound manner. I'd suggest a confab with White and Thaler as a good first step.

Underwater homeowners have been getting some rotten advice, but they're not the only ones.

 

Warren Buffett's Best Advice Ever

January 25, 2010 |

It's funny how often a prominent person's legacy is remembered with a single speech, or even a single phrase. Four score and seven years. I have a dream. Ask not what your country can do for you. One small step for man. Tear down this wall. You know what I mean. Without comparing the contributions of those men, I wondered whether one speech could define the career of the world's greatest investor, Warren Buffett, and his creation Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B).

Turns out, it can. While Buffett had been dominating for decades, his talent wasn't truly apparent to the world until he gave a 1984 speech at Columbia University titled "The Superinvestors of Graham-and-Doddsville."

The lengthy speech can be found in its entirety here (opens PDF file), but I'll give you the Cliffs Notes version.

Dumb luck, pure skill, and flipping coins
Buffett begins by imagining a nationwide coin-flipping contest. Everyone in the country participates and calls the flip of a coin. Call correctly and move on to the next round, guess wrong and you're out.

After 20 days, about 215 lucky flippers will have correctly called 20 consecutive flips. They gloat in success, yet the nature of coin-flipping tells us they're just lucky. It's a game of random chance.

But what if all 215 flippers lived in the same town? What if they all hailed from the same school? The same fraternity? Then we'd get excited. The laws of probability suggest 215 winners after 20 days. But those same laws tell us that if all 215 belonged to an associated group, that almost certainly wouldn't be the product of random chance. These 215 flippers clearly would know something we don't.

Meet nine "lucky" flippers
The real flippers in Buffett speech are nine "superinvestors" -- himself included. All nine crushed the market averages over multiyear periods by between 8% and 22% per year.

In a world with millions of investors, such returns can occur by sheer luck -- just like the 215 coin-flippers appeared at first glance. But all nine superinvestors hailed from the investment school of Benjamin Graham and David Dodd -- Columbia professors now known as the fathers of value investing. That meant something big. It meant that their success wasn't the product of luck. It almost had to be attributable to the only common link they shared: the investing philosophy learned from Graham and Dodd. The "intellectual origin," as Buffett put it.

What set Graham and Dodd's philosophy apart? That's where the title of this article comes in. Explaining it was simply the best advice Buffett ever gave.

Here it is
Buffett states the superinvestors' core values quite succinctly:

The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market. Essentially, they exploit those discrepancies without the efficient market theorist's concern as to whether the stocks are bought on Monday or Thursday, or whether it is January or July, etc ...

It's very important to understand that this group has assumed far less risk than average ...While they differ greatly in style, these investors are, mentally, always buying the business, not buying the stock.

It's that simple
Most investors aren't superinvestors. To them, there's little distinction between price and value. A cratering stock means risk, while a soaring stock somehow indicates strength and safety -- all with little regard to other, more deeply rooted factors. This is akin to assuming that all attractive people make great spouses.

But a more philosophical view shows how crazy this is. Risk appears when market value equals or exceeds the long-term value of a company's discounted cash flows -- its intrinsic value. It then diminishes in proportion to how far market price drops below intrinsic value. Really simple. The relationship between price and risk is often the opposite of what it's comfortable to assume.

Here's an example: Was Google (Nasdaq: GOOG) riskier in 2007, when optimism was on fire and shares exploded, or in late 2008, after shares crashed and bottomed out at around 12 times forward earnings? The answer is easy. Google was enormously risky in 2007, when the market assumed it was a surefire bet, and steadily approaching riskless territory in late 2008, when market volatility made investing look suicidal. Same goes for companies such as Alcoa (NYSE: AA) and Dow Chemical (NYSE: DOW). Investing risk was lowest when the performance and volatility of their shares looked bleakest. That was when the gap between price and intrinsic value was widest. That's when you want to invest.

Looking ahead
Our Motley Fool Inside Value service looks for this kind of gap. Right now, the team has identified Western Union (NYSE: WU) and Wal-Mart (NYSE: WMT) as companies whose market is price is far below their long-term intrinsic value. Since inception, the team's picks have outperformed market averages by more than seven percentage points, making them superinvestors in their own right.

Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Berkshire, Wal-Mart Stores, and Western Union are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. Berkshire and Western Union are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended writing puts on Western Union. The Fool owns shares of Berkshire, and has a disclosure policy.

 

Lenders Pursue Mortgage Payoffs Long After Homeowners Default

January 28, 2010, 08:53 AM EST

By Kathleen M. Howley

Jan. 28 (Bloomberg) -- When John King stopped making payments on his home in Coral Gables, Florida, two years ago, he assumed the foreclosure ended his mortgage contract, he said. Last month, a Miami-Dade County court gave collectors permission to pursue him for $44,000 stemming from the default.

King is among a rising number of borrowers who are learning that they can be on the hook for years after losing their homes. Amid a crisis that stripped $6.4 trillion, or 28 percent, from the value of U.S. residential real estate since the 2006 peak, lenders are exercising their rights to pursue unpaid mortgage balances. To get their money, they can seize wages, tap bank accounts and put liens on other assets held by debtors.

“The big dogs get a bailout, and the little man gets no mercy,” said King, 39, referring to the U.S. government’s rescue of banks and other financial institutions. While there are no statistics on the number of deficiency judgments approved by courts, the Federal Deposit Insurance Corp. tracks the amount banks collect after defaulted loans were written off.

These mortgage recoveries rose 48 percent to a record $1.01 billion in the first nine months of last year compared with the year-earlier period, according to the Washington-based regulator. Recoveries on defaulted home-equity loans almost doubled to $392 million, the FDIC data shows.

The figures don’t include money retrieved by trusts overseeing mortgage-backed securities, such as the one that holds the loan on King’s former home, or efforts by distressed- asset funds and companies that buy bad loans to profit from collection rights. Judgments such as the one levied against King usually tack on court fees, fines and interest.

‘Next Big Crisis’

Deficiency judgments were rare in the 15 years since the last real estate slump, said Ben Hillard, a former investment banker who now is a real estate and corporate attorney at Hillard & Rogers in Largo, Florida. “The banks have been too underwater with foreclosures to spend much time on deficiency judgments, but that’s beginning to change,” Hillard said in an interview. “This is going to be the next big crisis.”

Almost 4.5 percent of mortgaged U.S. homes were in foreclosure during the third quarter, the highest rate in the 37 years of tracking the data, the Mortgage Bankers Association said Nov. 19. A record one in every 10 mortgages was at least one payment overdue in the same period, the Washington-based trade group reported.

The Obama administration is seeking to modify as many as 4 million loans by 2012 to prevent foreclosures through the Home Affordable Modification Program, which cuts monthly payments to about a third of borrowers’ income. By the end of December, the program was responsible for more than 850,000 modifications, the Treasury Department said in a Jan. 15 report.

20-Year Window

The federal government spent $230 billion in the year ended in September to support homeowners, according to the Congressional Budget Office in Washington. Those efforts didn’t help people who had already walked away from their houses. In states such as Florida, courts give mortgage holders as long as five years to seek a deficiency judgment and, if granted, up to 20 years to collect. Usually, they have the option of renewing the judgment if it’s not paid off within 20 years.

About a third of U.S. states, including California and Arizona, prohibit collection efforts on primary residences after foreclosure. In some cases, homeowners waive that protection if they refinance. Most states allow collection on unpaid home equity loans.

Depression-Era Protections

The laws in states that protect some borrowers stem from the Great Depression in the 1930s, when a lack of bidders at foreclosure auctions caused deficiencies that, with added fees and interest, sometimes were bigger than the original loan amount, according to a 1934 Virginia Law Review article by Sol Phillips Perlman. Today, many courts measure the shortfall using a property’s market value at the time of foreclosure rather than auction results.

The likeliest candidates for deficiency judgments are so- called rational defaults, said Larry Tolchinsky, a real estate attorney in Hallandale Beach, Florida. In those cases, people who are current on their mortgages decide to walk away from a property because its value has sunk so far below their loan balance they have no hope of recouping the loss.

About 21 percent of American homeowners owe more on their mortgages than their properties are worth, according to Zillow.com, a Seattle-based real estate data firm. “Walking away from a property comes with a cost, especially for people who otherwise have good credit,” Tolchinsky said in an interview. “The bank is going to pull your credit report, and if you’re current on your other bills they are going to come after you and potentially ruin you.”

Fine Print

It’s not just foreclosures that can trigger debt collections. Short sales also may lead to deficiency judgments years after former homeowners have moved on, according to Hillard, the attorney in Largo. In a short sale, lenders agree to let borrowers sell a home for less than the mortgage balance.

“Banks are being very careful to preserve their rights, either outright in the short sale agreement or by using vague language that leaves that door open,” Hillard said. About 90 percent of people who do a short sale think they are “off the hook.” That was the case when two of his clients, Brigitte and John Howard, sold their home in New Port Richey, Florida, almost two years ago without using a lawyer to check the bank’s short- sale agreement.

$20,000 Shock

“We got a call out of the blue saying we owed $20,000,” said Brigitte Howard, 45. “It was a shock. There was no mention in the short-sale contract that the bank might come after us for the difference.” The money King owes to the Soundview Home Loan asset-backed security that holds the mortgage on his former Coral Gables condominium consists of $38,000 for unpaid principal and almost $6,000 in legal fees and interest accrued prior to the ruling. According to the judgment, the security can charge 8 percent interest until he pays off the debt.

King, who said his default was caused by a reduction in his income, now rents near Fort Lauderdale, Florida, where he teaches ballroom dancing. “I thought the foreclosure was the worst of a bad situation, but it’s not,” said King. “The people who got sucked into the real estate bubble are still paying for it, even after they’ve taken our homes.”

 

PHOTOS: Cher's Hawaii Home Sells For $8.7 Million

Recession? What Recession?

With the housing market still supposedly in a slump as the world economy struggles to recover following a global recession that’s been felt by all, Cher has managed to buck the trend, selling her luxurious Hawaiian home for a whopping $8.7 million at auction.

The three-quarter-acre property, that overlooks the Pacific Ocean in Kailua, Kona, was one of five Big Island residences auctioned off on Monday for a total of $19.4 million. Cher’s Balinese style residence was sold by a luxury Real Estate auction company, who had estimated the value at between $8 million and $12 million.

Located in the beautiful and exclusive Hualalai Resort, the 8,800-square-foot home features a gated center courtyard leading to the main residence. Designed by Cher herself, the property boasts six bedrooms, a master wing, great room, top of the range kitchen, dining room, outdoor living area and an infinity pool with spa overlooking the resort’s golf course.

The house was purchased by an unnamed, and obviously wealthy buyer in Arizona

 

Bottom-feeding' investors drawn to US real estate in hope rates stay low

By Henny Sender in New York
FT.com

The beleaguered US commercial real estate sector has been attracting a new wave of money from sources including foreign banks, US private equity firms, and a leading Chinese sovereign wealth fund. Market participants warn that the activity represents "bottom-feeding" by opportunistic investors whose strategies could be derailed by rising interest rates. Also, the deals done so far are tiny compared with the debts that need refinancing.

Nevertheless, the growing interest from investors is a sign of stabilisation, making it less likely that worsening commercial real estate conditions will sink banks and choke off a US recovery. "We believe the real story is that capital is ready to buy, even though it may not be so visible today," said Bob Steers, co-chairman of Cohen & Steers, a real estate investment firm.

Recently, state-owned China Investment Corporation (CHA) has enlisted Cohen & Steers, Angelo Gordon and Morgan Stanley to identify commercial real estate opportunities, people familiar with the matter say.

A public sign of such activity came on Friday when Colony Capital won a Federal Deposit Insurance Corporation auction for $1bn of commercial property loans formerly held by failed banks in states hit hard by the real estate downturn. The deal valued the loans at 44 cents on the dollar and was structured so the FDIC contributes $136m and holds 60 per cent of the equity, while Colony, a Los Angeles investment firm, puts in $90m for the remaining 40 per cent.

Tom Barrack, Colony founder, called the investment "an implicit bet that rates stay low" and warned: "If rates go up, everyone will be crushed." Earlier last week, SL Green, a real estate investment trust, said it had refinanced a Times Square tower it owns with Canada's Caisse de Dépôt et Placement du Québec in a $475m deal ed by Bank of China.

In December, JPMorgan Chase raised $625m for Inland Western, a real estate investment trust, of which $500m was in the form of securities backed by commercial real estate assets.

The deal was particularly notable because it was done without help from the term asset-backed securities loan facility, or Talf, which was set up to provide financing for investors in such deals. In all, an estimated $1,500bn to $1,800bn in commercial property debt needs to be restructured, as well as $800bn in commercial mortgage-backed securities.

 

West Palm Beach Foreclosures going once, going twice, going online

January 05, 2010 Juan Carlos Fanjul

WEST PALM BEACH-- Look around virtually every neighborhood in the area and you will see a for sale sign. And many of those homes are also foreclosures, about 45,000 in Palm Beach County alone.

"The foreclosures are terrible, there are 6 of them in my block alone," said Alan Mentser. The professional real estate investor is in the business of bidding for foreclosed homes, traditionally done at a live auction run by the county. But now the clerk's office has decided to go once, go twice, and go online.

"We are hoping to reach a broad audience and to open up sales globally. Conceptually, someone in China could bid for these properties going on sale," said Mark Broderick of the Palm Beach County Clerk and Comptroller's office.

Starting January 21st, all Palm Beach County foreclosures will be conducted online, no more live auctions. That's why a group of real estate experts took part in an orientation class Tuesday to find out how to make their bids on a new specially designed website.

The clerk's office, which had to cut 100 employees in 2009 because of state budget cuts, says the E-bay-like auctions will free up the remaining workers, while bidders will not be tied up at the court house all day.

"I can put in my maximum bid on the computer and then basically walk away. At the end of the day, the results are generated and I will receive an email notification," said Ian Yorty of Grant Street Group, the Pittsburgh-based firm which designed the website for the county. But Mentser says nothing beats a live auction.

"You kind of know who who you are bidding against. You put a face to that number and that has some advantage," he said. Starting Wednesday the site will go live enabling people to register, place deposits and research properties.

 

U.S. Loan Effort Is Seen as Adding to Housing Woes

PETER S. GOODMAN

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.

“If they had said, ‘We can’t work with you,’ I’d have said: ‘What are my options? Short sale?’ None of this would have happened,” said Jaimie S. Smith. Her lender simultaneously modified her loan and foreclosed on her.
The New York Times

Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.

As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”

Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.

“Then the carpenters can go back to work,” Mr. Katari said. “The roofers can go back to work, and we start building housing again. If this drips out over the next few years, that whole sector of the economy isn’t going to recover.”

The Treasury Department publicly maintains that its program is on track. “The program is meeting its intended goal of providing immediate relief to homeowners across the country,” a department spokeswoman, Meg Reilly, wrote in an e-mail message.

But behind the scenes, Treasury officials appear to have concluded that growing numbers of delinquent borrowers simply lack enough income to afford their homes and must be eased out.

In late November, with scant public disclosure, the Treasury Department started the Foreclosure Alternatives Program, through which it will encourage arrangements that result in distressed borrowers surrendering their homes. The program will pay incentives to mortgage companies that allow homeowners to sell properties for less than they owe on their mortgages — short sales, in real estate parlance. The government will also pay incentives to mortgage companies that allow delinquent borrowers to hand over their deeds in lieu of foreclosing.

Ms. Reilly, the Treasury spokeswoman, said the foreclosure alternatives program did not represent a new policy. “We have said from the start that modifications will not be the solution for all homeowners and will not solve the housing crisis alone,” Ms. Reilly said by e-mail. “This has always been a multi-pronged effort.”

Whatever the merits of its plans, the administration has clearly failed to reverse the foreclosure crisis.

In 2008, more than 1.7 million homes were “lost” through foreclosures, short sales or deeds in lieu of foreclosure, according to Moody’s Economy.com. Last year, more than two million homes were lost, and Economy.com expects that this year’s number will swell to 2.4 million.

“I don’t think there’s any way for Treasury to tweak their plan, or to cajole, pressure or entice servicers to do more to address the crisis,” said Mark Zandi, chief economist at Moody’s Economy.com. “For some folks, it is doing more harm than good, because ultimately, at the end of the day, they are going back into the foreclosure morass.”

Mr. Zandi argues that the administration needs a new initiative that attacks a primary source of foreclosures: the roughly 15 million American homeowners who are underwater, meaning they owe the bank more than their home is worth.

Increasingly, such borrowers are inclined to walk away and accept foreclosure, rather than continuing to make payments on properties in which they own no equity. A paper by researchers at the Amherst Securities Group suggests that being underwater “is a far more important predictor of defaults than unemployment.”

From its inception, the Obama plan has drawn criticism for failing to compel banks to write down the size of outstanding mortgage balances, which would restore equity for underwater borrowers, giving them greater incentive to make payments. A vast majority of modifications merely decrease monthly payments by lowering the interest rate.

Mr. Zandi proposes that the Treasury Department push banks to write down some loan balances by reimbursing the companies for their losses. He pointedly rejects the notion that government ought to get out of the way and let foreclosures work their way through the market, saying that course risks a surge of foreclosures and declining house prices that could pull the economy back into recession.

“We want to overwhelm this problem,” he said. “If we do go back into recession, it will be very difficult to get out.”

Under the current program, the government provides cash incentives to mortgage companies that lower monthly payments for borrowers facing hardships. The Treasury Department set a goal of three to four million permanent loan modifications by 2012.

“That’s overly optimistic at this stage,” said Richard H. Neiman, the superintendent of banks for New York State and an appointee to the Congressional Oversight Panel, a body created to keep tabs on taxpayer bailout funds. “There’s a great deal of frustration and disappointment.”

As of mid-December, some 759,000 homeowners had received loan modifications on a trial basis typically lasting three to five months. But only about 31,000 had received permanent modifications — a step that requires borrowers to make timely trial payments and submit paperwork verifying their financial situation.

The government has pressured mortgage companies to move faster. Still, it argues that trial modifications are themselves a considerable help.

“Almost three-quarters of a million Americans now are benefiting from modification programs that reduce their monthly payments dramatically, on average $550 a month,” Treasury Secretary Timothy F. Geithner said last month at a hearing before the Congressional Oversight Panel. “That is a meaningful amount of support.”

But mortgage experts and lawyers who represent borrowers facing foreclosure argue that recipients of trial loan modifications often wind up worse off.

In Lakeland, Fla., Jaimie S. Smith, 29, called her mortgage company, then Washington Mutual, in October 2008, when she realized she would get a smaller bonus from her employer, a furniture company, threatening her ability to continue the $1,250 monthly mortgage payments on her three-bedroom house.

In April, Chase, which had taken over Washington Mutual, lowered her payment to $1,033.62 in a trial that was supposed to last three months.

Ms. Smith made all three payments on time and submitted required documents, Chase confirms. She called the bank almost weekly to inquire about a permanent loan modification. Each time, she says, Chase told her to continue making trial payments and await word on a permanent modification.

Then, in October, a startling legal notice arrived in the mail: Chase had foreclosed on her house and sold it at auction for $100. (The purchaser? Chase.)

“I cried,” she said. “I was hysterical. I bawled my eyes out.”

Later that week came another letter from Chase: “Congratulations on qualifying for a Making Home Affordable loan modification!”

When Ms. Smith frantically called the bank to try to overturn the sale, she was told that the house was no longer hers. Chase would not tell her how long she could remain there, she says. She feared the sheriff would show up at her door with eviction papers, or that she would return home to find her belongings piled on the curb. So Ms. Smith anxiously set about looking for a new place to live.

She had been planning to continue an online graduate school program in supply chain management, and she had about $4,000 in borrowed funds to pay tuition. She scrapped her studies and used the money to pay the security deposit and first month’s rent on an apartment.

Later, she hired a lawyer, who is seeking compensation from Chase. A judge later vacated the sale. Chase is still offering to make her loan modification permanent, but Ms. Smith has already moved out and is conflicted about what to do.

“I could have just walked away,” said Ms. Smith. “If they had said, ‘We can’t work with you,’ I’d have said: ‘What are my options? Short sale?’ None of this would have happened. God knows, I never would have wanted to go through this. I’d still be in grad school. I would not have paid all that money to them. I could have saved that money.”

A Chase spokeswoman, Christine Holevas, confirmed that the bank mistakenly foreclosed on Ms. Smith’s house and sold it at the same time it was extending the loan modification offer.

“There was a systems glitch,” Ms. Holevas said. “We are sorry that an error happened. We’re trying very hard to do what we can to keep folks in their homes. We are dealing with many, many individuals.”

Many borrowers complain they were told by mortgage companies their credit would not be damaged by accepting a loan modification, only to discover otherwise.

In a telephone conference with reporters, Jack Schakett, Bank of America’s credit loss mitigation executive, confirmed that even borrowers who were current before agreeing to loan modifications and who then made timely payments were reported to credit rating agencies as making only partial payments.

The biggest source of concern remains the growing numbers of underwater borrowers — now about one-third of all American homeowners with mortgages, according to Economy.com. The Obama administration clearly grasped the threat as it created its program, yet opted not to focus on writing down loan balances.

“This is a conscious choice we made, not to start with principal reduction,” Mr. Geithner told the Congressional Oversight Panel. “We thought it would be dramatically more expensive for the American taxpayer, harder to justify, create much greater risk of unfairness.”

Mr. Geithner’s explanation did not satisfy the panel’s chairwoman, Elizabeth Warren.

“Are we creating a program in which we’re talking about potentially spending $75 billion to try to modify people into mortgages that will reduce the number of foreclosures in the short term, but just kick the can down the road?” she asked, raising the prospect “that we’ll be looking at an economy with elevated mortgage foreclosures not just for a year or two, but for many years. How do you deal with that problem, Mr. Secretary?”

A good question, Mr. Geithner conceded.

“What to do about it,” he said. “That’s a hard thing.”