Bulk REO, Fact vs. Fiction Part VII: "Fraud, Misrepresentation, and the Handling Thereof"

I don't know how I got this hat, but I guess someone HAS TO DO IT.

Two days ago my client and I were put on a call with what was supposed to be an asset manager for Freddie Mac. That person never made it to the call. Instead another "broker" got on the call and started dictating the way my client was to proceed including sending POF to this "asset manager". We said "fine", and simply wanted a confirmation that this "asset manager" in fact works for Freddie and has the authorization to sell SFR REO on their behalf and thus has a fiduciary mandate to vet potential buyers (and thus ask my client for POF). My client told this "broker" they will gladly POF to Freddie, but not to a "broker" or "title company" unless either are charged with that duty (and can be verified) by Freddie.

The pool of assets was an all AZ deal (a healthy 8 figures) that was allegedly for sale for around 50 cents of current BPO.

As the call proceeded we come to find out that this person DOES NOT work for Freddie Mac at all and is not an asset manager, but instead some "third party" that Freddie uses to sell bulk SFR REO. We said "great" let's do a quick verification of that fact and we move forward. The "broker" (which I have now learned is an attorney) hemmed and hawed and wouldn't let us do any verification and then wanted to terminate the call because we wouldn't follow "his" protocol stating "this isn't going to work out". ARE YOU KIDDING ME!

I then called Freddie Mac to inquire as to who this person was (as we now had the name of this "asset manager"). I spoke to the Director of Bulk REO sales at Freddie Mac (a very nice woman). She informed me that Freddie is just starting to entertain bulk sales, and there is an involved registration/vetting process for any buyer. They sell at 75-80 cents off current BPO, and most importantly the "asset manager" I was dealing with was in fact nothing more than an investor currently going through the approval process to buy in Bulk from Freddie himself.

Once again not a single piece of data that was represented to me or my client was true. A COMPLETE MISREPRESENTATION.

I don’t know about you but I am no longer willing to tolerate the fraud and misrepresentations I encounter on a weekly basis. The other day someone told me that many "brokers" don't like me. That I'm too abrasive, that I'm too direct. Well that may be true. But I ask you: what would you do when your livelihood is at stake and you've lost nearly a YEARS worth of income due to the lies, fraud and misrepresentations of others. Ethics is severely lacking in this industry and I am willing to be "the bad guy" if that means I can help curb (or get rid of) the liars, cheaters, scammers and fraudsters that we are all tired of dealing with.

I am confident the real players will welcome my stance, my “aggressive” due diligence, and continue to work with me. And those that protest, get upset, or otherwise deride me for this post, well those are the ones we ALL NEED TO STAY AWAY FROM ANYWAY.

The FDIC is BROKE! Now what?

This past Tuesday the FDIC announced not only was it broke, but in the RED for over 8 BILLION dollars. Now what?

As discussed in my previous posts the FDIC has taken back over 100 banks this year alone, with another 1000+ on their "watch list". And while the FDIC is currently working diligently through their 5 distressed debt third party sellers, as well as their defaulted 1st Resi PPIP program, to my knowledge they have not yet announced any plans for the sale of the thousands of SFR REO they currently "own".

And now with the FDIC in the RED, distressed banks should be HIGHLY MOTIVATED to sell their distressed assets and SFR REO inventory.

January should be a VERY interesting month!

Another One Bites the Dust

Working in distressed assets is kind of like playing pin the tail on the donkey on the edge of a cliff. Not only can't you see, but one wrong move and you're SPLAT!

My optimism and “beingness” to succeed is being tried at this moment. Another one of my deals just all but died (and the carrot being dangled seems just as unreal).

This was a note sale on a large retail center. The property is almost done with the foreclosure process and REO is just around the corner. Our buyer (and when I say "our" I mean I was an intermediary/referral party and didn't control the buyer or the bank) repeatedly stated they wanted to buy the note before foreclosure, issued an LOI, and when the bank finally said "bring us a PSA" it was all but a done deal. At least that is what we were told.

Then at the 11th hour we get an email listing a litany of objections as to why they won't be consummating the trade. Most of the email was BS and simply "fear" and "lack of understanding" of the deal. The carrot was "we'll wait till it goes REO and revisit the trade". I won't hold my breath.

And like that another 6 figure commission is all but a memory.

I have a stomach ache. I should be used to this by now. I'm not.

I'll get over this loss soon and continue to "warrior" on.

But right now I feel like screaming on the TOP OF MY LUNGS until I can NO LONGER SPEAK.

In fact, I think I'll do just that.

The First Barrier to Learning (or doing business); Thinking You Already Know

We are all guilty of it. Colloquially it's called "knowing enough to be dangerous" or "having enough rope to hang yourself" or some such other expression. But in business, such a barrier can mean the difference between doing a deal, and going home.

I used to think I knew it all. Then, as I matured, I realized I didn't even know what I didn't know.

This is acutely true in business. I can't tell you the number of times I was on a deal, thought I had it under control, only to realize (sometimes begrudgingly) that I had no clue what was going on, what the seller or my buyer were talking about, and I had to go research just to keep up.

If you’re lucky, no-one will find out until after the deal is done, and you've been paid. If you are unlucky, no-one will do business with you from that point forward.

It's hard sometimes to "eat crow" or "swallow one's pride" or "admit one was wrong" or "didn't know". But I think the most offensive and disingenuous action a person can take, is to continue to assert their "rightness" or "knowledge" even in the face of overwhelming proof to the contrary.

It takes "a big man", courage, to admit you are "wrong" or "really don't know what you are talking about".

I run into this scenario often in my practice. It happened again just yesterday (and continued today). A perhaps well meaning "broker" (an unlicensed "investor" and "entrepreneur" I might add) spouting off his "knowledge" when it was obvious that he had KNOW IDEA what he was talking about. At best he was erroneously forwarding someone else’s false "knowledge" or false data as true, at worst he was just unintelligent, and arrogant.

I know I've certainly made the same mistake. Perhaps still do. But I have learned to be humble in the face of contrary data that clearly demonstrates that I was "wrong" or at best "was missing data".

In fact, I have as a standing rule, that if anyone can prove in writing my data to be false, I will humbly "eat crow" and admit I was wrong. I would rather KNOW than be "RIGHT"!

So a lesson to us all (and lest one think I think I have all the answers, I KNOW I do not). Have the courage to confront the truth. And even more, know when you are "in over your head" and seek to learn, not assert your "knowledge".

Bulk REO, Fact vs. Fiction: Part VI, "Intel From the Trenches"

Yesterday I turned 40. Aside from a nice brunch with my father and a few good cigars, it was a less than desirable birthday. Four of my bulk REO trades all but fizzled into oblivion. So I thought I'd share my experiences with you to help you better understand the real Chaos that exists in the Bulk REO world.

I used to think "other brokers" were making a fortune doing bulk trades. I used to think, wow there is so much business out there and there are so many "brokers" doing deals, and so much product, it shouldn't be too hard with my knowledge, experience, expertise, and contacts/clients, to get in on this "gravy train".

Boy was I wrong. I think giving birth to a Rhino would be less painful.

The four most recent "abortions" were each with a different bank. The first was a healthy size deal with a less than healthy bank. Things started off quite well. We got the asset pools, we modeled them, underwrote them, and submitted our indicative bids. We had a call with the bank and were moving forward to PSA. Then in the 11th hour a senior bank official decided that their October "one off" retail sales were good enough that they were not going to move forward at this time on the bulk trade. What? Are you kidding me? Everyone knows October numbers are the result of August and September sales, the peak of the retail Real Estate market. So this bank, who incidentally has never done a bulk trade, thinks they are now going to sell over 500 homes (or some significant portion thereof) in the Q4 because they did well in Q3.

Bank #2 was also a decent size trade, with a bank that needs help. Again we got the asset pool, modeled, bid, and had a call all set with the bank. Then we find out that the left hand doesn't know what the right hand is doing, and all the homes we bid on are already sold or under contract and that the bank has to do a complete inventory audit and thus is not doing any Bulk trades at this time.

I'll spare you the details from the other two but suffice it to say that if these four banks are any indication of the internal chaos that exists in the 1000+ "troubled banks" in this country, we are in for quite a ride during this "recovery".

I bumped into this blog today which echoes my sentiments in my last two postings. The banks are simply unmotivated to do any significant bulk trades even though they are taking back RECORD numbers of REOs.

As I subscribe to the "no such thing as failure" school, I will continue to plug on as I firmly believe the clouds are gathering and it won't be long before many, if not hundreds of these distressed banks will be forced to sell their distressed assets, REOs and the like, to the private markets.

Or, as has been the case for over 100 banks this year alone, they will be consumed by the FDIC and that entity will be forced to start bulk selling.

Bulk REO, Fact vs. Fiction: Part V, "Market Manipulation Continues"

I saw this article today and thought it was a perfect indicator of what is REALLY going on in the foreclosure markets nationwide.

In my previous post I touched on the market manipulation that led up to the "bubble burst": artificial demand through cheap and fraudulent capital causing explosive supply, followed by massive defaulting of that artificial demand leading to a massive over-supply, all driving down real estate values, and driving up REO bank inventory (see Part IV for the full story).

According to this report: “For California, Deutsche Bank projects that as of Q1 2009, 54.3 percent California homeowners were underwater on their mortgages, and that within two years, 67.9 percent will be under water. Projections for areas like Modesto and Stockton are more extreme with 2011 estimates at nearly 90 percent”.

Let's really confront this. More than Half of all homes in California are upside down (homes worth less than the unpaid principal balance of their mortgage) and that number could go as high as 90% within 2 years in some communities.

The sheer magnitude of this is staggering, and if the country, as it usually does, follows the trends of CA then we have only scratched the surface of REO inventory as of 2009.

I recently worked on a trade with one of the Majors in California. It didn't consummate. We (my client and I) were told that 70% was the floor of any bulk discount. We couldn't get to this number. And yet the pool we worked on sold in smaller chunks and in "one-off" contracts for 75-80 cents of current AVM.

So here is my question. With MILLIONS of homes already in foreclosure and/or REO and with MILLIONS more homes going into foreclosure, and the Banks clearly withholding their inventory to artificially prop up prices by artificially restricting supply (thus driving up "competition/demand" on what they will sell, and thus keeping prices "high") then how or more importantly WHEN will REAL VALUE be established for REO inventory? And when will the Majors start selling in Bulk, at a real enough discount to entice private capital?

I asked this question in my last post, and I got some very interesting answers. One viewpoint was to let the banks "trickle" the inventory onto the market over time, so that prices could stabilize. That's a great idea. But with several million homes currently in and going into foreclosure in the near future, this "trickle" will take many years. Do we simply wait for this process to run its course before new housing starts and other Real Estate indicators can ever recover?

Let's look at it from a Banks' perspective. A bank keeps a loan on its books as a performing asset so long as it DOES NOT affect it's TIER ONE capital requirements. Meaning, as soon as a loan defaults and is labeled "nonperforming" the bank MUST compensate with a % of NEW capital. So when the Majors took billions in TARP funds what they essentially did was prop up all those distressed assets. Why should I sell my distressed assets (whether loans or REOs) when I can just borrow all the Tier One capital I need from the American taxpayer to offset my books. What motivation do I have to let the market WORK and sell these distressed assets. The answer is NONE, and there is the problem.

Due to Gov't meddling, the Major Banks have not had to sell their distressed assets at the volume they would otherwise need to raise capital to offset their losses. They can default the loan, take back the home as REO, all the while "propping up" their capital requirements with tax payer borrowed money.

And when they do sell the REO, they can "one-off" them at or near current market value. They don't need the capital! They got it from the Tax Payers. So why sell the millions of REOs they have in Bulk at a discount to private firms? There's no need. They'll just sell them, slowly, and pay back the Tax Payer over several years. Seems reasonable enough, doesn't it?

But as we all know, there is only so much "bailout" any of us can take or will tolerate. At some point the Banks will not be able to "prop up" their books, and they will be forced to sell their assets on the open Market. I don't know if that will happen this year, or next, but at some point, there will be NO MORE MONEY for them to prop up their books, and at some point I think they will all be FORCED to start Bulk selling these Millions of homes to private funds to raise the money they need to operate.

The "X" factor I see here is the role of the FDIC. Right now that agency is strapped for cash. Yet every week I get my FDIC notification of the 1-5 or more banks "taken over" by the Gov't, and in each instance hundreds of millions or billions of dollars worth of notes and REOs are put into Gov't recievership for liquidation. And currently there are over 1000 banks on the distressed "watch list". There simply isn't enough money for the FDIC to take over all these banks.

So whether the banks themselves, or the FDIC, there will be a "tipping point" and Bulk Sales of SFR REOs, at a significant discount to entice private capital, will have to ensue. The only question is when?

What do you think?

Addendum: Rather than make this a separate post, I wanted to add this article that I just read (Saturday 7 Nov) that I think drives home my point. REO inventory is declining while foreclosure filings continue to rise . We are in for a much longer haul than the talking heads on TV want us to believe. And this should be a blessing to those of us working in the distressed asset space. Opportunities abound.

Bulk REO, Fact vs. Fiction: Part IV, "A Possible Solution"

Economics 101 tells us that supply and demand determine market value. When supply goes up, and demand goes down or remains level (thereby increasing supply) prices come down. And when demand goes up and outstrips supply prices go up as well. It’s a pretty simple formula. But what happens when either the supply side or demand side are artificially manipulated? Artificial Booms and Depressions.

That’s what we have right now. For years due to cheap capital and almost non-existent regulation (fraud) in the mortgage market, the demand for housing in this country went through the roof. The manipulation with FNMA (Thank you Barney Frank and Company) set up a scenario where “anyone with a pulse” could get a loan for a home. And with this raging demand came the housing boom. New construction of homes and condos proliferated. Whole new cities were built. New condo construction in most major cities exploded out of control. Apartment buildings by the 100,000s of units were converted to condos. The supply side of the equation was attempting to keep up with the “demand”. But as we now know that demand was artificial, manipulated, and false. And a large portion of those “buyers” are now in default, and losing their homes. (I left out the entire scope of how mortgage backed securities and derivatives trading helped drive the demand for and creation of mortgage products that pushed this demand even higher but suffice it to say Wall Street played a large role in this current crisis).

What we are left with are millions of homes and condos vacant, or going into foreclosure and soon to be vacant.

So what’s the solution? Simply, all that supply that the artificial demand generated needs to be absorbed. One smart broker emailed me from my last post and suggested that if the banks were to “dump” their entire inventory onto the market, it would create such an oversupply of product that it would further depress prices. Well I have to agree, except why is that a bad thing. Until the Real Estate market establishes a true “floor”, a true base line of home values based on supply and demand, all transactions now and in the future are and will be based on “artificial values”. For how can someone buying a home today, and getting a mortgage based on an appraised value, do anything but lose money, and lose equity, if there is still so much inventory, and thus still a built in “value killer” in the market.

As I see it, the only way to solve the housing crisis is for the banks to release their entire REO inventory to the private sector. The large funds out there will over the next year or two (or 5) buy up most if not all the banks inventory at a nice discount. This at once will set the floor for housing nationwide. Yes in the short term it will depress current home values. But once that inventory is bought from banks, and the floor is established, those private firms will begin selling those homes, for a profit, and home prices will begin to steadily rise, based on supply and demand, back to a REAL value level.

Like a sponge, the only way to get more water in it, you first have to wring out all the water that currently resides. So until this entire surplus inventory is “wrung out” of the system, we can never see a true recovery in the Real Estate market.

How many more foreclosures and REOs are being created right now by banks loaning money on a “false floor”.

Think of it like this. If one steps on a foreign body, and then gets an infection in their foot, they can soak their foot everyday, and take antibiotics all they want, but until that foreign body is removed, that foot won’t heal.

So the excess inventory the banks currently have needs to be put out there for the market to truly correct itself. This will not be popular in the short term, but as I see it, the only way a long term, real recovery, can ensue.

What do you think?