No one likes to talk about foreclosures.
But sometimes they happen, and how much OREO (other real estate-owned property) a lender ends up with as a result is a topic of great interest to the industry, its regulators and communities in which the properties are located.
“Banks don’t want to own OREO – and the law and their regulators won’t allow them to own it indefinitely,” said Ken Ehrlich, co-chairman of the banking law department at Nutter, McClennen and Fish in Boston.
Indeed, all lenders are eager to dispose of OREO for these and cost-of-ownership reasons. It costs about one-quarter of 1 percent of a property’s value – $750 per month for a $300,000 home – to keep up a residence, not counting taxes or water and sewer bills, estimates Linda Kody, real estate broker and owner of Kody & Assoc. in North Andover, which specializes in maintaining and marketing foreclosed-upon properties.
But it can be hard to find private buyers who want to take on the risk of owning a foreclosed property on which there could be municipal liens or title questions, and which the buyer usually isn’t allowed to enter before a sale.
This means that more often than not, lenders do end up taking ownership of properties they foreclose upon even when they’re auctioned – at least for a time.
Lenders presently own about 4,600 Massachusetts properties that they’ve foreclosed upon, but very few of the lenders are community banks, according to Banker & Tradesman parent company The Warren Group.
And if a local bank does own foreclosed-upon real estate these days, it tends to be commercial property.
That’s because community banks didn’t write the subprime loans that ran into foreclosure trouble, said Bill Kozak, president, chief executive officer and founder of WTK Assoc., a Rockport bank strategy consulting firm. If they did write any, Kozak said, they sold them.
Indeed, it’s not easy to find a local bank that has foreclosed on a home. Just one of four banks interviewed by B&T says it currently owns any foreclosed homes.
Butler Bank owned $4.49 million worth of OREO at the end of last year, according to the Federal Deposit Insurance Corp., but presently owns about $2.35 million, said President and Chief Executive Officer John H. Pearson Jr. That amount is for two properties, one $2 million home taken back after a residential mortgage defaulted, and one $350,000 home it foreclosed upon after the builder couldn’t pay up.
Butler Bank is renting out both homes for a total of $5,600 per month, Pearson said. He thinks that kind of guaranteed monthly income in a weak sales market makes own-ership the right strategy for now.
A bank employee took care of the rental arrangements and is managing the property.
At the end of the year-long tenancy, the bank will reassess whether it wants to sell or extend the tenancy, Pearson said. Regulators require banks to have a policy for get-ting rid of OREO; Butler Bank’s policy is to dispose of it within three years.
Book Value
Middlesex Savings Bank owned no foreclosed-upon real estate at the end of last year. It had to foreclose upon just one residence and one commercial property in the past year, said Senior Vice President Robert Lavelle. Both were sold at auction to private buyers, so the bank never owned them.
Salem Five Cents Savings Bank and Danversbank – two of the top 10 institutions on the FDIC’s list of Massachusetts-based holder of OREO on Dec. 31, 2007 – attribute the $6.4 million and $3.5 million worth of OREO they owned entirely to large commercial loans.
Salem Five is expecting to sell one of the two to a private buyer at a profit, said bank Executive Vice President and commercial lending chief Kim Meader. The bank wiped out two junior mortgages when it foreclosed, and now has buyers interested in purchasing the oceanfront property for more than the principle loan amount owed.
Danversbank is marketing a 22-lot subdivision in Haverhill, using the services of a local Realtor, according to Vice President of Workouts and Collections Alan Byrne.
That property accounted for all of Danversbank’s OREO as of last December.
The commercial property Middlesex Savings foreclosed upon sold last week at auction, but didn’t get to that point until more than six months after the loan went into ar-rears, said Middlesex Savings Senior Credit Officer and Senior Vice President David Keller.
“You don’t proceed against someone unless they are more than 90 days past due for payments,” Keller said, “and even then, if they are talking with you, you don’t proceed. Only if they are not responsive do you proceed, and [foreclosure] can take three or four months beyond that past due date.”
If a property gets to auction, a lender will set the opening bid at the mortgage loan amount it’s owed, said David Sidon, founder and principal of The Navis Group, a financial risk-management consulting firm in Danvers.
“At that point, all the bank wants is to get their money,” Sidon said. “Anyone who bids even $1 over that amount will get it.”
Bill Kozak, owner of WTK Assoc., a bank strategy consulting firm in Rockport that works with banks across New England, said once a bank owns OREO, it is “very aggres-sive” in attempting to dispose of it.
Banks will look at their asking prices for the properties with an eye toward recouping the loan amount they’re owed, but also with the goal of removing the “non-performing asset” from their books, he said.
Lenders with the most OREO in Massachusetts these days are Countrywide Financial, Wells Fargo, and government loan purchasers Fannie Mae and Freddie Mac, said Kody, the North Andover real estate-owned property sales specialist.
Countrywide is marketing 290 lender-owned residences in the Bay State, and Wells Fargo, 209, according to their Web sites.
Fannie and Freddie may be known for purchasing conforming, non-subprime loans, but they’re “foreclosing just like anyone else,” Kody said.
Lately, she noted, subprime loan status doesn’t seem to be the necessary precursor to a foreclosure.
“Subprime loans started the ball rolling,” she said, but now, all types of loans are foreclosing as falling home prices and a nationwide credit crunch prevent borrowers from refinancing out of all types of loans.
Once a lender owns a home, Kody said, they’ll base their resale asking price on the fair market value. The homes do sell at market prices, she said, and lenders are moti-vated to sell quickly.
She said lenders and the sales agents they hire will consider the condition and location of a home and recent sales of nearby properties before pricing a home.
And while lenders could sell a home quickly for a bargain price to get a non-performing asset off its books, they’re not doing that, Kody said.
“They don’t want to destroy the local market,” she explained. “They know they are all in this together.”
