Straight From the Foreclosure Expert’s Mouth

INSERT DESCRIPTIONPhoto: Brook Pifer Brad Geisen

Millions of homeowners across the country have gone through the foreclosure process (Michael Jackson just narrowly escaped), and more will likely continue to do so for a while.

People used to act uncomfortable and standoffish when Brad Geisen, president and CEO of Foreclosure.com, told them what line of work he was in.

Today, he says, foreclosures have become so common that people open up to him and “want to tell me their life stories.”

Geisen heads a number of real-estate investment and valuation companies: he is a mortgage lender, mortgage broker, real-estate broker, certified asset property manager, and loan portfolio analyst.

He has agreed to answer some of our questions about the burgeoning foreclosure industry and the people who are running it.

Question

Is it more difficult for lenders to foreclose on homeowners now than, say, two years ago?

Answer

It’s not necessarily more difficult, but their role has certainly changed significantly. For example, when a lender would foreclose on a couple of homes in its inventory several years ago, it was not really a huge factor on the balance sheet because it was a small loss that the lender could more than likely recoup in the near term.

Today, however, that same lender has such an influx of properties coming in that it has become such a big percentage of its balance sheet. So now, rather than just going out and foreclosing on a homeowner who fails to pay his or her mortgage, the lender needs to sit, crunch the numbers, and make a decision about what is the best way to minimize loss. When dealing with such a big percentage of its portfolio, if the lender does it the “old way” and just foreclose on every default, it will create the maximum loss it is going to take. And if the lender does that on all inventory, the bank could become insolvent. So the lender has to play the numbers game, determining how to stay solvent and figuring out how to minimize loss.

That is essentially how the lender role has really changed. It’s different and more complicated, but whether or not it is more difficult really depends on this institution.

Question

Have you seen lenders cutting more slack or softening up on homeowners in the last year or so?

Answer

Yes, they have been more lenient; it’s not because they want to, but because they have no other option. It all goes back to minimizing losses. Lenders have learned that if they cut distressed homeowners some slack, such as renegotiating loans, then they can save or even make money over the long-term.

Question

Do you think empathy for the homeowner facing foreclosure ever affects the lender’s actions?

Answer

That’s hard to say, but they probably don’t have the time to sit and think about things like that. This is business for them and, ultimately, a numbers game. They are trying to minimize losses by running calculations and making business decisions about whether or not it makes more sense to foreclose on or workout certain loans. And if they decide to leave the person in the home, it’s probably not because they feel bad, but because it makes the most sense from a fiscal standpoint.

Question

What’s something most people don’t know about the foreclosure process?

Answer

People are always out to demonize the banks as if they are interested in taking back their real estate assets from homeowners. The reality is banks have no interest or motivation to repossess homes. They’re in the business of lending money, not selling real estate. They lend money with the hope of getting a return. They’re not in the business of managing, marketing, and selling properties. So when they are forced to foreclose on a property, all of a sudden they have entered into the real estate business. That’s not where they want to be; it’s a last resort, which is the reason it’s possible to score great deals on bank-owned homes.

Question

Where do you think the next big wave of foreclosures will be?

Answer

The next big wave is not necessarily going to be in foreclosures, but in lending. There is so much criteria right now that is restricting people in foreclosure from actually being homeowners. The new administration is eager to promote homeownership; however, all the lending criteria restricts homeownership. So what you are going to see in terms of the “next big wave” are very proactive plans about how to keep people who have gone into foreclosure in their homes.

Question

How do we know when foreclosures have hit bottom?

Answer

When property values are cheap enough that they equal rental values. What I mean by that is when you can buy a property with very little money down and finance it at a good rate, and then rent it out for just enough to cover the mortgage, insurance, and taxes, then you’ve hit what I call “economic value.” That’s when the property value is the same as its economic value. That’s pretty close to bottom. Now, when you have a pendulum swinging, and values are still dropping a bit, it may swing a little past that. If the property was already 30 percent less than market value, and property values are still dropping, and it gets down to economic value, then that’s when the pendulum will begin to stop and begin to swing the other way.

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  1. me, first says:

    Actually the pendulum will begin to swing once prices are below ‘economic value’ homeownership is annoying and takes commitment – so if the costs of rental or ownership are the same – then people are still better off renting and purchase prices still have to fall. Depreciation must be factored in along with the other risks of home ownership.

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  2. Jackie says:

    Why have so many reversed their opinion that homeownership is to be encouraged? While some should indeed rent, doesn’t home ownership have tangible macro-benefits to society? (sense of community, stability, investment in properties, etc.) While many were “encouraged” to become homeowners weren’t ready, the new credit situation is going to make it hard for young people who would, and should, be good candidates for homeownership.

    With the job situation for young colleage graduates I feel sorry for them. No chance to take out small loans to establish a good credit rating, either.

    Seems like people might need to develop some alternative financing options — like the “micro-loans” that are co-signed by friends, collective financing, or other ideas. Traditional banking and credit industries don’t work well for most people – there’s no equal bargaining power. There are probably people being foreclosed on who, if you knew their individual characters, situations, etc., would be able to make it work given a chance. Their fate hangs in the hands of someone so busy and removed from the situation that even a relatively small amount could upend their lives for decades. That’s no way for people to live.

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  3. Publius says:

    I have a hard time seeing, after such tremendous home appreciation, that home prices will stop dropping until they have reached their century long historic ratio of home-price-to-average-rent AND home-price-to-medium-income.

    That’s as high as 20% more depreciation to go in places like New York.

    With unemployment rising, banks on life support, and stock investments at 50% of their highest value – someone has to explain to me how home prices are going to stabilize ABOVE the aforementioned historic ratios.

    And remember folks, it’s still this bad with historically low interest rates.

    When the Fed has to start raising interet rates to fight infaltion, how do you think that’s going to affect home sales?

    We’ve a long way to go.

    If you don’t have to – DO NOT BUY.

    Rent.

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  4. Sid says:

    #1, you must realize that cost of owning is usually about 50% higher than cost of renting.

    Homeownership supposedly confers the benefit of being in your very own home. This is psychological and justifies a premium over renting costs.

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  5. David says:

    me, first, in his or her rush, seems to have forgotten to mention:

    1) The tax advantages of ownership
    2) The fact that your mortgage payments will remain constant whereas rents will tend to at least rise with inflation
    3) That mortgage payments build equity

    I am in the process of closing on a condo in Chicago. It seems to me that the cost of renting would be about the same as mortgage, assessments and taxes. Given 1)-3) and the 8K that the government is giving me to buy, it seems to me to more than make financial sense.

    Of course, there is also the fact that I can change the place however I want and then hope to recoup my costs if I sell it — unlike with a rental.

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  6. jz says:

    @David, #5
    to expand your thinking,
    #1. the tax advantages. These are trivial. The interest on your mortgage is tax deductible, but subject to limitations at a higher income.
    #2. inflation? So too, will your property taxes, property insurance, maintenance and repair costs rise with inflation.
    #3. build equity? yes, but for the disciplined investor, there are many alternatives to build equity. for the undisciplined person, mortgage is a good route.

    The 8k may be a soothing balm if your property continues to depreciate another 20%.

    I own two homes in your region. The *cost of ownership* in my primary home is 4% of its value annually, just to own it. The *cost of ownership* for the vacation home is 2.5% of its value annually. Neither has appreciated over the long term to match the cost of ownership. It is silly to consider residential property as a long term appreciation.

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  7. ktb says:

    #3 Actually, according to you, you shouldn’t buy in New York (and probably California, Florida, etc). Real estate is extremely regional, even to the neighborhood, and not all locations were overvalued.

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  8. zeeshan says:

    Before the recession, rental rates were 0.5% per month of ownership rates according to real estate surveys in the UK. Though this is increasing, it still has a long, long way to go to become eqal.

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