Straight From the Foreclosure Expert's Mouth
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.
Is it more difficult for lenders to foreclose on homeowners now than, say, two years ago?
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.
Have you seen lenders cutting more slack or softening up on homeowners in the last year or so?
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.
Do you think empathy for the homeowner facing foreclosure ever affects the lender’s actions?
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.
What’s something most people don’t know about the foreclosure process?
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.
Where do you think the next big wave of foreclosures will be?
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.
How do we know when foreclosures have hit bottom?
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.