Page 2 of 2 Credit still at the wheel By Julian Delasantellis
For most of the properties involved, the auctioneer announces a temporary
postponement of the sale to a time one week to two months hence; obviously, the
bank or mortgage company put the property on the docket today in the hope that
the registered letter that arrives at the mortgagees' address announcing the
upcoming auction might focus his mind a bit towards paying the mortgage, or at
least contacting the bank or mortgage company about getting back on track with
a payment plan.
If an auction does start, and the price does not reach the bank or mortgage
company's pre-set minimum reserve the auctioneer will not finalize the sale;
the financial institution here, like sellers of real estate all over the world
these days, will have to more closely
align its hopes and beliefs about what the market should bring for the property
with the current market reality.
Occasionally, there is a real live auction, but these, too, are very sedate.
Bidding is increased in $5,000 increments, and there's no wild flamboyance
attendant to the bidding; you would almost think that what the bidders are
doing is repeating their dentist's quotes for a root canal.
Most of the potential bidders in the plaza have come to try to get one, at the
most two, of the properties up for sale; if you're so unfortunate as to have
picked out a property that another bidder has his eye on you had better be
prepared to open your wallet wide. The emerging science of behavioral economics
has done much research on how the fever generated in contested auctions can
cause bidders to bid far more than they originally intended. I saw a property
that started out at $115,000 get sold for $180,000 after two bidders decided
that each absolutely, positively had to have it.
One of the first successful bidders is a young couple of two women, obviously
madly in love with each other. They tell me they have just picked up a house
valued at $440,000 for just $270,000. I can imagine their elation, for no
longer will they have to be imprisoned in the back seat of a real estate
agent's car while the agent, knowing full well that if she shows this
particular couple a nice house in a nice neighborhood she'll never again get
another listing from that neighborhood, shows this couple the absolute dregs of
the multiple listing service.
Of course, for all their joy, the couple can't just load up the truck and move
right in. I am informed that most of the properties being sold here today are
still occupied, either by the delinquent borrower or someone leasing the
property from that borrower. The World Press 2008 photo of the year, a gritty
black-and-white shot of a gun-toting detective working through an Ohio
property, its furniture and artifacts scattered around in utter destitution,
pretty much illustrates one way the process may work out [1]. The county court
and sheriff will charge the new owners about $400 for that final indignity,
having the old residents "put out" on the street to make room for the new.
Most of the bidders and auctioneers seem to know each other well; I was
probably the principal stranger that everyone wondered about. If I told this
crowd I was here for Asia Times Online, they'd probably think I was delivering
eggroll. A common greeting on the plaza is "So, just what are you going to bid
on today?"
At first, that question flummoxed me, as it seemed to imply that these people
who looked like they could barely afford to feed the parking meter were
amassing veritable real estate empires of auctioned houses at around $250,000 a
pop. How could they do that, if all these auction deals had to be 100% cash?
The answer is that credit, leverage, has not been banned from this process,
just forced to take a seat a few rows back in the bus.
I learned that the romantic couple who intended eventually to live in their
house were the exception; most who were there looking to bid either called
themselves "investors", meaning that they intended to rent out their new
properties, or "speculators", the fix 'em up and flip 'em away crowd.
If you are handy enough with power tools, the economics of being a foreclosure
auction landlord come into view. Property rents did not get caught up in the
mad appreciation of the boom, but nor are they really plunging down hard in the
crash. Do the repairs of property management yourself, and acquire enough
properties cheap to be able to live on your rental income, and you can have a
fairly comfortable life, even if all you know about economics is that marginal
utility is a cheap tool belt from Home Depot.
But how can you acquire enough properties to make it worth your while if you
have to pay cash for each one of them?
The answer is that credit, while not part of the formal auction purchase
process, rears its ugly head soon afterwards. At the back of the plaza are
people representing small lending agencies that receive their funding, not from
Wall Street, but from wealthy private investors seeking higher returns than are
currently available on standardized, exchange-traded stock and bond
investments.
The returns these investors receive are particularly juicy since, as I have
heard is most common in these arrangements, the proprietors of these small
lending agencies are frequently in no hurry to inform the US Internal Revenue
Service about the details of their investors' portfolios.
Here's how it seems to work. A buyer wins a property at auction, intending it
as the next shining jewel in his rental property real estate empire. After the
big check is transferred to the auctioneer, it's off to the small lenders.
Since the buyer now has a 100% equity position in the new property, the lender
can be very generous in providing what is in essence a home equity line of
credit on the new property, which can then be used either to finance
renovations in what was just purchased, or to be back on the plaza seeking new
properties. The small lender's investors are getting coupon interest payments
far in excess of the pygmy returns the markets are now offering, and if the
borrower defaults then it's the small lenders back with their hooks in the
property.
In many cases, this process, particularly for those using it to finance
multiple property acquisitions, does vaguely evoke the foul stench of the real
estate flippers at the end of the boom; then again, the flippers of that era
flipped themselves into their ruination by buying at the top of an overheated,
frothy market - something that can hardly be said to describe what was going on
at the foreclosure auctions.
Once again, it is proved that even when transferred through this fairly
unorthodox mechanism, American real estate needs credit like a flower needs
water. No government official could safely live outside an underground FEMA
bunker should real estate prices suddenly fall to levels where everybody could
afford to pay cash for their homes - Americans can't even do that with most of
their used-car purchases.
Even though the people on the plaza were unfailingly cooperative and helpful,
going above and beyond simply answering my questions to expose the system's
rules and underlying logic, I have a hard time sympathizing with many of them;
after all, for all their friendliness, they're still seeking a misogynistic
profit from others' misfortune.
Then again, this was certainly not the case of the wretched of the Earth being
oppressed by cruel and greedy aristocrats; the eternal permeability of the
American class structure means that these working-class guys trying to improve
their lot in life through winning a house at auction and then committing
themselves to long days and years of wielding a hammer and a saw in its service
probably started from a lower social station than those wallowing away in their
indolence while waiting to be evicted.
As Monty Python's harried highwayman Dennis Moore realized on seeing the
failure of his scheme to steal lupins from the rich to shower on the poor,
"Blimey, this redistribution of wealth is trickier than I thought." For me,
however, I hope there's some day found a way to "creatively destroy" a child's
memory of having his entire world put out on the street.
Halfway through the auction, two young, formally dressed couples, the young men
in tuxedos, the young ladies in long white dresses carrying flowers, leave the
courthouse to skirt around the plaza. Obviously, this is a very special day for
them; they undoubtedly just got married inside by a justice of the peace. They
will hopefully always remember the joyous event that happened that morning at
the courthouse, as will, of course, those that get foreclosed and evicted from
what happened at the auction, with undoubtedly far less joy attached to these
memories.
As Charles Dickens once described another society hopelessly rent by class and
wealth, on the courthouse plaza that morning, "It was the best of times, it was
the worst of times." [2]
Notes
1. See
here for the award-winning photograph.
2. A Tale of Two Cities (1859).
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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