California foreclosure sales soaring

DISCOVERY BAY
May 12, 2009 8:28am

As spring unfolds across California, the foreclosure auctioneers’ gavels are coming down on more and more homes.

Sales at auction rose by 35 percent overall and a record number of those properties were purchased by third parties at an average 28 percent discount from estimated market value, according to a report on April’s foreclosures by ForeclosureRadar Inc. of Discovery Bay.

“We believe this is largely in reaction to inventories of listed bank owned (REO) properties dropping dramatically over the last few months as sales of listed REO's has been strong, while little new REO inventory has been added due to moratoria,” says Sean O’Toole, chief executive officer of ForeclosureRadar.

(Mr. O’Toole talks about the data in a CVBT Audio Interview via Skype. Please left-click on the ling below to listen now or right-click to download the MP3 audio file for later listening.)

But new notices of foreclosure dropped last month, the report says.

Notices of Default, the first step in the foreclosure process, dropped by 18.2 percent from the record level set in March. Notices of Trustee sale, which set the auction date and time, also dropped by 8.5 percent from the prior month.

High-level findings for April 2009 include:

• Notices of Default remained near earlier record levels, despite falling 18.2 percent from March to 42,675 filings. Year-over-year filings dropped by just 1.1 percent, though April of 2008 had held the record for Notices of Default until March 2009.

• Notices of Trustee Sale declined by 8.5 percent to 29,552 filings, a .8 percent decrease from the prior year, and a 24.2 percent decrease from the peak reached in July 2008.

• Foreclosures taken to sale at auction increased by 35 percent, to 13,550 representing $6 billion in loan value. Despite the significant increase, these trustee sales remained 40.7 percent lower than the prior year, and 52 percent lower than the peak reached in July 2008. Nearly 90 percent of the foreclosed loans this month were originated between January 2005 and December 2007.

• Lenders took back 11,916 foreclosures for which no third party bid was received representing $5.3 in total loan value. Of these loans, nearly 99 percent were first mortgages, with many of these foreclosures wiping out the secured interest of junior lenders. Potential losses by junior lenders exceeded $623 Million across 6,911 wiped out junior loans.

• The number of foreclosures sold to third parties increased in April to 1,634 a 52.3 percent increase over March. Though the increase was significant, the percentage of foreclosures sold to third parties remains just 12 percent of the total, with 88 percent going back to the lender. The number of foreclosures sold to third parties increased 217.9 percent increase from April 2008.

• Lender discounts at auction decreased slightly to an average of 40 percent with Merced, San Joaquin, Stanislaus and Monterey counties seeing the largest discounts at 47 to 49 percent on average.

“As … bank owned, or REO, inventories drop across California, we’ve seen a dramatic increase in demand for information on the foreclosure auctions as an alternative source for buying property in the current market”, says Mr. O’Toole. “Despite the discounts offered at the trustee sale auctions, we’d like to remind everyone that these discounts come with significant risks, especially for consumers and inexperienced investors.”

In return for taking on the risks, third party buyers enjoyed an average 28 percent discount from ForeclosureRadar’s estimated market value. With an average estimated market value of $294,000, that discount represents a significant savings of nearly $82,000.

Despite the size of this discount, actual margins are lower given the costs associated with evicting occupants, cleaning, repairing, maintaining and reselling the properties. Private investors can often accomplish these tasks far more cost-effectively than large banks, making it a win-win for both parties, Mr. O’Toole says.