Wednesday, June 04, 2008

Story of a foreclosure

I know I am probably a broken record on the subject, but I thought discussing an actual foreclosure might be of some use.

It took me a while to come up with a foreclosed property that I could discuss. Apparently my firm is a bit more successful than I had realized in the REO market. Anyhow, the following property is one with which I have had absolutely no involvement. All the information I have is derived from public records.

Some background information: The property is a house and lot located in south Fulton County. Fulton County is the largest county in Georgia, both in size and population. Atlanta proper is located mostly in central Fulton County. North Fulton County is largely middle class to upper middle class suburbia. Many athletes and CEO's live in north Fulton County. South Fulton County was, until very recently, a backwater. There are actually still some working farms in south Fulton. Within the past five or so years, there has been a boom in affordable starter type housing construction in south Fulton.

Our purchaser, Mr Kelly, bought the property back in October of 2004 from a builder. He paid $167,000 for it. The property was a new house located in a brand new subdivision. To finance his purchase, he borrowed $127,500 on a first loan with an adjustable interest rate and $25,000 on a second with a fifteen year balloon payment. That means he was to pay interest only for fifteen years and the entire amount of the loan would be due at the end of the term. The interest rate on the first started at 5.125% and could potentially increase by one per centum every six months. Mr Kelly did not have to make any principle payments on his first note until 2014.

Since 2004, Mr Kelly accumulated a total of eight starter type houses, all in south Fulton. He, however, lives in New York City. Late last year his properties started to be foreclosed upon. So far, he has lost six of his eight properties. Our property was foreclosed on April 1, 2008. The lender on the first note bought it back in at auction for $140,000. The lender on the second note was cut off and lost everything.

For those who have difficulty following the math, Mr Kelly bought the property for $167,000. He financed $152,500 of his purchase, meaning he actually paid (cash) $14,500. This is not a happy story. A man bought a house, probably for speculative purposes, couldn't sell it and wound up losing his investment. A lender lent him money on a second and lost all of their money as well. The lender on the first note now has a house and lot that it likely will not be able to sell for anything close to what was lent on it any time soon.

It is a sad situation. My point is that, while it is typical, it bears little to no resemblance to the situation being presented in the media. To the best of my knowledge, Mr Kelly is not homeless. He actually had a decent interest rate on his first note. His credit rating is likely in tatters, but that is not the end of the world. And he still has two houses left.

Finally, I could find none of the indicia of bad faith anywhere. There were no gouging interest rates, no weird financing, fly by night lenders, powers of attorney to strangers, flip sales or stray documents.

The sub prime lending market makes a great story and sub prime lenders make great culprits, but, at least here in Georgia, what's driving the foreclosures is that the former owners bought investment property at the peak of the real estate cycle. Builders over built houses compared to demand. And lenders got over-excited about generating commissions for making loans. Housing prices are getting rational again and those who bought high are getting squeezed.

There is no solution needed. This is a self-correcting problem. In a few years, housing will exceed the stocks in demand and prices will rise again. No one need do anything at all.


Perpetua said...

In California also much of the houses lost are investment properties. However, there were also a lot of unverified loan applications and a lot of inflated appraisals. Here is an interesting story of one such deal gone awry.

Marie at Rez said...

So, Mr Kelly had title to the house from October 2004 to April 2008. And he had almost $15K invested in it. If he rented it out for at least 10 months for at least $1500 per month, then he did not lose, but made money.
If that is the case on the other 7 properties he bought, 2 of which he still owns, then he
made out just fine, thank you very much. He probably applied his profit to the two he wanted to keep, and is sitting pretty. If he pays the notes on those for the next seven years his credit will have been redeemed, the two houses will be worth more than he paid for them and he can sell those and buy more.
He will have recieved income tax deductions for interest, taxes, insurance and depreciation on all eight houses that will just about offset the rental income. And the profit he makes on the sale of the 2 houses will be taxed at the capital gains rate, where as if he had put his downpayment into a
savings account, the interest he would have recieved would have been taxed at the earnings rate. All in all, I say Mr Kelly came out ahead.

Matthew said...

Atlanta led the nation in real estate fraud for several years running. Those chickens are definitely coming home to roost.

As far as renting his properties, I have no knowledge about these properties other than what is available via public records. South Fulton is still the back of beyond, so he may have had difficulty renting his houses. But that is just speculation. ;)

Zana said...

It's good to hear stories from "the other side," as the MSM prefers to air doom-and-gloom stories rather than a more balanced appraisal of what's happening. I'm not saying there aren't homeowners out there living out of their cars, or shady deals taking deceptive advantage of the system, but there's *always* another side, and that unspoken "other side" often brings things into perspective. Thanks for the post!