Author Archives: Jillayne Schlicke

About Jillayne Schlicke

Educator in the field of mortgage lending and real estate. Follow me on Google+

Will the New National Loan Originator Exam be Too Easy?

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I just took a look at the sample questions provided by the National Mortgage Licensing System for the new national loan originator exam and I must say these are so easy why even bother with a test?  Let’s take a look:

If an applicant works 40 hours every week and is paid $13.52 per hour, what is the applicant’s
monthly income?
(A) $2,163.20
(B) $2,343.47
(C) $2,379.52
(D) $2,487.68

The requirement for private mortgage insurance is generally discounted when the loan-to-value ratio falls below:
(A) 20%
(B) 50%
(C) 80%
(D) 90%

Which of the following documents itemizes all settlement costs including lender charges?
(A) Agreement of sale
(B) HUD-1 form
(C) Form 1003
(D) Forbearance agreement

A discount point is BEST described as a charge the borrower pays to:
(A) a lender to decrease the interest rate on the mortgage loan
(B) a mortgage broker at the time of application to obtain a favorable rate
(C) the seller as part of the closing costs of a loan
(D) a lender to ensure against foreclosure

Which of the following methods of disclosure does NOT meet the requirements of the Equal Credit Opportunity Act (ECOA)?
(A) E-mail
(B) Mailed letter
(C) Telephone
(D) Faxed letter

What does a loan originator use to determine the estimated value of a property based on an analytical comparison of similar property sales?
(A) An appraisal
(B) A market survey
(C) An area survey
(D) A cost-benefit analysis

But perhaps I’m being to harsh. We have a vast number of unlicensed loan originators who are working for companies licensed under the Consumer Loan Act. We call these folks “consumer loan lenders,” or “non-depository lenders.”  Rhonda Porter sometimes refers to these folks as “correspondent lenders.”  They differ from a mortgage broker because by definition, a lender is an entity that has the ability to make the loan (fund the loan) and a broker is a middleman who does not make or fund loans, but FINDS the lender for a fee.  Mortgage broker LOs are licensed in WA State but consumer loan company LOs are not.  Yet. 

Consumer loan company LOs can start to take their new national exam beginning July 31, 2009. Their real deadline is July 1, 2010 so it looks like I need to block off May and June 2010 for exam prep classes next year as predict the majority will put it off until the last possible days.

Anyone who has been originating for any length of time need not be afraid if the test questions are going to be this easy.  Once the test launches I will go take it and let you know. 

Perhaps for folks who are brand new to mortgage lending, these test questions might seem a little more challenging. That is the whole purpose of national testing and licensing: To create a minimum barrier to entry.  The regulators at the federal level have put a lot of time and care into the education portion of the new law.  Let’s hope that their chosen test vendor, Pearson Vue (who absorbed Promissor) doesn’t use the same old tired bank of test questions that’s been around for a decade.

Update: Prometric is also a test vendor for the new NMLS exam.  Here’s a link to their website.

Longer Waiting Period to Evict Tenants After Foreclosure in WA State Effective July 26, 2009 and Free Legal Aid for WA Homeowners Facing Foreclosure

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There was a new law signed by Governor Gregoire this past legislative session,  SB 5810. Here is the link to the legislative page for the bill. Click on the “final bill report” for a quick summary.  The law gives TENANTS 60 days to vacate a residential home after foreclosure. Currently it’s 20 days (scroll to the very bottom of this page for details.)  Althought I sympathize with the tenants, it’s important to point out that lenders will think about this as they price new mortgage loans in Washington state. Today, any tenant renting a home or condo must wise up fast and do a thorough check on the landlord so their first, last, and damage doesn’t end up taking a walk with the seller.

This new change to 60 days is only good for tenants occupying a home that was sold during foreclosure. If a homeowner is occupying the foreclosed property, they will have to vacate in 20 days.

It looks like the law was also changed to add an additional 30 days to the foreclosure process in a residential, owner occupied foreclosure. This adds a step: The lender MUST make a detailed attempt to contact the homeowner and must make a declaration that they have taken steps to contact the homeowner. 

NEW SECTION. Sec. 2. A new section is added to chapter 61.24 RCW to read as follows:
(1)(a) A trustee, beneficiary, or authorized agent may not issue a notice of default under RCW 61.24.030(8) until thirty days after initial contact with the borrower is made… (b) A beneficiary or authorized agent shall contact the borrower by letter and by telephone in order to assess the borrower’s financial ability to pay the debt secured by the deed of trust and explore options for the borrower to avoid foreclosure…(c) During the initial contact, the beneficiary or authorized agent shall advise the borrower that he or she has the right to request a subsequent meeting and, if requested, the beneficiary or authorized agent shall schedule the meeting to occur within fourteen days of the request. The assessment of the borrower’s financial ability to repay the debt and a discussion of options may occur during the initial contact or at a subsequent meeting scheduled for that purpose. At the initial contact, the borrower must be provided the toll-free telephone number made available by the department to find a department-certified housing counseling agency and the toll-free numbers for the department of financial institutions and the statewide civil legal aid hotline for possible assistance and referrals.

There are some exceptions to the new law. Follow this link and click on “bill as passed by the legislature” to read along with me:

Subsections (1) and (5) of this section do not apply if any of the following occurs:
The borrower has surrendered the property as evidenced by either a letter confirming the surrender or delivery of the keys to the property to the trustee, beneficiary, or authorized agent; or the borrower has filed for bankruptcy, and the bankruptcy stay remains in place, or the borrower has filed for bankruptcy and the bankruptcy court has granted relief from the bankruptcy stay allowing enforcement of the deed of trust.

This section applies only to deeds of trust made from January 1, 2003, to December 31, 2007, inclusive, that are recorded against owner-occupied residential real property. This section does not apply to deeds of trust:
(i) Securing a commercial loan;
(ii) securing obligations of a grantor who is not the borrower or a guarantor; or
(iii) securing a purchaser’s obligations under a seller-financed sale.

This law will go into effect July 26, 2009.  Will it help?

There are some good things we can say about getting in the defaulting homeowner’s face with more correspondence.  The letter sent to the homeowner will provide information on how to contact the Dept of Financial Institutions, HUD-approved housing counselors, and information on how to connect with the WA State Bar Association, which recently launched a community outreach program to offer FREE legal services to homeowners facing foreclosure.

The Washington State Bar Association (WSBA) is pleased to announce that its Home Foreclosure Legal Aid Project is accepting clients. In response to the current foreclosure crisis in our state, the WSBA is partnering with the Northwest Justice Project (NJP) to provide free legal assistance to Washington residents in danger of losing their homes. The goal of the project, which will last through May 2010, is to help Washington homeowners avoid foreclosure and stay in their homes. Homeowners in need of help who are unable to afford a lawyer can sign up by calling a toll-free number, 1-877-894-HOME (4663)

Information is also available on the WSBA website here.  I am hopeful that a measurable percentage of homeowners in default will open that letter and contact the Bar Association. Maybe this will help homeowners avoid predatory loan modification salesmen and foreclosure rescue scams. During the bubble run-up, we had many homeowners who used stated income loans and flat-out lied about their income. We had homeowners who lied about occupancy. We had non-English speaking homeowners who were duped by people from within the industry and some of who knowingly lied to their lender. I could think of at least 10 more examples but these three will do. I hear that some of these folks are afraid to talk to their lender. They get phone messages from the default department and they see the letters, however, they are afraid that if they talk to the lender they might be confronted with evidence that might lead to negative consequences, so they ignore all communication and let the lender foreclose.

In class this week, an agent told me that 95% of all available listings under $300,000 in Kent are short sales.  I’m afraid the foreclosure train has left the station and is rolling down the tracks towards the mid to upper price tiers.  The 60 day eviction waiting period is going to slow down REOs returning to the market, adding more hold-time to the lender’s balance sheet losses and pushing the housing bottom out longer.  Score one point for the tenants, zero points for the lenders, and two points for homeowners who get to stay in their home payment free for another 30 days. Maybe we can justify giving the lenders half a point if they get to collect rent from the tenant for the 60 days.

We will pay the piper on this one: Higher rates and bank/lender fees are in our future.

The legislature also slipped in something interesting: The foreclosing bank must prove that they hold the note before the bank can foreclose.

California Attorney General Demands All Loan Modification Firms Register with his Office and Post a 100K Bond

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From the Orange County Attorney General’s Office:

Oakland — Continuing his fight against scam artists who “prey on” vulnerable Californians, Attorney General Edmund G. Brown Jr. today issued a directive forcing foreclosure consultants to register with his office and post a $100,000 bond by July 1, 2009. Those who fail to do so will be in violation of state law, subject to criminal penalties of up to a year in jail and fines ranging from $1,000 to $25,000 per violation.

“California is awash with con artists who prey on vulnerable families facing foreclosure,” Brown said. “By forcing foreclosure consultants to submit detailed information to my office and post a $100,000 bond, this registry will help bring long-overdue transparency to this shadowy world.”  Up and down the state, scam artists pose as legitimate foreclosure consultants, promising homeowners they will prevent foreclosure. In reality, these scam artists charge huge up-front costs, but don’t provide an ounce of help.

Earlier this month, Brown’s office prosecuted a scam artist who provided hundreds of homeowners with forged bank documents and directed them to send their mortgage payments to accounts she had created, instead of the homeowners’ lender. Additionally, Brown’s office has seen a significant increase in the number of complaints from homeowners regarding foreclosure consultants.

The registry unveiled today will provide Californians with information about potential consultants and recourse in the event that a consultant violates the law. All foreclosure consultants operating in California must post a $100,000 bond and register with Brown’s office by July 1, 2009 and submit the following information:

– Name, address, and telephone number;
– All names, addresses, telephone numbers, websites, and e-mail addresses used or proposed to be
used in connection with their business;
– Copies of all advertising;
– Copies of each different contract the consultant will use with consumers; and
– A copy of its $100,000 bond.

Foreclosure consultants who provide proper information will receive a Certificate of Registration. Brown’s office, however, may refuse to issue, or revoke, a Certificate of Registration if the foreclosure consultant has made any misstatement in its registration form, has been convicted of fraud or misrepresentation, has been convicted of a violation of the state’s foreclosure consultant laws, California’s false advertising, unfair or deceptive practices laws or other laws dealing with mortgages. If the company violates the law, a court may order restitution to victims out of proceeds from the $100,000 bond. After July 1, 2009, consumers can call the Attorney General’s office to determine whether the company they are considering dealing with has been issued a Certificate of Registration.

There is more in the press release including the names of several companies busted by his office.  California is asking all “foreclosure rescue” firms to register which includes the pre-foreclosure scam artists and also loan modification firms.  I wonder how long it will be before Washington State Attorney General Rob McKenna makes a similar move towards foreclosure rescue companies? Unlicensed loan mod firms out of California continue to make a run for Washington State homeowners (based on the phone calls and emails I continue to receive about this company which sends paperwork to another loan mod firm under a different name for processing,) even though loan mod firms doing business in WA State must be licensed under DFI.

Do you think this registration system will help California homeowners?  Should we consider a similar system for Washington State?

Bellevue College Real Estate (College Credit Division) Winding Down

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Bellevue College (formerly Bellevue Community College) use to be the go-to place for real estate courses that also counted towards college credit.  I must have referred hundreds of people to BCC during the last decade. The slowdown in the real estate industry has hit this program hard.  But it’s not because real estate agent students aren’t taking classes. Instead, the majority of students I met during the classes I taught during the bubble run up were students who had entered the state workforce retraining program.  These folks were laid-off workers from Boeing or technology who were training for a career in a growing industry which at that time was real estate and mortgage lending.  The students I met had plans to become loan processors, loan originators, escrow closers, or appraisers. “Real estate sales? Yikes! That’s 100% commission,” they said.  Instead most  were looking for stable monthly income with a regular paycheck. All were extremely excited to be learning about the real estate and mortgage industries.  The classes were also sprinkled with people who were already in one side of the industry but were wanting to learn more.  For example, a title insurance employee who wanted to move into her company’s escrow department or a loan processor who wanted to become a loan originator.

Teaching community college students is radically different than teaching Realtors and loan originators in other venues.  First of all, community college students actually WANT to be there.  They are generally very motivated to learn and they are also very tired having just worked a full day before the evening class.  In order to make evening classes work, you need keep the students energized and interested, which makes for a totally fun, adrenaline filled classroom once the pace is set.

I’ll be teaching the last four real estate courses for Bellevue College this summer that are offered as “college credit” classes:  Land Titles, Beginning Escrow, Advanced Escrow, and Real Estate Investments.  Note that Bellevue College will still offer continuing ed real estate classes.  After the college credit program winds down, I hope that Kristen and Margaret save all the syllabuses and learning objectives from all the other classes (because for the next instructor coming in, this is really helpful.) It’s only a matter of time before the program starts up again. Our industry is and always will be cyclical.  There will eventually be another big demand for real estate and mortgage related education at the college level. The curriculum might not look the same as it did in the past, but the demand will come.  Maybe we will see the program shift into their continuing education division.  Then the big question will be how to market to existing real estate licensees.  Most of the Realtors I know don’t immediately think of Bellevue College when thinking of options for their clock hour classes.  It’s typically a last minute decision.   Maybe we’ll see some interest from real estate agents who need to take evening continuing ed classes due to another full time job.  But the question is, how will BCC reach these potential students?

I remember a job I held back in the mid 1990s with Pacific NW Title up in Everett.  Our County Manager Chris Schulz had a requirement that every single new hire take the beginning Land Title Institute course before our first performance review.  We were not able to receive a raise unless we finished the course.   I can remember reading and doing the take-home quizzes on an airplane, and on the weekends, but I finished in time.  Even though I complained about having to spend the time doing the work, I gained a tremendous amount of knowledge about land titles.

I taught a class onboard the Point Ruston floating sales office last Wednesday and we talked about real estate being one of the least trusted professions. I had the group brainstorm about why they thought this was true.  Most every group had one answer in common:  Too low of a barrier to entry.  I wonder if the upcoming changes in the real estate licensing laws are enough. 

In the future, I’d love to see more Washington State institutions of higher learning offer four year undergraduate degrees in real estate and mortgage lending finance.  The UW and WSU both offer undergrad degrees in finance. I wonder how those programs are doing.  Perhaps a demand for real estate and lending education at the higher ed level would only come if it were required. I’d like to think that it will be someday.

Seattle International Film Festival Review: Deadgirl

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June is a busy month for families.  Graduations, end-of-the-school year parties, summer camp registration, the end of spring sports and tryouts for fall sports, Father’s Day, yet I try hard to make time for….The Seattle International Film Festival.  I’ve seen 5 movies so far and last night’s screening of Deadgirl is my favorite.  I attended the movie with my nephew Josh and my daughter Miranda.  All of us like the horror genre and the Deadgirl storyline sounded creepy: 

Rickie and JT are high school outsiders, bullied by jocks and despised by the in-crowd. Though both would rather drop out than bear this never-ending misery, Rickie chooses to stay, if only to catch fleeting glimpses of JoAnn, his childhood crush and the current girlfriend to the captain of the football team. Then one afternoon, while cutting class, the pair makes a bizarre discovery in the darkest depths of an abandoned hospital—a beautiful young woman, neither living nor dead. 

It would be easy to dismiss this film as exploitative but there’s way more going on beneath the surface. On the one hand, it might seem as though Rickie and JT are holding opposing moral positions and the directors use this as dynamic tension to move the film forward. But  the way I see it, Rickie and JT actually want the same thing. The movie reminds me of another dark teen film, “Heathers.” Miranda says “Christian Slater’s character DOES everything Winona Ryder’s character wants to do.”

Director/Producers Gadi Harel and Marcel Sarmiento were there for the screening and took questions and answers afterwards.  One of the movies that inspired Gadi and Marcel was “Stand by Me” based on the short story “The Body” by Stephen King.  The Body was required reading during one of my psych grad school classes because it helped students understand the importance of developmental milestones.  Rickie and JT are older than the kids from The Body and their curiosity about life and death goes down a more gruesome path.

Miranda asked about the significance of a certain shot containing a small flower that surely was meant to convey symbolism.  Marcel was glad someone finally asked about that scene but refused to give away the meaning to the audience. Instead, he took her aside after the Q&A and whispered the meaning to her, and extracted a vow of secrecy. The rest of us will have to wait until the DVD release! 

One of the questions was, “How did you obtain financing for such a creepy story?”  Gadi and Marcel said that during the real estate bubble-run up, there was money available from people who had made plenty in real estate and those folks were the seed investors.  Interesting.  Times are different today. 

Deadgirl will play again tonight at midnight at the Egyptian and again on June 5th, 9:30PM at the Kirkland Performing Arts Center.

Seattle International Film Festival!

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This past Christmas, I bought my nephew Josh a 20-pack gift certificate to the Seattle International Film Festival and we’ve been surfing the SIFF movie sorter finding all kinds of films that are on both of our “must see” lists.  Last night we saw a Midnight Adrenaline showing of “I Sell the Dead.” Yes, more zombie movies are on my list to see with Josh including “Zombies of Mass Destruction” (filmed in Port Gamble, WA) and Dead Snow. 

This afternoon, I took a four-pack of teenagers to see “Spring Breakdown” and star Rachel Dratch (from Saturday Night Live) was there for a meet and greet. It was hilarious!  Josh had a chance to meet Rachel and get her autograph and I must say he practically levitated for the rest of the day.   After Spring Breakdown, we raced to the Uptown on Queen Anne to get in line for “Paper Heart” starring Charlyne Li and Michael Cera.  It’s a documentary/comedy/romance about Charlyne’s real life quest to find out why she doesn’t believe in love. The film was wonderful and everyone with my group gave it a 5 on the 1-5 rating scale for the audience choice award.  Tomorrow both my nephews and I will be heading down to the U District again to see Kevin Spacey in “Shrink.”

I don’t spend all my time with teen-friendly films and neither should you.  For gratuitous sex and violence, I’ll be catching “Dowloading Nancy” with my gratuitous-sex-and-violence-film-festival-buddy Ron.  Our pact is to ONLY see movies with gratuitous sex and violence each year.  I try to see the opening and closing night galas with my friend Kyoko who always entertains me with stories about what it was like when she was a UW student in the early 70s when the film festival was first getting started. 

Another favorite genre is horror.  Josh and I will be catching “Deadgirl” which created a buzz at the Toronto Film Festival and “The Hills Run Red.”  I wish I had time to see more psychological thrillers but alas, business calls.  If only I could take three weeks off work every year.  You can search the SIFF film sorter by website by genre, program, director, country or venue.   The calendar will give you a quick look at what films are playing where and when every day.  SIFF even has an iPhone app for the festival. I recommend buying tickets online and printing your ticket vouchers in advance. That way if the movie you want to see is sold out by the time you arrive, you’re rewarded for planning ahead by exchanging your vouchers for tickets at will call and get in the ticket holder line!  All the SIFF volunteers have been amazing at helping me with various questions.  My only complaint is having to constantly pay for parking at every venue which really adds up. 

Come say “Hi” if you see me at Four Boxes, West of Pluto, Burning Plain, Worlds Greatest Dad (filmed in Seattle), Cold Souls, or The Clone Returns Home and I hope everyone is enjoying our awesome weather this weekend!

WA Loan Originator Licensees Drops to 5335

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At the end of 2007, Washington State had 13,722 loan originators licensed under a mortgage broker.  At the end of 2008, that number fell to 8739.  As of May 5, 2009, we’re at 5335.  This number also includes inactive licensees. Based on the number of LO students who tell me that they already have a full time job elsewhere and are just keeping their license active “just in case” they want to originate a deal for a friend or family member, I’d say the number of active licensees is below 5335. 

In 2008, many mortgage brokers were forced to re-license as consumer loan companies due to changes in state law. Subsequently, many of those LOs let their license go in 2008. LOs who work for a consumer loan company will start their licensing process in August and we will be able to better track the number of consumer loan company LOs licensed in WA State.  As more lenders begin using the National Mortgage Licensing System to verify if the person who originated the loan is licensed in that state, perhaps some of the unlicensed, out of state shadow LOs will start being counted.

Let’s discover what “Lending with Expertise” means to Paramount Equity

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Paramount Equity has settled their case with the Washington State Department of Financial Institutions. Read the Consent Order here.  The Statement of Charges outlined many, many violations of state and federal law:

  • Using the term “mortgage bank

Foreclosure Rescue Scammer or AG Victim: You be the Judge

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In order to go into the foreclosure rescue business, foreclosure rescuers must make themselves believe that they are helping the homeowner. This is done in a cognitive way, by attending many foreclosure seminars, reading lots of books and memorizing scripts that can be played back inside the foreclosure rescuer’s head over and over again until it becomes real and true to them.

Similar to how we fool ourselves over and over again when we say to ourselves “it’s only one drink,” “it’s only a cookie” and “it’s not really sex.”  Self deception is very powerful and it appears to be working well with foreclosure rescuers.  I hear many phrases over and over again such as, “it’s perfectly legal,” “homeowners want to stay in their homes,” and “if it wasn’t for me, then….”  With the case of Joe Kaiser, we are starting to hear a different song. It’s the whine of the victim.  You know the type of person I’m talking about who constantly complains about being victimized to the point where they transform into victim.

Joe Kaiser (doing business as PreFlop, LLC, G. Hobus Investments, LLC, Bobo Buys Real Estate, and Unclaimed Funds, Inc.) makes money selling foreclosure rescue sales courses and books (examples: ‘The Subterranean Marketplace in 2009″ for $997. “Learn How to Day Trade in Real Estate Online Using Craigslist for $667.) though not everyone has been a satisfied customer.  Joe buys and sells homes in foreclosure but not just any kind of foreclosure: tax foreclosure.  Some of you will remember fine movie, “The House of Sand and Fog” very well acted by Sir Ben Kingsley, Jennifer Connelly, and the beautiful Shohreh Aghdashloo. I assign this movie as extra credit for my college students because of all the possible title insurance issues surrounding the tax foreclosure plot.  This movie should be required viewing for anyone thinking about entering the world of tax foreclosures.

In a very methodical way, described in his books, Joe locates homeowners who are delinquent on their real property taxes, and also have equity in their home.  This is a bit like a needle in the haystack kind of work today but during the bubble run-up, as others swarmed the trustee sales, Joe focused on tax foreclosures. Interestingly, several of his victims have Hispanic surnames but I digress. Le’ts read the public records documents:

The Court found that Mr. Kaiser violated the Consumer Protection Act by soliciting homeowners with false promises to help them keep or save their home when partial interest deals do not actually result in the homeowner keeping or saving their home.  The Court also found that, in the course of creating partial interest deals, Mr. Kaiser violated the Consumer Protection Act by falsifying real property excise tax affidavits and by acting as both trustee and co-beneficiary seeking a profit from the trust.

Kaiser solicits homeowners facing tax foreclosure and induces them to place their home in a trust, with Kaiser, through his business entities, as trustee and co-beneficiary.  Mr. Kaiser does not pay the homeowner for their homes. Once title to the home is in Kaiser’s control, he pays the delinquent property taxes and stops the sale of the home.

The land trust…that Kaiser created give him complete title and control over the homes and leave the former owners with only two tenuous rights: 1) the right to some percentage of the sales proceeds if Mr. Kaiser chooses to sell the property, and 2) the right to occupy the property for one to three years, provided the former owner pays rent. These two rights are tenuous because the documents contain hair-trigger default provisions which void these rights if the former homeowner is even five days late on a rental payment or violates any of the other terms contained in the numerous documents Mr. Kaiser has them sign.

Mr. Kaiser testified that every partial interest deal he has created is actually in default…therefore, none of the former homeowners maintains their right to possession of the property or a percentage of the proceeds if Kaiser chooses to sell it.  By virtue of the lease provisions and other contractual provisions for reimbursement of all of Mr. Kaisers expenses, his terms entitle him to receive either the entire home vacant or his share of the home’s equity without having ultimately paid any money….Homeowners who enter the transactions believing they are saving their homes are actually stripped of any ownership interest and are not even given a right of first refusal to buy back their home.  No fully informed person, not acting under compulsion would enter a transaction with such onerous terms.

There is much more in the Findings of Fact and Conclusions of Law and if you want to learn how to “Negotiate Foreclosures Like a SWAT Team Leader” then by all means, meet Joe here.

There are some investors who feel sorry for Joe.  Joe feels like he has been attacked by the AG’s office and is blogging about his new role as a victim. Let’s see if this logically works.

In the F&G M. transaction, Mr. Kaiser claimed he saved F&G’s home…What Kaiser actually did was purchase the home at the foreclosure sale and then had Mr. M. sign over his rights to the overage money from the foreclosure sale. As a result, Kaiser obtained both the house and the $45,428.47 in overage money he had paid at the auction. Kaiser never sold the house back to Mr. M. even when Mr. M. obtained a Realtor and made an offer. Kaiser then sent Mr. M. an eviction notice demanding Mr. M. immediately pay $2700 in rent or vacate the property.

I’m trying to work up some tears but they’re just not coming.  Now it’s your turn: is Joe Kaiser a posterboy foreclosure rescue scammer, a victim, a sociopath, a combination thereof, or am I too  justice oriented to become a real estate investor guru?  I just can’t look at someone, flat-out lie to them, and steal their house and money.  If that’s what it takes to be a real estate investor guru, count me out.

Why are Banks Setting the Opening Auction Bid Below The Principal Balance?

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I attended a foreclosure auction in Bellevue, WA last week to discover if the rumor was true that banks are opening their bids below the amount owed.  I received confirmation from three professional investors that yes, the banks have been doing that, it’s no secret, and there seems to be no discernable pattern.  It’s not one particular bank or lender, it’s not particular types of property or in any specific area. It appears to be random.

In addition to the 92 active trustee sales scheduled for that day in Bellevue (auctions were also going on in other King County locations,) there were 81 postponements.  Only a few of the trustee sales attracted bidders, and the rest were deeded back to the bank.  Out of the 92 active sales, 25 had opening bids below the amount owed to the bank.

Why would a bank or lender set their opening bid below the amount owed?

Banks and lenders have duties to their shareholders and investors to maximize profits and miminize losses (well, at least they use to.) If opening bids are set LOWER than what’s owed, perhaps the banks have already tallied their losses, realized that if they had to take back the house, get it cleaned out and cleaned up for resale, pay a real estate agent their commission to sell it, pay for title, escrow, excise tax, utilities, and any other carrying costs,  they might as well sell it at a discount at auction.  But maybe there are other reasons.  I wondered if the banks were trying to keep more REO inventory off the market in an attempt to prop up home values for their existing REO inventory.  Maybe appraisers can ignore trustee sale prices in their reports.  Not knowing the answer, I emailed three appraisers for help and here’s what I learned:  Appraisers need to mention trustee sales in the neighborhood if these trustee sales make up a significant percentage of available comps because they are legitimate sales even though title is transferred using a trustee deed instead of a warranty deed.  If an appraiser choses to ignore these, he/she will run the risk of having the appraisal run through an “enhanced review” process in order to catch trustee sale market activity.  If a trustee sale is a significant comparable sale, it can be used. The requirement to use closely comparable trustee sales as comps can also vary based on the requirement of the lender and investor.  It may not be absolutely required but it may be in the appraisers best interest to mention trustee sales. Thanks to Jonathan Miller, Shane Leady and Richard Hagar for teaching me something new today.

That still doesn’t explain the phenomenon of banks undercutting their own principal balances at the auction.  My theory is that banks are relying on third party information such as a mini appraisal or Broker Price Opinion (BPO) prior to auction.  If the BPO suggests that the outstanding principal balance is so high and out of range as to likely attract no bidders at auction, then the banks have nothing to lose by setting the opening bid closer to or significantly lower than the principal balance owed.  If no one bids at auction, they’re still only out the money they would have been out anyways and on the upside, if the low opening bid attracts investors, then perhaps the bidding will rise closer to the payoff.  If not, they have an immediate loss that could be significantly LESS than losses that would add up over time, having to carry the REO on its books for months of marketing time in addition to the other costs mentioned above.

If banks are undercutting their own payoffs, then why isn’t this phenomenon more widely publicized?  Okay, so we know that bidding on a home at a trustee sale is too frightening for most first time homebuyers but still, if more people know about this, then maybe there would be more folks showing up at the trustee sales and bidding those homes UP, thereby reducing the banks losses.  There certainly is NO shortage of tall, well-groomed, good looking, muscular investor gurus in shorts showing off tanned legs, even though it was only 63 degrees outside hanging out at foreclosure auctions with all kinds of downpayment solutions to offer newby real estate investors:  “We have zero down financing available for the right investor!” and “We have private hard money financing available for your purchase and you can refinance out of that loan in 30 days….My mortgage broker is right here, let me introduce you to her.”

Maybe the banks aren’t publicizing their low bids because they don’t want to bring buyer attention away from purchasing their REOs or short sales, knowing that investors are the ones who typically show up at the auction anyways.  The banks also have a vested interest in keeping traditional buyers focused on MLS listings. 

If I owned stock in a bank or lender that was undercutting their own payoff at auction, I’d want to be darn sure that this practice was saving the bank money and not hiding something else such as higher losses to be pushed on into the next earnings report…or the next stress test.


Foreclosure Auction Video Part 1
April 24, 2009
Bellevue, WA
Here is the rest of the auction.
Special thanks to Phil Leng for introducing me to all the investor bidders.