The Other Financial Industry Scandal: Bank-Owned Foreclosed Properties Gaining Attention

Calculated Risk picks up today on an overlooked outrage we’ve been writing about for a while now — the way banks handle their inventories of foreclosed homes. We’ve pointed out that banks often let those houses sit, vacant and vandalized, or sell them at fire sale prices to speculators.

I’m hearing stories frequently of banks selling REOs far below market prices, only to have local investors flip the properties.

A reader sent me some info on a property in Redwood City that is typical. The lender turned down two short sale offers at close to $649,000, and then, after foreclosing on the property, the bank listed the property at $509,000. The property sold for $493,000 all cash, even though there were other offers above the list price.

What is going on? I think the lenders are swamped, and this is OPM (other people’s money). The money doesn’t belong to the people making the decisions, and it is hard for them to accept a short sale, and after foreclosure, it is probably easier for them to just take a check and get the property off their desk. The result is the banks make a series of less than optimal decisions, and they leave money on the table at several points in the process.

CR also cites a story from the North County Times in California, noting how banks are so overwhelmed by the foreclosure crisis they are dumping properties in bulk.

Maybe now that the furor over AIG bonuses is settling down a bit, this problem will begin to get the attention it deserves. Like so much in the mortgage crisis, it’s felt first in neighborhoods and communities, long before politicians and policymakers see it. They’re already way behind the curve.