Take My House, Please

Leventina was purchased in April 2006 for $610,000.  It had been on the market for a long time at $680,000, so it looked like a good deal.  80% first loan at 7.25% interest only, and a 20% second.  In January 2007, our friends at BNC Mortgage did a refi for $710,000 at 9.025%, 50 year term 2/48, LIBOR +4.95%.  Bad move.

With the new loan in place and the cash out financing, it was time for Extreme Makeover, Belli Ranch Edition.  Somehow, this plywood siding clad house grew a French Provincial cottage interior with antique brick walls peeking out of the faux plaster walls, "chefs kitchen perfect for entertaining",  "designer paint", the whole works.  Except that the cash out didn’t cover the remodel costs, and the owners went to a hard money lender for an additional $49,999 loan (smarten, any idea why this wasn’t just 50K?).  The July 2007 payment on the first loan was missed, and a NOD was filed in October 2007.  About this time, the house hit the MLS at $895,000.

I toured it and chatted up the listing agent a bit.  The house was still a work in progress, with much of the remodel incomplete.  Do you get the warm fuzzies when you tour an "upscale" home and there are Post-Its all over with "This Will Be….".  I asked the agent if he had set the asking price, or if he had input from the owners, and he chuckled.  I told him my prediction of $650,000 Short, and he nodded at me.

Then nothing happened for 8 months.  It looked like some work might be going on to complete the interiors, but the house didn’t move to NOS status.  I think the bank realised that they didn’t want a half finished house on their books, and cut the owners some slack to get the work finished up and then try to sell it (no permit record, BTW) .  Winds then blew a large portion of the roofing off, just to make things worse.

In June 2008, another NOD was filed and it looked like the bank was going to get serious, and they filed a NOS in October.  The estimated amount due at sale was $804,502, still based on that July 2007 missed payment – they have been living mortgage free for over a year and a half.  The owners 95% completed moving out by Christmas.

The owners have pretty clearly stated that they don’t want the house.  The bank is saying that they don’t want it either, and won’t complete the foreclosure process.  Why not?  To complete the TD will cost them $10,000 or so – legal fees, HOA liens, and transfer taxes – on top of the legal expenses they have already incurred.   And what would be their reward taking Leventina back onto their books?

I’m not ragging on the owner for their exuberance and subsequent failure.  There are a lot of things that went bad for them at once (some of their own making – they sold their old home as a Contract of Sale, and the other party defaulted).   My interest is in how the bank is handling this property and I suspect 100’s like it.  I think there are a lot of these orphan properties out there.

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About Mike McGonagle

An architect, business owner, and compulsive public records hacker, Mike reads the tea leaves of the local real estate market from a unique perspective.. A former Chicagoan, Mike earned his MArch from Harvard University. Mike can be reached at mike@macassociates.com or 775-345-7435. His continued musings can be found on the REreno.com blog.
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8 Responses to Take My House, Please

  1. Avatar BanteringBear says:

    Are you saying the July 2007 payment was the only amount missed, or are you saying all payments have been missed since that time? Regardless, I see good reason for the bank to take back the property- to get back whatever money they can. If the property is allowed to fall into horrible disrepair, they’ll get next to nothing. They stand to lose more by not foreclosing, IMO.

  2. Avatar Martin says:

    I agree with BB. The biggest mistake the bank could make here would be to let the house deteriorate by sitting vacant for months on end. Whatever money the bank has to spend now to complete the foreclosure would not be throwing good money after bad. Granted, the “reward” for the bank would be taking the house into REO. But the property is certainly worth something, and a trustees sale will bring something by way of loss recovery. By doing nothing, the bank will recover nothing.

  3. Avatar SkrapGuy says:

    I assume by “the bank” at this point we are talking about a servicing company. It would be interesting to find out, although it may not be possible to do so, who really “owns” this loan now. Probably 25% of it is in a bundled tranch sold to a hedge fund in Singapore, 25% of it is in a bundled tranch sold to an investment group in Germany, 25% of it is in a bundled tranch sold to some obscure client of the former Lehman Bros., and 25% of it is in a bundled tranch now held by Wells or Citi by way of WaMu. And AIG was involved in the default swaps.

    But man, I really love that 50 year amortization 2/48. And the LIBOR plus 4.95%. This was freakin’ genius at work.

  4. Avatar Reno Ignoramus says:

    You know, even now, almost 4 years after the bubble popped, I am still amazed at the nonsense that went on. Did it just not occur to anybody here that if you have to go to a Voodoo loan witchdoctor and get a loan amortized over 50 years that maybe, just maybe, you really can’t afford it? And then, to agree to 2/48 terms? And then, to do this in ’07, when any casual reader of the RRB could have understood that the party was OVER?

    Now, is this the kind of situation that the Obama plan is intended to save? Help me out here.

  5. Avatar Raymond says:

    Maybe this loan could be re-amortized to be a 100 year loan, which would substantially lower the payments, which might allow the owners to be able to carry on.

    The fact the $710K (likely more at this point)loan is against a house that is now worth $450K is a technicality. Just a technicality. And I sure hope Smarten was not the hard money lender who came in at the end of this mess.

  6. Avatar Martin says:

    Have you all heard about the bill in the Nevada Legislature introduced by Speaker Buckley that will require the lender to go to mediation with the defaulting owner before the foreclosure can go through? The bill is now just at the committee stage and it is possible that it will be substantially amended before it becomes a law.
    Obviously our govt, at every level, is totally commited to preventing the market from adjusting itself. Apparently the govt will interfere at every level and in every way to prevent the inevitable.
    I just read that 60% of all loans that have been renegotiated to lower the monthly payments, go back into default within 6 months.

  7. Avatar Land Guy says:

    Mike,
    Hope this is a relevant question. With the current NOD list dominated by HOA filings, what real recourse do they have in such a junior position? Thanks…

  8. Avatar GreenNV says:

    Land Guy, HOA liens are considered senior to the mortgage. The vesting order on a property is IRS, Local Government (property tax, special assessment, sewer), HOA, 1st mortgage, 2nd mortgage, etc.

    In more normal times, HOAs will just file a lien for the unpaid dues, and they get paid off when the property transfers or the owner pays up. HOAs filing NODs and initiating the foreclosure process is sort of a new and disturbing wrinkle. It shows how desperate they are to get paid.

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