Bear Stearns Meets Possums in Georgia as Foreclosures Increase
By Kathleen M. Howley and Bob Ivry
2035 Lilac Lane in Decatur, Georgia Friday
July 2 (Bloomberg) -- Only the possums are enjoying the backyard of 2035 Lilac Lane in Decatur, Georgia, where Wall Street titan Bear Stearns Cos. is just another homeowner by default.
``It's a mess,'' said Kiwanna Ford, 31, who grew up next door to the vacant brick ranch-style house four miles south of the DeKalb County Courthouse. Bear Stearns seized the property three months ago after Ford's neighbor stopped making payments on his mortgage. ``If we wanted to sell our house right now with that next door, it would hurt,'' she said.
Bear Stearns, the second-biggest U.S. underwriter of mortgage-backed securities now reeling from the worst housing decline since the 1930s, never planned to take possession of the three-bedroom house. After selling the property last week, Bear Stearns said it still owns 18 houses in the Decatur area acquired since November. Citigroup Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and JPMorgan Chase & Co. are listed in public records as the owners of at least 35 homes in the suburb, where 19,000 people live seven miles east of downtown Atlanta.
As foreclosures climb, Wall Street's lenders and investors are claiming a bigger chunk of Main Street. The value of U.S. homes held by commercial banks swelled 53 percent nationwide to $2.3 billion at the end of March, the highest since 1992, from $1.5 billion a year earlier, according to the Federal Deposit Insurance Corp.
Fire-Sale Prices
The dilemma facing banks is whether to pay maintenance costs or dump the properties at fire-sale prices, said Keith Gumbinger, vice president at HSH Associates, a mortgage research firm in Pompton Plains, New Jersey. Both options can reduce real estate values. Homes that sit vacant can become neighborhood eyesores, while rock-bottom sale prices drag down values of similar properties in the area, he said.
``No lender wants to own real estate, but at the same time you can't just unload these properties because you would send home prices into a freefall,'' Gumbinger said.
Home values and the $6 trillion U.S. mortgage-backed securities market are locked in a downward spiral. Bear Stearns is bailing out one money-losing hedge fund it controls and leaving another to liquidation by creditors. Both funds invested in securities backed by subprime loans. The loans, for borrowers with bad or limited credit histories, are secured by houses such as the one on Lilac Lane.
Subprime Loan
Bear Stearns took possession of the three-bedroom Lilac Lane house for $76,500 on March 6, according to the foreclosure deed. The owner who defaulted had purchased the house in April 2005 for $160,000 using a subprime loan that required no money down. He had been renting it out, according to the neighbor, Ford.
The lender was Meritage Mortgage Corp., one of more than 60 subprime home loan companies that have halted operations, gone bankrupt or sought buyers since the start of 2006, according to data compiled by Bloomberg. Bear Stearns had bought the mortgage from Meritage at a discount.
The firm sold the Lilac Lane house on June 28 for $84,000, said Elisa Marks, a Bear Stearns spokeswoman. That's about half the price paid two years ago. Other homes on the street sold this year for $85,000 to $185,000, according to public records.
The house's condition deteriorated while it was a rental property, Ford said. Being empty for six months only made it worse to the extent that possums had the run of the backyard, she said.
Sheriff's Auctions
``It's hurting values,'' said Ford, interviewed June 24 outside the house.
Foreclosed Decatur homes are sold on the steps of the DeKalb County Courthouse in so-called sheriff's auctions held the first Tuesday of every month. The sale is intended to pay back investors who hold the unpaid mortgage.
Lenders often outbid competing buyers to take title and then offer it for sale on the open market unless the auction price goes above the amount owed, said David Stich, an attorney at Solomon Pearl Blum Heymann and Stich LLP in New York. The ``sale price'' on a foreclosure deed doesn't always reflect the amount the lender is owed, he said.
Whether selling at auction or using a real estate broker, lenders usually get ``cents on the dollar,'' which undermines the confidence of mortgage bond investors by showing property values are nowhere near the loans they collateralize, said Keith Shaughnessy, president of Foundation Mortgage Corp. in Littleton, Massachusetts.
Comparable Values
``It will have a decimating effect on the mortgage-backed securities market when lenders start facing the music and letting property go at whatever price people will pay,'' Shaughnessy said.
Appraisers determine home values using so-called comparable sales, the prices paid for nearby homes that have similar features. If foreclosed properties are used as comparables, it drags down values throughout the neighborhood, said John Kilpatrick, president of Greenfield Advisors, a Seattle real estate consulting firm.
``There's the general stigma effect that comes from living next to a house that's been foreclosed on which could affect the marketability of your property, and then there's also the direct impact when a distressed property is used as a comparable sale,'' Kilpatrick said.
Bear Stearns said it has sold eight houses in Decatur since November, including a three-bedroom, 2,100-square-foot home that sat on the market for 582 days. Bear Stearns and its subsidiary EMC Mortgage Corp. sell up to 15 percent of the homes they own every month, John Vella, chief executive officer of the Lewisville, Texas-based mortgage unit said in an e-mail.
`Mod Squad'
EMC formed the ``Mod Squad'' in April, a team that helps borrowers modify their loans to avoid foreclosure, Vella said. Eight Decatur houses owned by Bear Stearns will be offered for sale at a July 21 auction in Atlanta, according to Vella. Among the properties is a three-bedroom, 1,400-square-foot home that will have been empty for 1,000 days.
Declining originations, ``weaker U.S. mortgage market conditions'' and tighter underwriting of subprime and Alt A loans, made to borrowers who have a close-to-prime rating, caused Bear Stearns's fixed-income net revenue to fall 21 percent in the quarter ended May 31 from a year earlier, Chief Financial Officer Samuel Molinaro Jr. said during a June 14 conference call. The company's stock has dropped 19 percent since reaching a record in January.
The share of subprime loans entering foreclosure in the first quarter was 2.43 percent, the highest in almost five years, the Washington-based Mortgage Bankers Association said. Subprime late payments rose to 13.77 percent, compared with 11.5 percent a year earlier.
Ohio to California
Bear Stearns and its affiliates are listed as buyers of at least 53 homes so far this year in San Diego County, California, 48 in Maricopa County, Arizona, and 40 in Cuyahoga County, Ohio, according to a search of property records.
JPMorgan, the third-largest U.S. bank, and its subsidiary Chase Home Lending acquired at least 194 homes this year through foreclosure in Wayne County, Michigan. Merrill, the third-biggest securities firm by market value, and its mortgage unit, First Franklin, took possession of at least 87 homes this year in San Diego County, California. Citigroup and affiliates are the new owners of at least 47 homes in Clark County, Nevada.
``Our expertise is in lending money to people to buy homes, it's not in owning homes,'' said Chase Home Lending spokesman Thomas Kelly.
Spokeswomen Danielle Romero-Apsilos of Citigroup and Jennifer Sala of Morgan Stanley and spokesmen William Halldin of Merrill and Brian Finnegan of Lehman declined to comment. The banks are all based in New York.
Tumbling Prices
Countrywide Financial Corp., the largest U.S. mortgage lender, said it had $110.1 million of foreclosed real estate at the end of March, quadruple the $27.4 million it held three months earlier. Calabasas, California-based Countrywide has acquired at least 21 homes in Decatur since November, according to public records.
Prices are tumbling in the U.S. housing market as inventories grow. In the second quarter, the U.S. median home price probably dipped 2.4 percent from a year earlier, the fourth consecutive quarterly decline, according to the National Association of Realtors. Before the third quarter of 2006, prices hadn't dropped since 1993.
Measured annually, the national median price for a previously owned home probably will drop 1.3 percent this year, the first decline since the Great Depression in the 1930s, according to Lawrence Yun, an economist at the Chicago-based National Association of Realtors.
Home Sales
``Dumping foreclosed properties back out on the market in a desperate manner actually worsens the situation because all your other borrowers, the ones who are paying their mortgages on time, are going to see their equity disappear as the fire-sale prices drag down everyone's values,'' HSH's Gumbinger said.
U.S. sales of previously owned homes fell in May to 5.99 million at an annualized pace, the slowest in almost four years and the number of properties for sale was the highest on record, the Realtors' group reported last week. That number doesn't include most foreclosed properties slated for auction.
Sales of new houses fell to an annual rate of 915,000 in May, 16 percent lower than a year ago, the Commerce Department said last week. There were 536,000 new homes on the market in May. The average over the last 20 years is 346,000.
`Adverse Effect'
Conditions are the worst since the 1990-1991 recession, which was caused by a credit crunch that followed a boom-bust real estate cycle similar to the last seven years, Gumbinger said. Like the 2000 to 2005 boom, the previous surge in sales and prices was sparked by a decline in mortgage rates, and featured ``risky mortgage lending,'' he said.
The number of homes either sold at auction or taken back by the lenders after the bids failed to reach a high enough price surged 67 percent in May from a year ago to 43,295, according to Foreclosures.com, a Sacramento-based Web site.
``I hope they'd continue to hold them, because selling them at a price that's too low would have an adverse effect on the neighborhood,'' DeKalb County Commissioner Connie Stokes, who is also a real estate broker, said of Decatur-area foreclosures.
At some point in the next two years, most of those properties, known in the industry as REO, or real estate owned, will be sold, said Jack McCabe, chief executive of McCabe Research & Consulting LLC in Deerfield Beach, Florida.
``We'll see those deals being done in the next 18 to 24 months,'' McCabe said.
Vacant Homes
In Decatur, JPMorgan owns a brick ranch-style house on Kelley Lake Road, according to the tax assessor's office. Bear Stearns holds a second mortgage on the property, said spokeswoman Renu Aldrich.
The vacant house sits across the street from an elementary school. A sign on the red-painted front door warns people not to turn on the water because antifreeze has been poured into the plumbing lines so they won't burst in frigid weather.
The former owners bought the three-bedroom property in September 2005 for $155,000 with no down payment, using a so- called piggyback loan, or a second mortgage taken out at the time of sale, according to the deed. Both loans, now defaulted, were originated by Union Federal Bank of Indianapolis.
``It's sad to see the empty houses,'' said Janette Brown, a 52-year-old nurse who has lived two doors away for 25 years. ``I'm worried about what it might do to the values.'' |
