A couple bought a house at a foreclosure sale, but when they got inside they learned they found stacks of dead animals and mountains of animal poop. The buyers are scrambling to get out of the deal, but, at least from the news report, there are no obvious grounds for reversing the sale.
The story is pretty gross, but it highlights something that lots of people don’t realize: A homeowner is entitled to stay in possession of the home until after the foreclosure sale. No one — not the bank or the potential buyers — have any right to enter the house to see if the room arrangement is pleasing, the plumbing is functional or there isn’t poop several inches deep on the floor.
As the subprime market continues its downward trend, keep your eye on the poop.
A foreclosure sale isn’t like a regular sale, with all the attendant warranties. The owner can stay in possession and keep the door bolted, for clear policy reasons: Until the legal process is completed, the homeowner is the owner. Besides, there would be a huge cost imposed on struggling homeowners if the mortgage company could take the property away without giving the homeowner some kind of day in court.
But the consequence of the owner-in-possession rule means that mortgage foreclosure sales can bring a LOT less than the market value of the home. An angry, frustrated, judgment-proof homeowner may destroy the property. Once a homeowner knows the house will be lost, any delays mean that the homeowner can live rent-free for a long time. I was talking with a mortgage lender last week who estimated that by the time the mortgage lender company paid expenses, that it would clear about 15-30% of the actual market value of the property.
Not everyone facing foreclosure is destructive (although some may be). Not everyone in foreclosure has a weird or ugly home inside (although some may). But the market analysts have told us that rational pricing should be all about risk management. A mortgage lender holding a $125,000 mortgage on a $100,000 home may have a lot of leverage against a homeowner who doesn’t want to lose the house, but that if the lender has to push all the way to foreclosure, the leverage changes and the risk of write-down could be in the 80-90% range.
In past housing downturns, homeowners and their lenders often came to the table to negotiate. But as Gretchen Morgenson reported two weeks ago, the new asset securitization pools often mean fractional ownership and pooling arrangements that leave no one with authority or incentives to negotiate a deal that is better for the lender — and for the homeowner.
Foreclosure is in no one’s interest. But this market seems to be stepping deeper and deeper in poop. (PS Thanks to Colin Marks at St. Mary’s for the poop story.)
