5 ms·

> When a property is repossessed by a lender, it is sold (often at auction) by the lender Is this just what they do as it makes financial sense to them, or is

> When a property is repossessed by a lender, it is sold (often at auction) by the lender Is this just what they do as it makes financial sense to them, or is there some law or similar prompting them to do it? I was wondering if holding on to strategic property would be beneficial. But if they are immediately selling all property that is repossessed then it doesn't sound as ominous as I imagined and actually sounds like the most beneficial thing that could be done, for the market and potential buyers.

eropple 8y ago
The bank's core competencies don't lie in real estate investment (of the direct kind) nor in stuff like property management. As far as I'm aware there's no law demanding they turn around and sell, but it makes a lot of sense to.
- mikefivedeuce 8y ago
  Not a law but regulatory capital requirements on speculative real estate make it uneconomical for the banks to hold the properties.
- cestith 8y ago
  Banks are interested primarily in liquid assets. There's not much less liquid than real estate.
VLM 8y ago
The whole point of fractional reserve banking is a $100K house being held represents a modest return during a housing bubble, but they could turn that $100K property into $1M of mortgages with a likely higher total return. During a bubble people want to transact like crazy so tying up working capital in dirt would have some substantial opportunity costs. So in a financial model of banking that doesn't actually exist, it still would not be a good idea. There are practical problems relating to specialization in the industry; there are no participants at this time who could play the proposed game. There are salespeople-transactors companies who need to turn their working capital over every month or so; the people who sell you a loan for a commission and then sell the loan to a national servicing company next month, they need to turn that working capital over every month or two or they go out of the business of selling loans because they run out of cash to turn over in new loans. Meanwhile the national servicers specialize in logistics, sort of, by trying to optimize cheap and poor customer service to turn (junk) bonds and such into the largest income stream they have; they optimize all internal processes on being identical and simple and fast and dumb. They're in the business of raising money, buying lots of small income streams, then milking it for all its worth via monthly payment transactions and trying to branch out into long term real estate investing is problematic for that business model level. Why don't restaurants own farmland, because skilled farmers and skilled restaurant operators usually aren't the same people so two people trying to do that would overall make far more money if one tried to be the farmer and one tried to be the restaurant chain owner. There are real estate investment trusts but they tend not to be a tiny department of a sales org or a servicing org. REITs tend to be stereotypical investment organizations that happen to buy real estate and derivatives and holding companies rather than Apple or Google stock; not a desk at your local bank branch or a dude in the mail room at a national service center. The closest analogy is probably pawn shops. Those guys will sometimes do weird things to optimize return on their collateral. Its probably a good thing they tend to be smaller and less centralized than the world wide megacorporate financial system.
- vonmoltke 8y ago
  > The whole point of fractional reserve banking is a $100K house being held represents a modest return during a housing bubble, but they could turn that $100K property into $1M of mortgages with a likely higher total return. That is a significant misunderstanding of fractional reserve banking. Banks can only lend money they have, i.e. that customers have deposited. They can't just invent money to lend. So, a bank with $100,000 in cash can only make loans totaling $90,000 with it (assuming a 10% reserve requirement).
  - mattgibson 8y ago
    This appears to no longer be true: http://gregpytel.blogspot.com/2009/04/largest-heist-in-history.html http://gregpytel.blogspot.com/2009/04/largest-heist-in-histo... By financialising the mortgages and other loans, the banks can now treat them as if they were lendable cash. A bit like they can treat gold bullion like cash.
howard941 8y ago
They're not immediately repoing the property much less selling it. It's a point of contention in the US anyway that first mortgagees, who are invariably bondholders rather than banks, are leaving the properties vacant and unmaintained post-default to avoid maintenance and other obligations, often for many years, contributing to neighborhood blight and deteriorating property values.
toast0 8y ago
I've reveiwed California laws, but some time ago, and other jurisdictions vary (sometimes considerably), but my recollection is that after repossession, the lender must pay the excess value to the borrower in a fairly short timeframe. The auction sale to establish value is not required by law, but is allowed by law, and provides an efficient and nearly unchallengeable method to establish the current value. When banks end up owning properties is usually when there are no bidders; the starting bid is usually either the amount of delinquent debt or the total of the debt and any other costs that can be charged to the borrower. The bank has effectively shown that the house is worth less than what was owed at that point in time, and then it's their job to get rid of it (in some cases a bit of staging will go a long way, in others, they'll have to sell it for much less or hold it for a long time or both)

eropple 8y ago

The bank's core competencies don't lie in real estate investment (of the direct kind) nor in stuff like property management. As far as I'm aware there's no law demanding they turn around and sell, but it makes a lot of sense to.

mikefivedeuce 8y ago
Not a law but regulatory capital requirements on speculative real estate make it uneconomical for the banks to hold the properties.
cestith 8y ago
Banks are interested primarily in liquid assets. There's not much less liquid than real estate.

VLM 8y ago

The whole point of fractional reserve banking is a $100K house being held represents a modest return during a housing bubble, but they could turn that $100K property into $1M of mortgages with a likely higher total return. During a bubble people want to transact like crazy so tying up working capital in dirt would have some substantial opportunity costs. So in a financial model of banking that doesn't actually exist, it still would not be a good idea. There are practical problems relating to specialization in the industry; there are no participants at this time who could play the proposed game. There are salespeople-transactors companies who need to turn their working capital over every month or so; the people who sell you a loan for a commission and then sell the loan to a national servicing company next month, they need to turn that working capital over every month or two or they go out of the business of selling loans because they run out of cash to turn over in new loans. Meanwhile the national servicers specialize in logistics, sort of, by trying to optimize cheap and poor customer service to turn (junk) bonds and such into the largest income stream they have; they optimize all internal processes on being identical and simple and fast and dumb. They're in the business of raising money, buying lots of small income streams, then milking it for all its worth via monthly payment transactions and trying to branch out into long term real estate investing is problematic for that business model level. Why don't restaurants own farmland, because skilled farmers and skilled restaurant operators usually aren't the same people so two people trying to do that would overall make far more money if one tried to be the farmer and one tried to be the restaurant chain owner. There are real estate investment trusts but they tend not to be a tiny department of a sales org or a servicing org. REITs tend to be stereotypical investment organizations that happen to buy real estate and derivatives and holding companies rather than Apple or Google stock; not a desk at your local bank branch or a dude in the mail room at a national service center. The closest analogy is probably pawn shops. Those guys will sometimes do weird things to optimize return on their collateral. Its probably a good thing they tend to be smaller and less centralized than the world wide megacorporate financial system.

vonmoltke 8y ago
> The whole point of fractional reserve banking is a $100K house being held represents a modest return during a housing bubble, but they could turn that $100K property into $1M of mortgages with a likely higher total return. That is a significant misunderstanding of fractional reserve banking. Banks can only lend money they have, i.e. that customers have deposited. They can't just invent money to lend. So, a bank with $100,000 in cash can only make loans totaling $90,000 with it (assuming a 10% reserve requirement).
- mattgibson 8y ago
  This appears to no longer be true: http://gregpytel.blogspot.com/2009/04/largest-heist-in-history.html http://gregpytel.blogspot.com/2009/04/largest-heist-in-histo... By financialising the mortgages and other loans, the banks can now treat them as if they were lendable cash. A bit like they can treat gold bullion like cash.

howard941 8y ago

They're not immediately repoing the property much less selling it. It's a point of contention in the US anyway that first mortgagees, who are invariably bondholders rather than banks, are leaving the properties vacant and unmaintained post-default to avoid maintenance and other obligations, often for many years, contributing to neighborhood blight and deteriorating property values.

toast0 8y ago

I've reveiwed California laws, but some time ago, and other jurisdictions vary (sometimes considerably), but my recollection is that after repossession, the lender must pay the excess value to the borrower in a fairly short timeframe. The auction sale to establish value is not required by law, but is allowed by law, and provides an efficient and nearly unchallengeable method to establish the current value. When banks end up owning properties is usually when there are no bidders; the starting bid is usually either the amount of delinquent debt or the total of the debt and any other costs that can be charged to the borrower. The bank has effectively shown that the house is worth less than what was owed at that point in time, and then it's their job to get rid of it (in some cases a bit of staging will go a long way, in others, they'll have to sell it for much less or hold it for a long time or both)