As home prices in the region climb and inventory dries up, the nation's largest mortgage lenders are gambling on the future of the housing recovery, a Herald-Tribune analysis shows.
Banking giants from Wells Fargo to Fannie Mae are routinely paying top dollar on the auction steps to hold onto their own distressed properties, outbidding cash offers and paying well above assessed value, according to a review of thousands of Southwest Florida auction purchases.
They are speculating that the properties will appreciate even more in the next couple of years.
The new strategy is a shift from the years after the nadir of the foreclosure crisis, when mortgage lenders accepted any fair offer to avoid the hassle of listing the default.
Yet worries are mounting that the competition between lenders and billion-dollar investment funds could drive housing values higher through the kind of price speculation that marked the walk-up to the Great Recession.
With the large amount of Southwest Florida real estate now controlled by lenders and institutional investors, the auction wars could have adverse impacts on the long-term health of the market: inflating prices beyond what most working families can afford, said Joe Adamaitis, president of the Gulf Coast Mortgage Bankers Association.
And industry analysts fear that the trend could suffocate short sale and loan modification approvals for delinquent borrowers.
"These homes are going for more on auction than they could ever get on retail," said Matt Weidner, a St. Petersburg foreclosure attorney. "The banks can control prices and inventory, and trickle these properties onto the market at their own pace."
In some cases, lenders this year have bid up to 600 percent more than a property's worth to retain foreclosures — one of the primary reasons the acquisition costs for competing real estate investors also has spiked in recent months.
In the 12 months ending June 1, 4,865 foreclosures were auctioned in Sarasota and Manatee counties. Lenders outbid third-parties to keep 3,754, or 77 percent.
Banks paid $259.2 million for the properties, an increase of 34 percent from the amount they spent in the same 12-month period a year ago.
It also was the highest tally dating back to the peak of the foreclosure crisis in 2009, a Herald-Tribune review of court records showed.
Banks do not have to pay out-of-pocket until they bid more on an auction than what a court judgment deems they are owed on the foreclosure. That is a fairly rare phenomenon.
Most of the bids from banks and investors alike remain below the principal amounts borrowed on boom-time home loans.
But turning down hard cash offers above assessed value to instead list a home on the market — and assuming the cost of maintenance, repairs and Realtor commissions — is a risk most banks would not dare to attempt just two years ago, Adamaitis said.
"Banks were watching the market carefully, and they have figured out they can hold onto these foreclosures a little longer and make some additional money," he said.
"It's a gamble."
Most industry analysts attribute the change in direction to the so-called "Blackstone effect."
The infusion of capital from the giant New York-based hedge fund and several others like it has boosted home values and tightened supply since Blackstone began buying single-family investment homes in Southwest Florida last fall.
Coupled with pent-up demand from baby boomers, and conditions that make it difficult for many boom-time purchasers to list a home for sale, banks can hold onto distressed houses with less long-term risk.
"Why sell for pennies on the dollar to Blackstone, when they can do it themselves now," Adamaitis said. "Blackstone set the market, and now banks are taking advantage of the opportunity. They now have all of the top variables to control the market."
The idea is that the banks would turn down bids at auction — presumably from a local flipper or investor — to instead list the property on public Realtor databases, where it can draw higher offers from owner-occupiers.
The lenders hope to mitigate their losses on their bad loan by cutting out the middleman and waiting for prices to increase.
"A strong real estate market is changing strategy quite a bit," said Charles Brown, chairman and chief executive of Sarasota's Insignia Bank. "There's a stronger market now to move properties and banks don't feel like they're getting fair value at auction anymore."
So far, lenders have had mixed results.
The strategy worked to near perfection for a 2,100-square-foot house on Venice's Flamingo Road. To keep the three-bedroom home, Fannie Mae outbid a $161,700 third-party offer at a Jan. 11 auction — committing $31,700 more than the property's assessed value.
With a $276,827 final judgment and $250,297 unpaid principal in the deal, the government enterprise famously bailed-out by federal tax dollars was bound to take a loss on the property either way.
But by holding onto it for six more months, the lender found a retail buyer willing to pay $194,000 on May 30 — reducing the loss by $32,300 with the gamble.
Although Fannie Mae can still go after the borrower for the difference, banks rarely pursue a deficiency judgment to collect the remaining balance.
Fannie Mae whiffed on a similar attempt with a home on Lockwood Meadows Boulevard in Sarasota.
The lender turned down firm cash offers at an auction in late January to bid a winning $121,001 for the property — a 203 percent markup from the assessed value.
During the next five months in Sarasota, the median prices for single-family homes grew nearly 19 percent.
Despite that rapid appreciation, the home could only fetch $92,200 on the retail market in May. Fannie Mae's overpayment at auction ultimately cost the lender $28,800 on top of the soured principal amount, plus any subsequent expense to maintain the property and brokerage fees to find a buyer.
Brokers who closely monitor foreclosure auctions say until recently, Fannie Mae would have been content to accept the original auction amount on both of those deals and the hundreds of others like them.
"The banks seem to be offering more than they usually would — going for market value and above," said Shannon Moore, broker and owner of Green Lion Realty in North Port. "I don't quite understand the logic. It's a vast shift from the last few years when would take any reasonable amount just to get rid of them."
From the start of 2010 until fall 2012, banks offered more than the assessed value in less than 3 percent of the 11,629 foreclosures auctioned in Sarasota and Manatee counties during that timeframe.
But since Blackstone began buying investment homes here in October — a shopping spree that began at local foreclosure auctions — lenders began to greatly increase their bids. In those eight months, banks bid above assessed value on about 39 percent of their auction offers, a Herald-Tribune analysis of auction records shows.
Meanwhile, competition has grown fierce.
Spending activity from investors has spiked 220 percent over the year, with non-banking entities paying $108.1 million during the past 12 months to snap up Sarasota and Manatee foreclosures.
A recent Herald-Tribune review showed these institutional investors have routinely paid well above realistic values for their purchases.
Now banks appear to be joining in.
"The banks have been paying a lot higher than they should at this point," said Bill Howell, co-broker of Sarasota's Hook & Ladder Realty, a firm that specializes in bank listings. "Fannie Mae and Freddie Mac are increasing prices in the market because they know people will pay. And why not? There's bidding wars going on."
While banks and investors jostle for control of distressed homes, the exit strategy for each remains somewhat different.
Investor purchases are primarily being turned into residential rentals, feeding an uptick in demand for leased homes. Those properties are not likely to be seen for sale for several more years.
The lender seizures also are expected to more quickly provide some relief to an inventory of homes for sale in Southwest Florida that now flirt with record-lows.
The vast majority of recent auction foreclosures have yet to be listed on the market, but lenders already have slowly begun to release some of those listings.
Most industry observers expect that process to be slow. Banks have an interest in not flooding the market with another wave of distressed homes.
But the higher prices climb, the more eager lenders may become to unload those assets, said Drew Peterson, a foreclosure specialist with the Re/Max Alliance Group in Sarasota.
"In the past, the banks would factor in the cost of putting a home on the market and try to avoid it," Peterson said. "Now they just want the property back no matter what, knowing they will mostly be better off when these properties come on the market six months down the road."
A pinch on short sales
Lenders have been lethargic in their processing of foreclosures for much of the past two years.
That has largely been the result of the widespread fraud reported in lenders' handling of many boom-time cases.
Last spring, five of the nation's most prominent lenders signed on to the largest consumer financial protection settlement in U.S. history — a $25 billion penalty earmarked to help recession-battered homeowners and state governments with affordable housing.
The national mortgage settlement also was aimed at encouraging more short sales, loan modifications or deeds-in-lieu of foreclosure — all less bruising methods of disposing of distressed properties. Those processes have a smaller impact on a borrower's credit and are generally thought to be less hazardous for the overall economy.
But the deal also paved the way for banks to catch up on their backlog of cases, providing clearer guidelines for processing new defaults and more defined penalties for any mistakes.
With banks now aggressively pursuing home seizures on auction again, some worry it will ultimately limit the envisioned impact of the mortgage settlement, especially if lenders believe they can command more for a bank-owned listing in six months than they can for a short sale today.
That could alter how banks handle the logjam of pending foreclosures in Florida's court system. At the end of April, that figure was pegged at 342,962, including 14,938 in the circuit encompassing Sarasota, Manatee and DeSoto counties, according to the latest report from the Florida Courts Administrator.
"The banks have definitely taken a different turn, and a lot of that has to do with the artificial price inflation we have already seen," said Jack McCabe a real estate consultant in Deerfield Beach. "It's the recipe for another bust, and the big losers are the ones trying to qualify for a short sale or modification."
Driving up prices
Banks' spiking activity at auctions also could trigger a rise in home prices across the market, with values rising as banks and investors wrestle for properties.
It is a potential war that also will drive up initial acquisition costs for both stakeholders.
The price hikes at auction will ultimately be passed on when the entities go to list the foreclosures on the Multiple Listing Service, influencing the price for comparable homes not in distress, McCabe said.
Even with the continued gains in pricing that are anticipated for the real estate market, the strategy can be risky.
It can be more expensive for banks to hold a foreclosure rather than accepting a reasonable auction offer or modifying a poor loan. It also requires more capital to keep the books balanced.
Most national lenders have insurance and other programs in place that reduce that financial upkeep, leaving them with much more flexibility in foreclosure auctions than smaller community banks, said Charles Murphy, president and CEO of Sarasota's Bank of Commerce.
Often lenders already have adjusted their books to reflect a more realistic value of what a bad loan is worth. Factors vary by each individual property, including the amount the bank already has invested in the loan.
Even after a crash that shuttered nearly 70 banks across Florida, the idea of playing the housing market again no longer seems unreasonable, Murphy said.
"They have gone in and done their own evaluations, so they have a good sense of what these properties are worth to them," he said. "They're just trying to minimize their losses."
"Banks always have to determine a floor. That floor is just moving up with values," he said.
"In today's world — with the supply and demand we're seeing — it sounds like a great business decision."
By Josh Salman