Auctions of Distressed Loans on the Rise: A New Phenomenon in Residential Foreclosures

A previously unfamiliar practice in the commercial real estate market is now appearing in the residential sector, as distressed homeowners face an unexpected threat: auctions of their nonperforming home mortgages. The wife of a Painesville family was shocked to learn that her $248,676 loan on their 2004 Colonial was up for bid, with a starting price of $50,000 on a website operated by REDC Commercial. The family is in the middle of a refinance process and had filed for bankruptcy to keep their home.

Key Takeaways:

• The rise of online auctions of nonperforming home mortgages, a previously unfamiliar practice in the residential sector, is a new phenomenon in dealing with nonperforming loans.
• RealtyNoteBid.com, a website based in Newport Beach, Calif., lists six Ohio real estate loans for auction, including one on Cleveland's East Side and another in Oberlin.
• This trend is a surprise to hard-bitten local foreclosure experts, who thought they had seen everything, and may be a developing trend as lenders initiate foreclosure proceedings and then drop them to avoid demolition or repair expenses.
• Community improvement groups, such as Neighborhood Progress Inc., are reportedly preparing to buy distressed loans at a discount to work out new terms for homeowners or gain control of properties before they fall into decline.
• The auctions are made possible by the Internet, which allows lenders to sell distressed loans to average investors and cut foreclosure and property maintenance costs by as much as 30% of the loan value.
• Major real estate auction companies, such as Marcus & Millichap and Keller Williams, have announced joint ventures with technology companies to market distressed loans and bank-owned properties through their national brokerage networks.

Statistics:

• $248,676: the original value of the Painesville family's loan, now up for bid at an auction price of $50,000.
• $150,000 and $25,000: the woman's yearly income before and after it dropped in 2008.
• 30%: the estimated savings for lenders in foreclosure and property maintenance costs through selling distressed loans online.
• 2004: the year in which the Painesville family purchased their home, which is now up for auction.

Sources:

• Crain's, "Auctions of Distressed Loans on the Rise: A New Phenomenon in Residential Foreclosures".
• RealtyNoteBid.com, a website operated by RealtyNoteBid.com in Newport Beach, Calif.
• REDC Commercial, a company based in Orange Beach, Calif. that offers auction services for nonperforming loans.
• Marcus & Millichap, a real estate investment brokerage company that has announced a joint venture with a technology company to market distressed loans.
• Keller Williams, a residential brokerage company that has announced a joint venture with a technology company to market distressed loans.
• Neighborhood Progress Inc., a community improvement group that is preparing to buy distressed loans at a discount to work out new terms for homeowners or gain control of properties.