Banks unloading real-estate-owned properties face some tough choices, such as whether to auction off homes or sell them to investors, and whether to fix them up first. But whatever they decide, the real challenge is to avoid dragging down property values from their already-depressed 25% to 30% discounts.

Finding the best price is "an art, not a science," said Matt Sylvia, a Bank of America senior vice president and REO production executive, speaking on a panel at a Mortgage Bankers Association servicing conference in Orlando, Florida Wednesday.

There are 2.2 million properties currently in foreclosure and another 1.8 million borrowers who, 90 days or more delinquent on their mortgages, might be soon, according to Lender Processing Services. Reducing this backlog of foreclosures is crucial to reviving the housing market and thus the economy, which in turn should help homeowners current on their mortgage payments stay current.

Still, it's a fine line; to lower that inventory, banks still have to dispose of their REO homes. Selling short of the best price possible, just to move a property, does little to lift values or help the economy overall.

Mark Paniccia, group vice president of REO at SunTrust Mortgage, in Richmond, Va., said his bank has several tricks for making sure it gets the best prices for REOs. The bank has a policy of listing properties for a minimum of 10 days, which often leads to multiple offers and helps avoid "being ripped off on an REO sale."

"We're upfront with everyone that we won't accept an offer until the property is on the MLS (Multiple Listing Service) for 10 days," he said on the panel.

To ensure it is pricing properties correctly, SunTrust typically orders an appraisal, a broker price opinion from a listing agent and a second such opinion. It then takes an average of the three to determine the REO sale price. The bank also performs "flip checks," and monitors REO sales for six months to reduce fraud.

Sylvia said BofA typically gets offers within the first 60 days of a property listing on two-thirds of the bank's REOs. "It's the other one-third that don't get offers that are the problem," he added.
Poor communication between banks' default and REO departments can be a hindrance. Often an REO will be listed for less than the price the bank could have received on a short sale.

"I wish we had that all figured out," Sylvia said. "This is an opportunity. We need to do a better job, and we're pushing hard to close that gap."

Paniccia said SunTrust is working on "how to bring valuation from REO upstream" to the short-sale process.

Banks want foreclosed properties to look like other homes in the same neighborhood but they also have to factor in whether to make repairs. During a panel discussion here, Paniccia said it is hard to commit to repairs if the repairs are not going to result in a substantially higher purchase price.

"If it costs $100,000 in repairs to get $30,000 back, that's a tough call because of my holding costs alone. I don't know that we're going to invest that."

Banks currently only auction about 2% of REO properties, but at least it's an option. Most properties that sell at auction are part of a bank's held for investment portfolio and tend to have unique characteristics that set them apart from other homes, Paniccia said.

For its part, BofA is considering whether to sell properties to investors or rent them out, one of several strategies that could lead to a more orderly absorption of existing inventory. "We want to look at investors to help us move assets and turn them to rentals," Sylvia said. "We haven't done a lot. You'll see more of that this year from us."

Though private equity investors have expressed interest in buying REO properties in bulk, particularly from Fannie Mae and Freddie Mac, it is unclear how they would be able to manage property rentals nationwide.

"There isn't a company today generating the value to manage hundreds of thousands of rentals," said Alan Jaffa, chief executive of Safeguard Properties.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.