REOs Leased by Bank Considered Shadow Inventory?

NEW -> Contingent Buyer Assistance Program
[quote author="awgee" date=1253153999][quote author="Geotpf" date=1253143369][quote author="trrenter" date=1253141052]<a href="http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR2529:/">H.R.2529 To amend the Federal Deposit Insurance Act to authorize depository institutions and depository institution holding companies to lease foreclosed property held by such institutions and companies for up to 5 years, and for other purposes.</a></blockquote>


Maybe the banks will start to do this more, lease out properties instead of selling them, hoping prices will rise in a few years. Pretty smart plan, IMHO. They get the lease income, and I doubt prices will fall much further.



Edit: However, that is just a bill (cue School House Rock skit). It's not law yet, and may never become so, although Barney Frank is one of the cosponsors, which makes the likelyhood of it at least leaving committee to be high.</blockquote>
More likely they will lease the property and it cost them way more in opportunity costs and depreciation as prices continue to fall.</blockquote>


In your opinion.
 
[quote author="RoLar_USC" date=1253155207][quote author="awgee" date=1253153999][quote author="Geotpf" date=1253143369][quote author="trrenter" date=1253141052]<a href="http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR2529:/">H.R.2529 To amend the Federal Deposit Insurance Act to authorize depository institutions and depository institution holding companies to lease foreclosed property held by such institutions and companies for up to 5 years, and for other purposes.</a></blockquote>


Maybe the banks will start to do this more, lease out properties instead of selling them, hoping prices will rise in a few years. Pretty smart plan, IMHO. They get the lease income, and I doubt prices will fall much further.



Edit: However, that is just a bill (cue School House Rock skit). It's not law yet, and may never become so, although Barney Frank is one of the cosponsors, which makes the likelyhood of it at least leaving committee to be high.</blockquote>
More likely they will lease the property and it cost them way more in opportunity costs and depreciation as prices continue to fall.</blockquote>


In your opinion.</blockquote>
Whose opinion has been more correct the last few years?
 
[quote author="RoLar_USC" date=1253155207][quote author="awgee" date=1253153999][quote author="Geotpf" date=1253143369][quote author="trrenter" date=1253141052]<a href="http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR2529:/">H.R.2529 To amend the Federal Deposit Insurance Act to authorize depository institutions and depository institution holding companies to lease foreclosed property held by such institutions and companies for up to 5 years, and for other purposes.</a></blockquote>


Maybe the banks will start to do this more, lease out properties instead of selling them, hoping prices will rise in a few years. Pretty smart plan, IMHO. They get the lease income, and I doubt prices will fall much further.



Edit: However, that is just a bill (cue School House Rock skit). It's not law yet, and may never become so, although Barney Frank is one of the cosponsors, which makes the likelyhood of it at least leaving committee to be high.</blockquote>
More likely they will lease the property and it cost them way more in opportunity costs and depreciation as prices continue to fall.</blockquote>


In your opinion.</blockquote>


Ro,



Right now I think is widely accepted that area's like Irvine are not at rental parity.



So if a bank leases the house out for less then what they can get today if they were to sell it how is that a good move?



Now if we are talking about area's that home prices are at rental parity then it may make sense.
 
[quote author="trrenter" date=1253156728][quote author="RoLar_USC" date=1253155207][quote author="awgee" date=1253153999][quote author="Geotpf" date=1253143369][quote author="trrenter" date=1253141052]<a href="http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR2529:/">H.R.2529 To amend the Federal Deposit Insurance Act to authorize depository institutions and depository institution holding companies to lease foreclosed property held by such institutions and companies for up to 5 years, and for other purposes.</a></blockquote>


Maybe the banks will start to do this more, lease out properties instead of selling them, hoping prices will rise in a few years. Pretty smart plan, IMHO. They get the lease income, and I doubt prices will fall much further.



Edit: However, that is just a bill (cue School House Rock skit). It's not law yet, and may never become so, although Barney Frank is one of the cosponsors, which makes the likelyhood of it at least leaving committee to be high.</blockquote>
More likely they will lease the property and it cost them way more in opportunity costs and depreciation as prices continue to fall.</blockquote>


In your opinion.</blockquote>


Ro,



Right now I think is widely accepted that area's like Irvine are not at rental parity.



So if a bank leases the house out for less then what they can get today if they were to sell it how is that a good move?



Now if we are talking about area's that home prices are at rental parity then it may make sense.</blockquote>


Unless of course those banks are "banking" on rising real estate prices sufficient to offset the implied negative carry of current rental rates as well as the additional risk with holding an managing properties.



Let's be clear we are talking about Banks transforming their portfolios non-performing real estate loans into pseudo-REITS.



I smell a train wreck coming. I also sense a great deal of obfuscation coming in how the banks will value these "assets".
 
[quote author="trrenter" date=1253156728][quote author="RoLar_USC" date=1253155207][quote author="awgee" date=1253153999][quote author="Geotpf" date=1253143369][quote author="trrenter" date=1253141052]<a href="http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR2529:/">H.R.2529 To amend the Federal Deposit Insurance Act to authorize depository institutions and depository institution holding companies to lease foreclosed property held by such institutions and companies for up to 5 years, and for other purposes.</a></blockquote>


Maybe the banks will start to do this more, lease out properties instead of selling them, hoping prices will rise in a few years. Pretty smart plan, IMHO. They get the lease income, and I doubt prices will fall much further.



Edit: However, that is just a bill (cue School House Rock skit). It's not law yet, and may never become so, although Barney Frank is one of the cosponsors, which makes the likelyhood of it at least leaving committee to be high.</blockquote>
More likely they will lease the property and it cost them way more in opportunity costs and depreciation as prices continue to fall.</blockquote>


In your opinion.</blockquote>


Ro,



Right now I think is widely accepted that area's like Irvine are not at rental parity.



So if a bank leases the house out for less then what they can get today if they were to sell it how is that a good move?



Now if we are talking about area's that home prices are at rental parity then it may make sense.</blockquote>


Parity is closer than people here admit, and banks don't need to pay a mortgage. Most of the rent is pure return.
 
[quote author="NewportSkipper" date=1253158083][quote author="trrenter" date=1253156728][quote author="RoLar_USC" date=1253155207][quote author="awgee" date=1253153999][quote author="Geotpf" date=1253143369][quote author="trrenter" date=1253141052]<a href="http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR2529:/">H.R.2529 To amend the Federal Deposit Insurance Act to authorize depository institutions and depository institution holding companies to lease foreclosed property held by such institutions and companies for up to 5 years, and for other purposes.</a></blockquote>


Maybe the banks will start to do this more, lease out properties instead of selling them, hoping prices will rise in a few years. Pretty smart plan, IMHO. They get the lease income, and I doubt prices will fall much further.



Edit: However, that is just a bill (cue School House Rock skit). It's not law yet, and may never become so, although Barney Frank is one of the cosponsors, which makes the likelyhood of it at least leaving committee to be high.</blockquote>
More likely they will lease the property and it cost them way more in opportunity costs and depreciation as prices continue to fall.</blockquote>


In your opinion.</blockquote>


Ro,



Right now I think is widely accepted that area's like Irvine are not at rental parity.



So if a bank leases the house out for less then what they can get today if they were to sell it how is that a good move?



Now if we are talking about area's that home prices are at rental parity then it may make sense.</blockquote>


Parity is closer than people here admit, and banks don't need to pay a mortgage. Most of the rent is pure return.</blockquote>
Have you ever worked at a bank? There is a capital charge that is assigned to the loan amount on the property (cost of capital plus overhead). So it's not the pure profit that you think it is. Holding onto those non-performing eats up a lot of capital at the bank which they could use to make loans and generate loan fees.
 
[quote author="NewportSkipper" date=1253158083][quote author="trrenter" date=1253156728][quote author="RoLar_USC" date=1253155207][quote author="awgee" date=1253153999][quote author="Geotpf" date=1253143369][quote author="trrenter" date=1253141052]<a href="http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR2529:/">H.R.2529 To amend the Federal Deposit Insurance Act to authorize depository institutions and depository institution holding companies to lease foreclosed property held by such institutions and companies for up to 5 years, and for other purposes.</a></blockquote>


Maybe the banks will start to do this more, lease out properties instead of selling them, hoping prices will rise in a few years. Pretty smart plan, IMHO. They get the lease income, and I doubt prices will fall much further.



Edit: However, that is just a bill (cue School House Rock skit). It's not law yet, and may never become so, although Barney Frank is one of the cosponsors, which makes the likelyhood of it at least leaving committee to be high.</blockquote>
More likely they will lease the property and it cost them way more in opportunity costs and depreciation as prices continue to fall.</blockquote>


In your opinion.</blockquote>


Ro,



Right now I think is widely accepted that area's like Irvine are not at rental parity.



So if a bank leases the house out for less then what they can get today if they were to sell it how is that a good move?



Now if we are talking about area's that home prices are at rental parity then it may make sense.</blockquote>


Parity is closer than people here admit, and banks don't need to pay a mortgage. Most of the rent is pure return.</blockquote>


Banks have cash flow assumptions built into the carrying value of their mortgage holdings. As those cash flows decline so toodoes the valuation. Whether they "pay a mortgage" or not is immaterial. At risk of stating the obvious, such reductions in cash flow assumptions is absolutely NOT "pure return" and represents impairment of capital ratios (because of the decline in carrying value) and resultant impairment on future earnings potential.



Financial Accounting is clearly outside your realm of expertise. But thanks for playing!
 
[quote author="trrenter" date=1253156728][quote author="RoLar_USC" date=1253155207][quote author="awgee" date=1253153999][quote author="Geotpf" date=1253143369][quote author="trrenter" date=1253141052]<a href="http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR2529:/">H.R.2529 To amend the Federal Deposit Insurance Act to authorize depository institutions and depository institution holding companies to lease foreclosed property held by such institutions and companies for up to 5 years, and for other purposes.</a></blockquote>


Maybe the banks will start to do this more, lease out properties instead of selling them, hoping prices will rise in a few years. Pretty smart plan, IMHO. They get the lease income, and I doubt prices will fall much further.



Edit: However, that is just a bill (cue School House Rock skit). It's not law yet, and may never become so, although Barney Frank is one of the cosponsors, which makes the likelyhood of it at least leaving committee to be high.</blockquote>
More likely they will lease the property and it cost them way more in opportunity costs and depreciation as prices continue to fall.</blockquote>


In your opinion.</blockquote>


Ro,



Right now I think is widely accepted that area's like Irvine are not at rental parity.



So if a bank leases the house out for less then what they can get today if they were to sell it how is that a good move?



Now if we are talking about area's that home prices are at rental parity then it may make sense.</blockquote>


Assuming prices remain steady or increase, they haven't really lost anything in getting a few thousand dollars a month for a few years and then the full selling price, as opposed to just the selling price now. The bank doesn't have a mortgage payment; they own an REO free and clear. As long as their monthly expenses (taxes, HOA dues, repairs) are less than the rent they are getting in (almost certainly), they come out ahead (well, also factor in the time value of money, although with inflation and interest rates low that's not much).



The only way the banks lose is if prices are significantly lower when the lease is up than today (if they make a net profit of $30k for a one year lease and the price of the property drops by $20k, they are still ahead). I personally believe that prices in a year or two or three will be equal to or greater than prices today.
 
[quote author="Geotpf" date=1253158869][quote author="trrenter" date=1253156728][quote author="RoLar_USC" date=1253155207][quote author="awgee" date=1253153999][quote author="Geotpf" date=1253143369][quote author="trrenter" date=1253141052]<a href="http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR2529:/">H.R.2529 To amend the Federal Deposit Insurance Act to authorize depository institutions and depository institution holding companies to lease foreclosed property held by such institutions and companies for up to 5 years, and for other purposes.</a></blockquote>


Maybe the banks will start to do this more, lease out properties instead of selling them, hoping prices will rise in a few years. Pretty smart plan, IMHO. They get the lease income, and I doubt prices will fall much further.



Edit: However, that is just a bill (cue School House Rock skit). It's not law yet, and may never become so, although Barney Frank is one of the cosponsors, which makes the likelyhood of it at least leaving committee to be high.</blockquote>
More likely they will lease the property and it cost them way more in opportunity costs and depreciation as prices continue to fall.</blockquote>


In your opinion.</blockquote>


Ro,



Right now I think is widely accepted that area's like Irvine are not at rental parity.



So if a bank leases the house out for less then what they can get today if they were to sell it how is that a good move?



Now if we are talking about area's that home prices are at rental parity then it may make sense.</blockquote>


Assuming prices remain steady or increase, they haven't really lost anything in getting a few thousand dollars a month for a few years and then the full selling price, as opposed to just the selling price now. The bank doesn't have a mortgage payment; they own an REO free and clear. As long as their monthly expenses (taxes, HOA dues, repairs) are less than the rent they are getting in (almost certainly), they come out ahead (well, also factor in the time value of money, although with inflation and interest rates low that's not much).



The only way the banks lose is if prices are significantly lower when the lease is up than today (if they make a net profit of $30k for a one year lease and the price of the property drops by $20k, they are still ahead). I personally believe that prices in a year or two or three will be equal to or greater than prices today.</blockquote>


Please see comment above.
 
[quote author="USCTrojanCPA" date=1253158629][quote author="NewportSkipper" date=1253158083][quote author="trrenter" date=1253156728][quote author="RoLar_USC" date=1253155207][quote author="awgee" date=1253153999][quote author="Geotpf" date=1253143369][quote author="trrenter" date=1253141052]<a href="http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR2529:/">H.R.2529 To amend the Federal Deposit Insurance Act to authorize depository institutions and depository institution holding companies to lease foreclosed property held by such institutions and companies for up to 5 years, and for other purposes.</a></blockquote>


Maybe the banks will start to do this more, lease out properties instead of selling them, hoping prices will rise in a few years. Pretty smart plan, IMHO. They get the lease income, and I doubt prices will fall much further.



Edit: However, that is just a bill (cue School House Rock skit). It's not law yet, and may never become so, although Barney Frank is one of the cosponsors, which makes the likelyhood of it at least leaving committee to be high.</blockquote>
More likely they will lease the property and it cost them way more in opportunity costs and depreciation as prices continue to fall.</blockquote>


In your opinion.</blockquote>


Ro,



Right now I think is widely accepted that area's like Irvine are not at rental parity.



So if a bank leases the house out for less then what they can get today if they were to sell it how is that a good move?



Now if we are talking about area's that home prices are at rental parity then it may make sense.</blockquote>


Parity is closer than people here admit, and banks don't need to pay a mortgage. Most of the rent is pure return.</blockquote>
Have you ever worked at a bank? There is a capital charge that is assigned to the loan amount on the property (cost of capital plus overhead). So it's not the pure profit that you think it is. Holding onto those non-performing eats up a lot of capital at the bank which they could use to make loans and generate loan fees.</blockquote>


Which is a lot lower than a mortgage rate. And if these belong in bonds, then it's pure return versus a doody sandwich.
 
I don't know much about banking so maybe someone who does can explain this to me... Why would a bank be motivated to hold a proprty and rent it? Could they be brazen enough to gamble on RE appreciation at a time like this or are there some greater forces in play?
 
[quote author="David714" date=1253159782]I don't know much about banking so maybe someone who does can explain this to me... Why would a bank be motivated to hold a proprty and rent it? Could they be brazen enough to gamble on RE appreciation at a time like this or are there some greater forces in play?</blockquote>
They are just trying to kick the can down the road. And without going into all the accounting procedures, of which I understand very few myself, the idea that it does not cost the bank anything to just hold on to the property is simplistic and just plain stupid.
 
Does anyone know who these banks are that leasing these properties? I'd love it of they were a publicly traded bank too... perfect short opportunity with the capital ratio issues.



BTW, if there was a lease in place when the bank foreclosed on the place, then they have to honor the lease. In a sense, they become forced landlords. A tenant can refuse cash for keys, and the bank will be stuck honoring the lease.
 
[quote author="graphrix" date=1253161026]Does anyone know who these banks are that leasing these properties? I'd love it of they were a publicly traded bank too... perfect short opportunity with the capital ratio issues.



BTW, if there was a lease in place when the bank foreclosed on the place, then they have to honor the lease. In a sense, they become forced landlords. A tenant can refuse cash for keys, and the bank will be stuck honoring the lease.</blockquote>


I know nothing about leasing laws, but logically it seems like if the lease is made with the previous owner, the lease/contract ends when ownership ends. If there are any costs involved with the early cessation of the lease, it seems the responsible party would be liable for those costs.
 
[quote author="awgee" date=1253161660][quote author="graphrix" date=1253161026]Does anyone know who these banks are that leasing these properties? I'd love it of they were a publicly traded bank too... perfect short opportunity with the capital ratio issues.



BTW, if there was a lease in place when the bank foreclosed on the place, then they have to honor the lease. In a sense, they become forced landlords. A tenant can refuse cash for keys, and the bank will be stuck honoring the lease.</blockquote>


I know nothing about leasing laws, but logically it seems like if the lease is made with the previous owner, the lease/contract ends when ownership ends. If there are any costs involved with the early cessation of the lease, it seems the responsible party would be liable for those costs.</blockquote>


Awgee... oh awgee... you were too busy watching the chart on GOLD break $1000 to notice the law that was passed recently to protect all those poor renters affected by the foreclosures. If there is a legitimate lease in place, whether it is 9 months remaining on a 1 year lease, or 1 year and 9 months remaining on a two year lease, no matter who the new owner is after the trustee sale (bank or investor), has to honor the lease. The only way around it is use the "cash for keys" method, and still the tenant can refuse. Something to think about if you want to buy at the foreclosure auction. I'd cite my source, but I am going to go check out what got foreclosed on today instead.
 
It's basic real estate law that a lease survives a sale.
 
[quote author="NewportSkipper" date=1253162051]It's basic real estate law that a lease survives a sale.</blockquote>


Thats not true Skippy..



<a href="http://www.govtrack.us/congress/bill.xpd?bill=s111-896&tab=summary">http://www.govtrack.us/congress/bill.xpd?bill=s111-896&tab=summary</a>



If the party purchasing is for Private use. Your out in 90 days.

Income property. Duration of Lease.



Title VII - Protecting Tenants at Foreclosure Act

Protecting Tenants at Foreclosure Act of 2009 -

Section 702 -

Declares that, in the case of any foreclosure on a federally-related mortgage loan or on any dwelling or residential real property after the date of enactment of this Act, the immediate successor in interest in the property pursuant to the foreclosure shall assume such interest subject to: (1) provision by such successor of a notice to vacate to a bona fide (non-mortgagor) tenant at least 90 days before the effective date of such notice; and (2) specified rights of such tenant to occupy the property until the end of the remaining lease term.

Section 703

Allows the owner to terminate such a tenancy, however, effective on the date of the unit's transfer to the owner if the owner: (1) will occupy the unit as a primary residence; and (2) has given the tenant a notice to vacate at least 90 days before the effective date of such notice.
 
[quote author="NewportSkipper" date=1253162051]It's basic real estate law that a lease survives a sale.</blockquote>


You just got served by BLT. That has gotta hurt, especially after trying to go big league with your definitive statement on real estate law. Shall we add that to the list of things that are beyond your area of expertise?
 
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