Why Making Investors Wait 15 Days to Buy a Repo Won’t Work

Westcoe Realtors, Riverside California…There was a lot of press given this past week to a proposal in Congress that, if passed, would make investors trying to purchase a bank repossession wait 15 days before they could make an offer. 

The theory here is that too many first time buyers or people who want to live in the home are being aced out of their offers because the investor can purchase with “all cash” while the “regular” buyer needs to get a loan…and since a new loan comes with more potential problems for the bank/seller (qualifying, appraisal issues, repair issues, etc.), the bank/seller accepts the investor offer over any other offer that is not all cash.  As a result, regular buyers don’t really have a chance to purchase these homes.

SO…since Congress is here to protect us all from  the evils that exist in our world (yes, in this case, note the sarcasm), someone got the bright idea to suggest and hopefully pass legislation that will give the regular buyers a 15 day head start before an investor can make an offer…thereby letting the buyer get first crack at the repo, and preserving truth, justice, and the American way (a phrase familiar to old Superman watchers).

There is just one problem with all this…it probably won’t work.

Why?  Because banks are about profits (or limiting losses in the case of a bank that has to foreclose on a property), politicians are about sound bites and good intentions (in that order seemingly), and just as water will find a way through almost any surface, so will a banker who wants to make money.

In this case fo this proposed legislation, the politicians can trumpet to whomever will listen that they have the backs of the regular buyers in their war against the evil, profiteering banks…and everyone will feel better…and then the politicians will move on to next weeks topic of good vs. evil. 

However, in my opinion, based upon 30+ years in this business watching both banks and well intentioned politicians, here is what will really happen.  History tells me that banks will put their repos on the market for sale, and simply wait 20 days to receive all offers, and then pick the best one from all those offers that stacked-up in the 20 days…and nothing will change since the banks will still continue to pick the all cash offers from the investors.  Simple as that.  Think I am being negative?

In 2009, the California legislature passed a new law that was supposed to protect the consumer from having to use the escrow companies that were being forced down their throats by the same banks.   All too often, the foreclosing bank forced the buyer (and agents) to use an overworked escrow company generally far away because the bank had a sweatheart deal for the fees these escrow companies charged.  The service stunk, huge delays were the norm, and no one was happy except the banks, for they paid far less for the escrow service than normal. 

So…the California legislature passed a law to “protect it’s citizens” from the evil banks (sound familiar) by making the choice of the escrow company completely up to the buyer, and not the seller.  Political sound bites followed, chests pumped out, and another dragon was slayed on behalf of buyers statewide.

The problem…the banks simply said that if the buyer insisted on using the escrow company of their choice, then the bank/seller would not pay for the title insurance (by custom, the seller pays the bulk of the title fees, not by law), AND…the bank would also not pay any additional costs the buyer may be asking for that would enable them to purchase the home.  In essence, the buyer insisting on using his or her escrow company would cost them hundreds to thousands of dollars for that privilege. 

The net result…nothing changed.  The buyers did not want to pay the additional money for the right to use a local escrow company, nor did they want to rock the boat…and the banks still got to use the escrow company of their choice at the same reduced rates that existed before the legislation passed.  And the politicians who meant so well?  They have moved on to other areas of consumer protection and future sound bites for the local news.  Everyone is obeying the new law, and nothing changed.

Cynical…perhaps…but also realistic.  Understand, I am not a proponent of what I have just described here.  In fact, we still hate using the escrow companies forced upon us by the banks, and we truly wish that the regular buyers who are getting beat out of their home purchases could indeed get the homes they desire.  It’s just that legislation is not the answer, because the banks will always find a way around any new law that is passed (see tarp money, huge bonuses, bailouts, etc.)

So…what is the answer?

Well, if you asked this person in the trenches…if the government wants to really help, then force the banks to put the thousands of repossessions they are now hoarding up for sale on the market.  This would greatly increase the supply of homes, bring down the multiple offer bidding, and leave plenty to go around for both the regular buyers and the investors.   There is enough for everybody if the banks would just stop stockpiling their foreclosures (see previous blogs on why banks are sitting on their inventory). 

Simple, and good for everyone.  However, until the government forces the banks to sell what they have, the banks will continue to find ways around almost any type of legislation.  I wish it weren’t true, but the realist in me (coupled with experience) tells me otherwise.  We’ll see.

In the meantime, take care, and thanks for reading.