Foreclosure Frenzy Dismays Aspiring Homeowners
It was early last year when Joby Morris, a 33-year-old floral designer in Pacifica, heard about the housing market’s crash. Soon she and her fiancé began dreaming of finally buying a home in the East Bay. But for 18 months, Ms. Morris watched helplessly as time and again, an investor with an all-cash offer and no intention of moving into the property swooped in and snapped up a house she was bidding on.
Michael Galloway, left, was among bidders on foreclosed homes during an auction at the Contra Costa County Courthouse.
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Go to the Bay Area Blog »Last year, she entered a bidding war for a home at 2208 41st Avenue in Oakland. It was listed at $149,000; she bid until the price topped $180,000, her real estate agent said. The winning bid was $265,000.
Last month, after the same thing happened a sixth time, Ms. Morris gave up.
“The idea of ownership was a falsehood,” said Ms. Morris, who was planning to finance the purchase with a loan guaranteed by the Federal Housing Administration. “It’s not going to happen.”
Ms. Morris and her fiancé, Justin Womack, with a combined income of more than $100,000, are among hundreds of qualified, aspiring homeowners in the Bay Area baffled and frustrated by the difficulties they face, local Realtors say. As Ms. Morris’s Oakland-based real estate agent, Charles Wright, said, “Everyday homeowner occupants are having a serious problem finding anything because there’s such a frenzy out there.”
“It’s happening in Oakland, the East Bay, Alameda County,” Mr. Wright added. At least four of his clients recently bid on homes, only to be outbid by investors.
There are, of course, winners as well as losers in the phenomenon. For existing homeowners, rising prices are not something to mourn. But it is frustrating for someone like Ms. Morris, who is qualified to buy most foreclosed homes at the offering prices.
The phenomenon is familiar to anyone who has watched a market swoon: vulture investing. Private investors have pooled cash and are buying foreclosed homes by the dozens in the Bay Area.
Despite the negative association with carrion-eating birds, some economists argue that opportunistic investing in depressed markets helps the economy by setting a floor price for devalued assets.
“What would it look like if you didn’t have these investors?” asked James A. Angel, a business professor at Georgetown University. “The banks would be stuck holding properties. The losses to the banking system would be so much more if you didn’t have vultures.”
Sometimes, Mr. Angel added, “investors are helping reduce losses in the banking sector, and that means less stress on the taxpayer to support it.”
In the process, Joby Morris and others like her are priced out of a market they otherwise could have afforded.
Barry Zigas, director of housing policy for Consumer Federation of America, said that as a consequence of the investment flurry, “we’ve seen over and over again a common outcome is investors acquire these properties, put minimal repairs in them and rent them out.”
“There’s been a longstanding history of advocacy to try to get there to be a priority to sell to owner occupants,” Mr. Zigas said, “but it’s a really tough policy to get enacted when financial institutions in our society are faced with trying to recover as much money as they can and move on.”
In Washington, lawmakers like Representative Barney Frank, Democrat of Massachusetts, are trying to give potential buyers more buying power by getting the Federal Housing Administration to guarantee larger loans with lower down payments in expensive markets like the Bay Area.
But a buyer with financing of any sort is still at a disadvantage when competing with an all-cash offer.
To the same end, Fannie Mae, the government-created agency that buys pools of home loans, announced three weeks ago that when it put a foreclosed property on the market, it would consider offers only from “owner occupants and buyers using public funds” for the first 15 days. Offers from investors will be considered only afterward.
Jon Freeman, the chief executive of Stonecrest Financial, an investment firm based in San Jose, would not want to wait. He keeps a laser focus on getting foreclosed properties into the company’s asset portfolio.
“There are huge opportunities out there for those who have cash and guts and foresight,” Mr. Freeman said.
Using the industry term for properties that banks acquire through foreclosures, he said, “Bulk R.E.O.’s — that’s the new buzzword right now.”
Last year, Mr. Freeman said, Bank of America sold him a package of 150 foreclosed homes scattered in low-income areas. He ticked off a few neighborhoods: “A lot in Richmond, Antioch, Oakland, some in San Jose.”
In the recorder-clerk’s office in Martinez, the Contra Costa County seat, Stonecrest Financial’s funds are listed as buyers alongside smaller investors, like Mancheno Enterprises of Orinda.
As of November, there were about 7,000 foreclosed properties of record — and an unknown additional amount in undisclosed bank inventories, according to Matthew Anderson, a partner at Foresight Analytics. Stonecrest Financial, with an estimated $25 million in real estate assets at any given time, is one of the country’s midsized players, which incessantly prod banks for new deals valued between $10 million and $20 million — be it a package of 50 homes in the East Bay or 500 scattered throughout the Rust Belt.
In markets like the Bay Area, the supply of foreclosed homes both for investors like Mr. Freeman and for ordinary buyers like Ms. Morris has been artificially suppressed by the banks that own them. In the months following the financial crisis, as federal bailout money relieved the urgent need for banks to liquidate their assets, lenders and government entities like Fannie Mae and the Federal Deposit Insurance Corporation curtailed sales to raise prices and avoid recording losses on the properties.
Kerry Vandell, director of the Center for Real Estate at the University of California, Irvine, Paul Merage School of Business, said these investors often turned the homes into rental units for short-term gains before looking to sell them at a handsome profit within three to five years. These proliferating operations, big and small, and a low supply of available homes — a counterintuitive consequence of the federal bailout of some banks — combine to put pressure on many first-time home buyers.
With homes falling into the portfolios of investors instead of the hands of potential occupants, Professor Vandell said, communities are subtly scarred.
“I get calls from concerned communities about this all the time,” he said. “You’re going to have speculators there who will tend to walk away from the property or milk the property and not put any investment capital into it.”
And, Professor Vandell added, “the communities are afraid they’ll rent to households of considerably lower income.”
Some investors, like Joshua Host, chief executive of Stone Equity Group, which is based in Southern California, argued that their work had “a social component.”
When he makes package deals, paying $2 million to $5 million for 50 to 300 homes, Mr. Host said, “it’s not just a matter of buying these packages of foreclosures without improving them — we’re not just playing a paper game.”
If buyers often unwittingly play the role of the demure ingénue in the market, their competitors thrive in a fast-talking world of high-stakes deal making and snap judgments made at local auctions in places like Martinez. The newer East Bay suburbs in Contra Costa and Solano Counties sustained extensive foreclosures. On Friday, despite rain, investors gathered on the steps of the county courthouse in Martinez at 10 a.m. to bid.
The tight supply has created a secondary industry of middlemen. Brokers interviewed last week said some of these promised access to property packages — whether or not they had such access.
You wouldn’t believe the number of guys running around telling me, ‘My cousin or my cousin’s cousin knows someone at the F.D.I.C.,’ ” said Leonard McKines of J.P.L. Investments, a group based in Fremont that is raising $100 million to buy bulk foreclosures. “This is the wild, wild West.”
Too wild for Ms. Morris and Mr. Womack.
“We’ve been renting for 13 years, and we’re getting married next month,” she said last week. “I’m from Connecticut, Justin’s from Texas. But this is where we want to make our home. The next logical step having been paying for so long would’ve been to own something. It’s not going to happen.“It’s all been a waste of time and a waste of money.”
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