Foreclosure Bottlenecks

Unclogging the Foreclosure Market
. . . on the Cheap

Want to fix the economy? First you have to address its Achilles' Heel, the weak national housing market. In turn, that means addressing housing's Achilles' Heel, the burgeoning number of foreclosures.

Instead of throwing tens of billions at former investment banks, Washington would do well to enlist -- for a fraction of the cost -- an entity that's much better situated to directly help the housing market. That's because it conveniently already has thousands of local housing experts strategically located in dozens of the hardest-hit U.S. markets.

Who's that? The National Association of Realtors, and, at least at the moment, its distinctly underemployed one-million plus members.

View from the Trenches

It's no secret among realtors working with "lender-mediated properties" (foreclosures and short sales) that bank response times are terrible. Weeks can go by without hearing anything, by which time any serious Buyer has likely lost patience and moved on.

No wonder so many distressed properties are languishing on the market.

However, clearly another aggravating factor in the dysfunctional, molasses-like foreclosure market is the overloaded listing agents representing such properties -- and the cut-rate commissions the banks are offering them (hmm . . . maybe there's a connection??).

It's not unusual today to find one realtor representing dozens of foreclosed properties. Indeed, a few minutes searching on MLS popped up at least four Twin Cities agents whose current listing inventory approaches or exceeds 100 foreclosed properties.

To put that in perspective, the average realtor closes anywhere from 8-12 "transaction sides" a year. Assuming those are evenly split between sales (representing Buyers) and listings (representing Sellers), that translates into 4 to 6 listings annually. Factoring in average market time, you'd guesstimate that at any given time, the average realtor has 1-3 active listings.

Nobody Home . . in Every Sense

So what happens when a realtor has ten -- or one hundred -- times that number of active listings? Not surprisingly . . very little.

Calls and emails from Buyer's agents get returned slowly, if at all. There's little or no information available about the home, either online or in the home -- never mind fancy color photos or any other marketing materials. You can also forget about Seller disclosures, municipal inspections, or any of the myriad other "trappings" of a listing not in foreclosure.

Even such basics as a functioning lockbox on the front door, to permit access, aren't a given (any idea how much 100 decent lockboxes cost??).

Such are the hallmarks of a low fee, high volume business -- which is exactly what brokering foreclosure sales is.

Real Estate "Combat Pay"

Instead of around 3% per listing, it's typical for foreclosure agents to get paid half of that, if not just a flat fee. Factor in the asking price of many foreclosures -- often under $100k -- and the listing agent's take may come to as little as $500 per house after subtracting their expenses and the listing broker's cut. That's not much for the real estate equivalent of combat pay.

Industry-wide, realtors are suffering from a triple whammy of shrinking volume, dropping prices, and shrinking margins. Bottom line: realtor commissions have dropped from almost $100 billion in 2005 to about half that this year.

That $50 billion pie is split amongst 1.2 million realtors. To put that in perspective, the top 25 hedge-fund managers earned $16 billion in 2007. The top-ranked manager, John Paulson, personally made $3.7 billion. How? . . . . drum roll, please . . . by essentially shorting the housing market.

Cheap Solution(s)

The foregoing suggests that, instead of throwing mega-billions at Wall Street, policy makers who want to stabilize housing could get a lot more bang for their buck doing something about the anemic commissions associated with foreclosures.

For a measly $5 billion -- half of what Goldman Sachs just got, or what AIG is getting weekly -- Washington could dangle a $5k carrot in front of every realtor selling a property in foreclosure. In turn, that money would ensure that realtors selling foreclosures can do their jobs properly. In other words, serve as liaisons to the bank-owners; attract and convert surprisingly strong Buyer interest in foreclosures into offers and closed deals; and otherwise make sure that someone competent is "minding the store" (the banks themselves clearly aren't).

Meanwhile, local governments could also help clear the foreclosure market by not heaping fees on foreclosed homes to recoup their increased expenses.

It's one thing to hike fees 10% or 20% -- but double or triple smacks of opportunism (and frankly, idiocy, given the consequences -- the fees usually become a lien against the property, which has the same effect as a tax. Aren't we trying to stimulate sales right now??).

Finally, the banks themselves may want to reconsider the wisdom of paying realtors as little as possible to urgently attend to what should be their highest priority. Perhaps a certain large new, taxpayer-supported shareholder can help in that regard.

Oh . . and banks with lots of foreclosures on their books may also want to re-think whether a local realtor who's currently sitting on 156 unsold properties (no, that's not a typo) should really be hired to list number 157.