All of the discussion about a new Resolution Trust Corporation (RTC) is extremely speculatory in nature since there is currently no legislation to support this notion. However, something in the model of a new RTC seems likely to happen since it’s a model with which the government is familiar and comfortable.
The key to watch for is the government’s guidelines for which assets (houses) they will take over, and the standards which the current lenders will need to meet in order to qualify.
There are three really big issues you should pay attention to:
- Property Valuation: How will the government assess the value of properties they take over? What safeguards will be involved to prevent appraisal fraud?
- Exchange Valuation: Related to but different than property value, exchange value will be the actual amount of money that lenders will receive from the government for their distressed properties.
- Buyer Restrictions: Who can buy these properties and what are the limitations?
For the record, I am opposed to the bailout program. Nevertheless, it’s prudent to prepare.
I have no idea how the government will go about establishing property value for all of the distressed properties. In all probability, properties will be sold to the government by the failed lenders as “packages” and not individually, but that does not negate the need to have a good grasp of the value of each property since virtually all of them are valued in the 6-digit range, and therefore financially significant on an individual basis.
One thing I know for sure: It is not safe to rely on the appraisers that have worked with the lenders who are being bailed out. Very little action has been taken against unscrupulous appraisers, even though they are as complicit in this problem as unscrupulous mortgage brokers. And let’s be clear: If a lender is responsible for their own property valuations, those valuations will in all probability be skewed highly in favor of the lenders, even if the lender’s properties are appraised by theoretically “independent” appraisers.
Bryan’s Suggestion: At the very least, the government must be responsible for establishing property values for itself, and appraisers who have been directly or indirectly involved with the lender who owns a specific property should be disallowed from being involved in appraisal for that property. This is merely a starting point, as there are few businesses with as much room for manipulation as the real estate appraisal business.
Once the value of a property is established as “X”, how much of that value will the government have to pay the lenders to take over those properties? For example: Will the government have to pay 90% of the value, or will they pay 40% of the value?
I hope that the government extracts a HUGE pound of flesh from the lenders. Frankly, these lenders are getting off easily and they need to suffer for their incredibly poor decision making. A great way to make that happen would be to make sure that the government pays only a small percentage of the value of the property so that the lenders still take a beating.
Serious, intense financial pain for the lenders is the only thing that will prevent this from happening again.
Bryan’s Suggestion: The government should pay no more than 60% of the value of the property, and maybe less for properties in very illiquid areas/circumstances. Additionally, the mortgage companies should not be able to completely push off their losses on mortgage insurers. At the very least, the mortgage companies must share the burden of their poor decisions.
The original RTC made it very difficult for small investors to get involved in the bidding/buying process after the first round of RTC transactions completed, and this is not reasonable. The goal here should be to facilitate the resale of these properties to U.S. citizens who need a place to live or provide housing to others, and any policy which slows that process – for either owner-occupied or investor-owned property – should be prevented.
Bryan’s Suggestion: At no time should any company who sells property to the RTC be allowed to be a buyer of any other RTC-owned property. It would be shameful for a mortgage company to sell off billions of dollars of real estate, only to be able to go back and repurchase other properties at favorable prices. Additionally, the bidding/buying procedures should be favorable to individuals and small investors at all times. After all, the problem we face is because of horrible government policy and terrible corporate management, not because of the activity of individual investors.
That’s enough for now. Your thoughts are welcomed here on FreeRealEstateTraining.com