Hundreds of houses went on the auction block across the country last month and thousands more were sold individually by private lenders and federal agencies as near-record numbers of Americans continued to lose their homes through foreclosures.
Dozens more auctions are scheduled in coming months as the Veterans Administration, the Department of Housing and Urban Development and private lenders press to sell the properties quickly, hoping to cut their losses as much as possible. The cost of acquiring and maintaining the properties runs into billions of dollars annually.
Nearly 175,000 foreclosed homes were in the inventories of the VA, HUD and two large secondary mortgage corporations at the end of January, spokesmen estimated. Institutions insured by the Federal Savings and Loan Insurance Corp. hold about $5 billion worth of foreclosed residential property, according to Federal Home Loan Bank Board figures. The insurance agency itself holds $330 million in property acquired from failed thrift institutions, a spokesman said. Agencies and lenders estimate their losses range as high as 30 percent of their investments.
The foreclosures remain at high levels while declining interest rates are boosting housing sales in many parts of the nation. Despite the booming real estate market, however, there is little sign of a slowdown in mortgage defaults. HUD could accumulate more than 40,000 foreclosed properties this year, according to James C. Nistler, the agency's deputy assistant secretary for single-family housing.
Foreclosures peaked in early 1985, then flattened out, "but unfortunately, they are not going down," said Richard H. Daniel, senior vice president for regional activities with the Federal National Mortgage Association. Increasing defaults in states hurt by falling energy prices are offsetting any decline in foreclosures rooted in the inflationary ups and downs of the early 1980s, he said.
"There is a lot of concern about the price of oil," Daniel said. Economic conditions "are not going to get better, and they could get worse in the energy states," particularly Texas, where unemployment is inching upward. Fannie Mae, a federally chartered corporation, buys mortgages from lenders and sells them, or securities backed by them, on the secondary market as a way to provide cash for new loans.
Houston, with an economy heavily dependent on the oil industry, has one of the country's highest foreclosure rates. A major auction of several hundred houses was held there during each week of February, and more are planned. Overbuilt markets have contributed to the high number of foreclosures throughout the Sun Belt, and the declining fortunes of farmers and heavy industry have boosted foreclosures in the Midwest, according to a report by the Federal Home Loan Mortgage Corp., also a secondary mortgage market company.
Federal agencies and lenders are increasing their efforts to interest consumers in foreclosed houses. Some are hiring professional managers or beefing up their own staffs, and Fannie Mae is preparing a brochure on how to buy a foreclosed home.
Foreclosed properties may be bargains for home buyers and investors, but prospective purchasers should be cautious, according to Benny L. Kass, a D.C. real estate consumer attorney.
"You have to ask, if this house is such a good property, why did the owner let it go to foreclosure?" Kass said. In addition, "People ought to realize that just because the government VA or FHA is selling a house to you, it doesn't mean it's in good shape." Usually, a homeowner facing foreclosure will "strip out everything he can" from a house.
Kass advises prospective purchasers to do a "lot of homework" on property values in the neighborhood, whether values are going up, what the rental market is like, and to inspect the property carefully, preferably with professional assistance. The VA and HUD's Federal Housing Administration, which insure home loans, acquire the properties after paying claims to lenders when homeowners default on their mortgages. The agencies and lenders try to recover as much of their costs as possible through sale of the foreclosed properties, but lose millions in high carrying costs, low sales prices and other expenses, they said.
HUD, for example, estimates that its average loss per house is $17,800, of which $12,450 "is due to expenses in acquiring, holding and selling the property," said Janet Hale, then general deputy assistant secretary for housing, in testimony before a House subcommittee last December.
The department acquired about 38,000 houses through foreclosure in fiscal year 1985, which ended last Sept. 30, sold about the same number and ended the year with another 16,700 properties still on hand, a HUD spokesman said. At the end of January, HUD's inventory had risen to 19,000 homes. In fiscal 1984, HUD took in 33,000 houses and sold 38,000.
At the end of January, the VA owned 18,783 properties and was in the process of acquiring another 14,809, according to R. J. Vogel, the VA's chief benefits director. In March 1984, the agency's inventory reached its high point -- 22,316 properties, said Vogel, who also testified before a House subcommittee last week. The agency sold 28,500 foreclosed properties in fiscal 1985. Vogel said the VA's present inventory is valued at about $787 million, and a spokesman said HUD's inventory is worth about $627.5 million.
By the middle of last year, savings and loan companies insured by FSLIC owned or were in the process of foreclosing on $7.7 billion worth of property, three-quarters of it residential, according to Federal Home Loan Bank Board figures.
Freddie Mac owned more than 3,400 foreclosed homes at the end of 1985, and Fannie Mae, which holds more loans in its portfolio, reported 7,700 homes in its inventory.
Mortgage bankers also have reported increases in foreclosures as well as increased losses over the past year as private insurance companies and the VA simply paid claims rather than buying the property in foreclosures, according to Glenn Corso, a Mortgage Bankers Association official.
Under a law passed in 1984, the VA uses a formula taking into account more of the costs associated with acquiring property than in the past. As a result, the agency is paying off claims, leaving the lenders with the property in 15 percent of foreclosures, three times higher than the rate in previous years, Corso said. Bankers lose betweeen $15,000 and $20,000 per property when the VA pays the insurance claim, compared with about $2,000 when the agency acquires the property, he added.
Normally, the private lenders and federal insurers sell their foreclosed properties through real estate brokers, but as the number of properties and the cost of maintaining them have grown, the lenders and agencies have turned more often to auctions.
Fannie Mae scheduled about a dozen auctions in the first five months of this year, and the VA has planned seven auctions in the Midwest and Southwest for the remainder of 1986. HUD has held five auctions since the beginning of the fiscal year last Oct. 1 and plans another five or six, a spokesman said.
The increasing use of auctions has sparked protests from the National Association of Realtors, whose members earn the industry's standard commissions of 5 or 6 percent for selling individual properties, but receive nothing for auctions. Auctions depress prices, strain availability of mortgage funds and bring in less for the VA and FHA, an article in the association's newspaper said last fall.
The association hopes to counter the use of auctions with a marketing plan its members will test in seven areas, including Washington, where the VA has large numbers of foreclosed property.