This story originally appeared in the July edition of DS News.
Jesse Roth joined Auction.com in 2012 as the SVP of Business Development and Client Management, where he oversees the business development and strategic initiatives of Auction.com’s national real estate disposition business.
Roth’s leadership has helped build Auction.com into the nation’s leading real estate marketplace, with more than 200,000 residential and commercial sales and $46 billion in transactions. Under his leadership, Auction.com’s client base increased by over 200% and asset volume increased by over 270%. Before joining Auction.com, Roth held senior management positions in portfolio management, capital markets, and servicing roles with mortgage industry leaders Citigroup, Fannie Mae, and GMAC.
What are some of the key challenges you’re seeing in getting properties turned around quickly and back into the hands of owner occupants?
Most of the properties that have gone through defaults here in the recent past, and that we’d expect to go through default once claims increase, are not suited for owner-occupants. What we have found is that, either our clients, if they take the property back in as an REO property or a local investor acquires the property at the foreclosure sale, as a third-party buyer. Both entities are attempting to solve that problem, and they just have different approaches. The REO department at most clients is looking at it, saying, “How do I best flip this property to an owner-occupant?”
But they’re generally doing it from a consolidated location, managing properties all over the country. Whereas, this local, third-party investor that bought them at the foreclosure sale knows much more about the neighborhood, about what needs happen to that property to get it back into the hands of the housing stock faster. We’ve actually seen by going back and looking at data that one year after the foreclosure sale, almost 60% of properties that sell with third-party foreclosure are now owner-occupied versus only 40% of properties that revert to the lender.
What factors are in play in the distressed market?
There are a couple of issues driving this. Number one is, just over the last year, we’ve been making significant investments, not only spending on marketing to drive more people to our online platform, but also in getting better at how we prioritize those assets and being more surgical in our marketing approach. We’ve also seen that, with the lack of supply, that has pushed people that traditionally wouldn’t only buy foreclosure sales.
They’ve shifted to the online environment just because that’s where we do have available inventory for them. The last piece is that many investors over the last few years have pulled out and sat on the sidelines. “Okay, it’s getting a little too hot here, a little too frothy in terms of property values. I’m going to sit on the sidelines and wait for the next downturn to start.” We’ve seen a lot of buyers say, “You know what? We think the next downturn is starting now, so I’m going to start looking at making some investments again.”
Do you think we’re going to see more and more of the focus on the online auction side of things?
I do. We’ve known for a very long time that 90% of home buyers start their home search online anyway. This institution that we have of forcing everyone into an offline transaction is antiquated in its approach. Being able to make an offer on a property digitally is just the next evolution of how real estate is going to be bought and sold in this country. You’ve seen it in other areas. For example, in Australia, 90% of homes are sold via an auction format. Even if it’s not purely an auction format, the ability to know what’s available for sale in a consolidated format, request to see a property, go through a tour or inspections virtually, and place offers seems like the next road in development for U.S. real estate.
Are you seeing impacts with regard to the foreclosure moratoriums that have been put into place?
Yeah, absolutely. What we’re seeing is the creation of a backlog. Putting a short-term moratorium in place while servicers and borrowers and governments all get their hands around what’s going on makes total sense. We just need to say, “Hey, we just need to take a pause here and let the dust settle and figure out what we’ve got going on.” The problem is that, the way they went about this moratorium, you’ve got a backlog of properties that were severely, severely delinquent. There could be instances in New York, for example, where it had been scheduled, has been going through foreclosure for the last three years. Now they were very close to coming out and having a foreclosure sale and resolving that neighborhood blight that happens from that kind of abandoned properties or dilapidated properties.
That’s just now being put on the sidelines. It really is creating a drag on those neighborhoods and ultimately drag on home prices around those properties. The other concern is around what the restart process looks like. Because they were so prescriptive and this moratorium’s about not initiating foreclosure, not advancing foreclosure, and not conducting foreclosures or evictions, it stopped everything in its tracks. Once these moratoriums are over, it’s going to be a lot of work to figure out, “What steps need to be started over? How long will the restart process take to get things back to normal?”
Are there any other surprises you’ve seen?
Honestly, the most surprising thing is just the sheer volume of borrowers that have raised their hands to ask for a forbearance plan. Truly it’s unprecedented. Even through the Great Recession, we didn’t have this forbearance option, and normally these forbearance plans are used around a natural disaster. You go through for a short period of time and say, “Okay, we’re going to give you some payment relief while we figure out what’s going on.” To see this happen on a global scale, particularly with the sheer number of borrowers, it’s mind-boggling to think about what’s going to happen with the work that servicers are going to have to do at the end of these, to convert these into some type of extension model.
Are you forecasting any changes to foreclosure price appreciation trends?
That’s the big question that everybody wants to know, and I think it will determine how quickly the moratoriums end, the forbearance is resolved, and if we see a wave of defaults, like we would expect just given the sheer number of unemployment claims and the rise in delinquencies. You’re certainly going to see pockets within the U.S. mortgage market around different product types. The bank-owned products and the GSE product are relatively stable, very high credit quality borrowers that were put into those programs with good equity positions. But in the FHA and private-label securities portfolios, you’re already seeing rises and delinquencies and a big part of the reason why we have seen prices rise right now is because of the lack of supply. When the supply flips over and exceeds the demand, you could potentially see a decline in home prices. Do you see an education gap in municipalities when it comes to zombie properties? I do. These nonprofits, these municipalities, they all look at it and say, “Look, foreclosures are bad. We shouldn’t do that.” Certainly in case of stay-at-home orders in this national practice, you don’t want to be kicking people out of their houses. But having these properties sit there empty doesn’t work for anybody. There’s this perception that local investors are just bad. What we’ve found is that the local investors are just better at getting the homes back into the housing stock than REO departments usually are. When you look at the before and after photos, what a property looked like when it’s sold to an investor at the foreclosure sale and what it looks like when they resold it six months later, versus what a property looks like when reverted to the lender and then was sold as an REO. They are night-and-day differences where you’re like, these two are not even like properties anymore. Just to the level of investment and renovation that are done on the properties that are sold to a third party, but then go through, and they make it that property that somebody, a first-time homeowner, a homebuyer wants to purchase because it’s turnkey ready.
How do you make sure that everything is communicated to all the people that it needs to be?
We work hard to stay in contact with the experts here. We’re talking to the foreclosure attorneys in each state, we’re talking to the servicers that are on the front lines, talking to borrowers. We’re talking to the GSEs, we’re talking to FHFA, we’re talking to HUD, just trying to understand what they are seeing. What are they hearing? What are they thinking? What are they trying to address? Then, we serve as this information conduit to where we can say, “Here’s what we’re hearing from everyone else.” We try to fill that advisor role, because all of the issues around the moratoriums and the forbearance, we’re not the ones having to actually administer them. We just happen to have a bird’s eye view of what’s going on and are able to help connect people that have heads down and all the information flying at them, so they can’t really pick up their head and see the forest for the trees.