Real Estate Auctions Become Critical During Extraordinary Circumstances in Housing Market

In case you haven’t read the papers, the housing industry is in a crisis.

The Government stepped in and took drastic action over the weekend, which is supposed to inspire a market turnaround http://www.azcentral.com/arizonarepublic/news/articles/2008/09/09/20080909biz-mortgages0909.html.

Apparently, the idea that everyone should be able to afford to own their own home is no longer part of the American dream … at least for many currently holding long term mortgages that are facing imminent foreclosure. And in the meantime, it’s causing a real pickle in the banking industry http://money.cnn.com/2008/09/07/news/companies/fannie_freddie_aftershocks/index.htm.

This harkens back to the late 70s, early 80s after the Savings & Loan industry collapsed, when it became apparent that holding portfolios of long term mortgages was incredibly risky. The value of mortgages with 30 year terms without government backing were vulnerable to interest rate increases. During this time, sellers heavily relied upon real estate auctions to help them find buyers for their properties.

To avoid a similar crisis, the government created Freddie Mac and Fannie Mae to hold the mortgages and create liquidity. This enabled the longest and greatest housing boom in history, and made the American dream come true for so many where otherwise this would have been out of reach. For an excellent summary on the mortgage industry click here: http://topics.nytimes.com/top/reference/timestopics/subjects/m/mortgages/index.html

Now, it seems that there is an inability or unwillingness to support the liquidity.

The news today is that big firms are looking to offload the mortgages into separate corporations in effort to get their balance sheets in a healthier state. Lehman is making the most noise in this arena, click here to read more: http://www.nytimes.com/2008/09/11/business/11lehman.html?_r=1&hp=&adxnnl=1&oref=slogin&adxnnlx=1221062427-esV5n/LUnuQvwqhqjUGKyA. Smaller banks, however, will have limited options for similar action and won’t be able to absorb the risk. Private investors are not interested in adopting the burden, either.

The impact in the real estate auction market is on the sell side. This reduction in liquidity makes it harder to sell properties and there are a reduced number of buyers who can obtain financing. The fewer options each side has, the more they will consider unconventional methods of real estate disposition, such as real estate auctions.

Attorney Wallace J. Wolff, Chief Operating Officer of Sheldon Good & Company, has over 25 years of experience in dealing with real estate as the head of several bank trust and wealth management departments. Prior to joining Sheldon Good & Company, Mr. Wolff managed the trust department for a 50+ branch, $2.5 billion Chicago area bank for 22 years. Mr. Wolff also served as a bank director for many years.