Moving Mountains

With more people falling behind on mortgage payments, Hidalgo County’s banks have a lot of property to sell.

As of late June, local banks had repossessed close to $138 million in homes, empty lots and unfinished developments. Despite the resilience of the Rio Grande Valley’s economy, the total value of properties foreclosed on and now owned by the bank soared by 40 percent in 2009, according to filings with the Federal Financial Institutions Examination Council.

Called REOs — or real estate owned — in the industry, the majority of the properties are planned communities left unfinished when builders ran out of money, banks tightened lending and consumers stopped buying.

“There’s been a slowdown in the absorption of lots,” said Carlos Garza, president of Inter National Bank, which has close to $33 million in repossessed property. “It’s a big number but in comparison to our balance sheet, it’s small.”

Regulators are pressuring banks across the country to offload the surge of foreclosed properties, which often forces the banks to discount them below current market value. In the Valley, the number of properties seized is generally smaller than other harder hit areas of the country.

With the banks still in a relatively strong financial position, the effort to sell is measured and slow to ensure properties sell for close to their market value. This benefits both the overall real estate market and the bank, which is able to appease regulators, said Dennis Santiago, CEO of Torrance, Calif.-based Institutional Risk Analytics.

“If (banks) release it quickly they have to release it at a deep discount, which calls into question the valuation of everything else in their portfolio,” Santiago said. “If you have to revalue all those holdings, it changes the amount of capital that you have. (A regulator) then calls up and says, ‘You need to raise more capital.’”

For the overall real estate market that means that property values won’t be depressed by a glut of foreclosed and discounted homes, said Jim Gaines, a researcher with the Real Estate Center at Texas A&M University.

“It’s a piece of good news for the McAllen community and the overall real estate market,” he said. “Banks are able to release it in an orderly fashion and not all of sudden flood the market.”

For consumers, that means that repossessed homes in Hidalgo County, won’t be much cheaper than others on the market. However, buyers will find financing easier to obtain with REO properties, said Charles Marina, a McAllen-based Realtor.

“Banks are extremely eager to make a loan on them,” he said. “If you find one standout property, I think you’re going to find financing easier to obtain.”

But there are drawbacks to going REO, said Dick Henry, president of the McAllen Association of Realtors. For one, they’re not cheaper than other homes on the market and second they’re sold as is.

“One thing that most people don’t realize is that when you buy REO properties, you buy them as is,” Henry said. “They ain’t fixing nothing.”

Some banks, however, do some repairs on the homes before marketing them, especially because of the high number of mortgages in Hidalgo County that are insured by the Federal Housing Administration. If the home is in poor shape, FHA will likely not insure the mortgage, said Deborah Martin, a McAllen-based Realtor.

The number of properties repossessed has been increasing generally since June 2006 when banks had a little more than $10 million of properties on their books. In spring of 2008, the pace quickened as the recession began unfolding.

In the second quarter of 2008, the value of the properties seized rose by 220 percent.

Most of the homes had traditional and not subprime mortgages. Most of the subprime loans in Hidalgo County, which in 2007 represented 27 percent of all mortgages, were made by banks outside the Valley.

“As a group we weren’t prepared for the wave that hit,” said A. Jabier Rodriguez, president of Lone Star National Bank. “Lenders as a whole didn’t have programs (to help troubled borrowers stay in their homes). Now they exist.”

Sean Gaffney covers business, the economy and general assignments for The Monitor. He can be reached at (956) 683-4434.