As a foreign institutional investor, I am thinking about diversifying our portfolio in the U.S. by adding some residential foreclosures. Some opportunities that have been offered to us by a third-party agency look very attractive on paper, but we are concerned about potential risks. What are the pros and cons for foreign institutional investors to invest in foreclosures? How can we mitigate our risks?
Answers
Residential foreclosures are a very tricky area to invest and require a depth of understanding of the process, regulatory issues and foreclosure procedures, which can vary significantly state by state. First, there is a significant cost to foreclosure, as you need specialized legal counsel to pursue each case and you need to budget for that. The procedures in some states can be more cut and dry and in others more drawn out. The time periods to conclude a foreclosure can vary from 90 days, on the short end, to as long as two years in states like New York due to procedural differences and court calendar delays. In addition, for residential foreclosures, if the lender did not follow all of the regulatory requirements imposed by law in the making, servicing and foreclosure of the loan, exercising foreclosure remedies can take much longer and be fraught with all sorts of dangers for these regulatory breaches. You would not be in a position, as a successor to the lender, to defend that. There have been many regulatory problems with certain banks and other lenders not following the strict regulations that apply to residential mortgages to protect homeowners from predatory or aggressive lenders against homeowners.
The only way to mitigate against risk is to do your diligence. Learn about the neighborhood and pricing. Check the quality of the house. Are you relying on an agent to do this? Is the party responsible? Is the party qualified? Don't you want someone on your team to check personally?
If the asset is under foreclosure and auction, basically, you have to buy and then work the numbers. Therefore, in my opinion, to mitigate risk on foreclosed assets is not going to be easy.