We have received many enquiries asking where information can be obtained on foreclosure properties being put up by banks for sale. All of these enquiries originate from NRIs or their relatives here.
In the US, buyers have defaulted and continues to default on home loan repayments. Few consecutive defaults sets in foreclosure action and there are specific legal provisions in different states, how the matter is to be dealt with. Its not a very quick process but can spread over 9 months to year or more, after a default is confirmed.
In India the boom started in 2005 and ended in early 2007. In 2007 itself, prices had jumped and buying had fallen to miniscule levels. 2008 was an year when almost nothing got sold. In effect not many people have really bought high priced apartments or villas. The sales in 2007 (after prices jumped) and 2008 have been sporadic and mostly, purchases were by buyers who had the resources and bought to stay.
If we take Hyderabad, there has not been any investors around for buying flats for last 1.5 to 2 years. People who bought at cheap earlier prices, are never going to default. Even with correction, market rates are still much higher than their "bought rates."
People who bought in 2007-2008 are resourceful, had their numbers ready and that is why they bought. Except few cases, do not expect anyone to default. Such few cases will have NO market impact since these will never be known widely. For the market to react and participate there has to be a critical mass of defaults, which is not at all possible
.0 Individual Loan Default
Buying of a property by an Indian is usually a "family affair". Even nuclear families fall back on parents / in laws / uncles for support, while booking a property. There is unwritten commitment from several people, behind each purchase.
If someone is stressed, family will standby. You will find pre-payments happening now, to reduce EMI. In fact banks have been reporting increased prepayments and rescheduling of loan by increasing repayment period and reducing EMI. No bank has reported foreclosures of individual accounts due to default, even though economy has been under severe stress for more than 7 months now. (There are only unsubstantiated loose talk fed by news from US)
In India, each housing loan is Guaranteed by someone known to the borrower. Once a borrower defaults and default is persistent, the bank will immediately sound out the Guarantor. The Guarantor is legally bound to pay EMI and settle any outstanding, if borrower defaults. Making Guarantor pay is considered a taboo, in India. Something that is to be absolutely avoided. And this fact also ensures that immediate family steps in to ease the burden. ( As far as we know such Guarantor provision does not exist in US Home Mortgage Agreements)
And even if someone is unfortunate not to have family support and lands up in big mess, usually banks will give interest free breaks, reschedule loan etc. If nothing works, (it may take couple of years to reach a stage of "nothing works"), the legal process starts which again is very laborious. Banks have to issue legal notices, get court orders etc before it can attach property. Even after attaching, selling-off is not easy. Again, court will be involved. With the way Indian legal system works, banks can not shake off the properties quickly at all.
So basically except sporadic incidents, never expect enough properties to come into market, at all, from individual home owners. Obviously, people in India chucking their homes and running away, is just a dream that many in US may have. Its not going to happen here at all.
3.0 Default by Builders
Now..this is a possibility which can not be ruled out. The reason is the fact that unlike individuals who get cocooned by family circle, companies have no love lost between them. If a business fails, its not practical for families to support since the default amounts are HUGE running into several crores. But does this help the eagerly awaiting so called "foreclosure buyer?"! Lets examine.
Logically, there is possibility that builders who are unable to sell and hence are unable to meet debt service obligations, will default.. In fact, most of the builders in Hyderabad have already defaulted. BUT, banks have a peculiar issue. They need to dress up their accounts and need to show as less NPA as possible by end March.
In fact, this March was hectic month for Banks here, with loan rescheduling exercise underway with all builders. Builders are given moratorium from payment for several months, loan repayment period is altered and several other exercises are carried out.
Banks will keep quiet for another year and start running again, in the first quarter of 2010 before Financial Year end. If by that time, builders are unable to recoup, they may be forced to start legal process which again will take months.
Most interesting thing about builder default: If builder has already completed construction, he would anyway have sold the inventory slowly, at reduced rates and got out of the mess. (So finished ready to occupy apartments, will not come from banks due to builder default)
If builder had cash flow, he would have anyway completed work, sold and got out, during the rescheduled loan period. No builder will give finsihed flats to Bank! But if builder is unable complete work during this period, then banks get stuck with worthless, incomplete structures, jutting into the sky.
Now, this is what is going to come into market for our dear people who are looking for Foreclosure Flats!!
And we can remain assured, that the NRIs who look for foreclosure properties in India will be the last ones to touch such ghost structures with No "BAP" to complete work.
Incidentally, Asset Reconstrcution Companies are taking shape on India now. They are supposed to buy these NPAs from Banks and later package such bad assets and sell to risk hungry funds. Obviously again, individual buyers will not be involved.
4.0 Does individual buyers buy Foreclosure Properties in the US?
If we are to believe a trust worthy source like Investopedia, it's a firm NO. Its says that the legal position of such properties are sticky and generally only investor groups or funds which take big risks, touch them. More info at: http://www.investopedia.com/ask/answers/08/foreclosure-investing.asp
5.0 Conclusion
Its more than obvious that talk of buying foreclosure properties in India is appearing due to complete lack of understanding of ground realities. Also it sounds a bit cruel, to think of feeding on another's misfortune.
Buying of a property by an Indian is usually a "family affair". Even nuclear families fall back on parents / in laws / uncles for support, while booking a property. There is unwritten commitment from several people, behind each purchase.
If someone is stressed, family will standby. You will find pre-payments happening now, to reduce EMI. In fact banks have been reporting increased prepayments and rescheduling of loan by increasing repayment period and reducing EMI. No bank has reported foreclosures of individual accounts due to default, even though economy has been under severe stress for more than 7 months now. (There are only unsubstantiated loose talk fed by news from US)
In India, each housing loan is Guaranteed by someone known to the borrower. Once a borrower defaults and default is persistent, the bank will immediately sound out the Guarantor. The Guarantor is legally bound to pay EMI and settle any outstanding, if borrower defaults. Making Guarantor pay is considered a taboo, in India. Something that is to be absolutely avoided. And this fact also ensures that immediate family steps in to ease the burden. ( As far as we know such Guarantor provision does not exist in US Home Mortgage Agreements)
And even if someone is unfortunate not to have family support and lands up in big mess, usually banks will give interest free breaks, reschedule loan etc. If nothing works, (it may take couple of years to reach a stage of "nothing works"), the legal process starts which again is very laborious. Banks have to issue legal notices, get court orders etc before it can attach property. Even after attaching, selling-off is not easy. Again, court will be involved. With the way Indian legal system works, banks can not shake off the properties quickly at all.
So basically except sporadic incidents, never expect enough properties to come into market, at all, from individual home owners. Obviously, people in India chucking their homes and running away, is just a dream that many in US may have. Its not going to happen here at all.
3.0 Default by Builders
Now..this is a possibility which can not be ruled out. The reason is the fact that unlike individuals who get cocooned by family circle, companies have no love lost between them. If a business fails, its not practical for families to support since the default amounts are HUGE running into several crores. But does this help the eagerly awaiting so called "foreclosure buyer?"! Lets examine.
Logically, there is possibility that builders who are unable to sell and hence are unable to meet debt service obligations, will default.. In fact, most of the builders in Hyderabad have already defaulted. BUT, banks have a peculiar issue. They need to dress up their accounts and need to show as less NPA as possible by end March.
In fact, this March was hectic month for Banks here, with loan rescheduling exercise underway with all builders. Builders are given moratorium from payment for several months, loan repayment period is altered and several other exercises are carried out.
Banks will keep quiet for another year and start running again, in the first quarter of 2010 before Financial Year end. If by that time, builders are unable to recoup, they may be forced to start legal process which again will take months.
Most interesting thing about builder default: If builder has already completed construction, he would anyway have sold the inventory slowly, at reduced rates and got out of the mess. (So finished ready to occupy apartments, will not come from banks due to builder default)
If builder had cash flow, he would have anyway completed work, sold and got out, during the rescheduled loan period. No builder will give finsihed flats to Bank! But if builder is unable complete work during this period, then banks get stuck with worthless, incomplete structures, jutting into the sky.
Now, this is what is going to come into market for our dear people who are looking for Foreclosure Flats!!
And we can remain assured, that the NRIs who look for foreclosure properties in India will be the last ones to touch such ghost structures with No "BAP" to complete work.
Incidentally, Asset Reconstrcution Companies are taking shape on India now. They are supposed to buy these NPAs from Banks and later package such bad assets and sell to risk hungry funds. Obviously again, individual buyers will not be involved.
4.0 Does individual buyers buy Foreclosure Properties in the US?
If we are to believe a trust worthy source like Investopedia, it's a firm NO. Its says that the legal position of such properties are sticky and generally only investor groups or funds which take big risks, touch them. More info at: http://www.investopedia.com/ask/answers/08/foreclosure-investing.asp
5.0 Conclusion
Its more than obvious that talk of buying foreclosure properties in India is appearing due to complete lack of understanding of ground realities. Also it sounds a bit cruel, to think of feeding on another's misfortune.
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