National Public Radio did a feature on foreclosure auctions, following one real estate investor as he sought a bargain at an auction in Boston. The auction held a surprise for the investor, the reporter, and me. After the young man who was being followed by the NPR correspondent won a lively bidding battle for a $300,000 house at the bargain price of $84,000, the bank refused to sell it to him. The reason: the auction was a “reserve” auction rather than an “absolute” auction, meaning that there was an unpublished price at which the bank would sell the property, but winning bids below that amount could be rejected. The investor was angry. The NPR reporter was confused.

The auction was rigged.
Interviews with various individuals administering the auction uncovered lots of double-talk, deceit and rationalizations. True, they admitted, nothing in the publicity for the auction had said it was a reserve auction rather than an “absolute” auction, in which the winning bid meant a final sale. “How often are there absolute forclosure auctions?,” NPR’s reporter asked. Nobody knew of any. The papers that bidders received before the auction did mention that it was “reserve”…in small print at the end of page 5. “Shouldn’t the auctioneer make it clear that winning a bid for a property doesn’t necessarily mean you’ve bought it?” the reporter inquired. “We want our auctioneer to say a lot of things,” was the evasive answer. The reporter listened to his tape of the auction: at no point did the auctioneer or anyone else state that the bank “reserved” the right not to sell. “It’s up to the bidder to do their homework, their due diligence, and learn about the conditions of the auction,” was the explanation for this. In other words: we make it as hard as possible to find out the real conditions of the auction without actually engaging in fraud, and it’s the bidder’s job to ferret out the truth. Sound fair to me!

“But if there’s a minimum sale price, why does the bidding start so low? If the auctioneer says, ‘The bidding starts at $10,000,’ doesn’t that imply that the property can be sold for that amount?,” the reporter asked. “It doesn’t imply that at all,” answered the banker.

Liar, liar, pants on fire.

Here is what is happaneing: the banks know that the price is liable to be bid up higher when the bidding starts low; it’s a basic, universal auction principle. So they lure the maximum number of bidders by hiding the true nature of the auction until it can operate a “bait and switch.” Investors come looking for bargains, but they don’t know that there are limits on how good a bargain the banks will let them get. At least, not until they learn the hard way.

NPR’s featured investor was lucky: because the bank’s unethical manipulation of his good faith efforts to buy a house was being followed by the “Marketplace” program, the bank gave in and sold him the property at his original bid. The episode proved again, however, if there was any lingering doubt, a basic fact about the banking industry.

You just can’t trust these guys.