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October 07 2012


REO Shadow Inventory: 90% of Foreclosed Properties Held Off Market

Is supply drying up or are lenders just holding back? We’ve seen the ebb and flow of supply since the market crashed. Typically, lean times are accompanied by a rapid increase in foreclosures available on the market. Analysts are reporting the floodgates are primed being opened based on the number of homes in “shadow REO” inventory. See the article below for a closer look:

Real Estate Investment Coach

(Many homes are) a part of what’s called the “shadow REO” inventory: repossessed homes across the country that banks or investors often purposely keep off industry. The practice isn’t a secret, and refraining from dumping a large inventory of foreclosures on the market keeps house values from crashing.

Real Estate Investment Coach
However the extent that lenders keep their stock of REOs - industry parlance for “real estate owned” properties - from the market could be much bigger than a lot of people think.

As much as Ninety percent of REOs are withheld from sale, in accordance with estimates recently given to AOL Real-estate by two analytics firms. It’s proof of lenders’ fears that flooding the market with empty could wreak havoc on their balance sheets and offer a hazard towards the housing marketplace in general.

Online foreclosure marketplace RealtyTrac recently found out that just Fifteen percent of REOs inside the Washington, D.C., area were on the market, a statistic to display nationwide numbers, the organization said.

A Liability to Lenders

Analytics firm CoreLogic provided an even lower estimate, suggesting that just 10 percent of REOs in the country are listed by their owners, such as mortgage giants Fannie Mae and Freddie Mac as well as the Federal Housing Administration. At the time of April 2012, 390,000 repossessed homes sat in limbo, while about 39,000 were actually listed for sale, said Sam Khater, senior economist at CoreLogic.

Daren Blomquist, v . p . of RealtyTrac, declared he was amazed at his company’s finding, especially since a similar analysis in '09 discovered that banks were trying to sell nearly double the amount of their REO inventory in those days.

“It was surprising to determine that that percentage had fall,” he said, noting that many agents that his firm has spoken to “have mentioned that there’s is a shortage of foreclosure inventory - and they’re wanting more.”

But Realtors who would like more bargain-priced homes to sell may well not manage to get thier way in the near future. Foreclosed properties are an extreme liability to lenders, holding the possibility not just in dent their profits but to actually bankrupt them altogether.

That’s because each time a lender carries an REO on its books, it really is allowed to value the home on the price that the foreclosed-on borrower originally paid for it. Once the lender sells the house, it should book a loss of revenue: the difference between the original cost and the current value. And since home values have fallen by nearly a third because the housing bust, that results in huge losses for the bank.

“They’ve already taken a loss about the loan,” Khater said, “but they’re going to require a loss on the asset once they dump it.” Adding insult to injury, REOs typically sell in a 33 percent discount.

Fears of your Domino Effect

Releasing REOs on the market also chips away at home prices generally, depressing the value of the homes of other clients - who would be able to be teetering on the brink of foreclosure - and the additional REOs that lenders hold on their books.

“Each REO which comes through includes a domino effect on properties that are near that property,” Khater said.

In fact, if lenders turn their REO release valve to full blast, the deluge of foreclosures cascading onto the market could plunge the country in to a recession, said Thomas Martin, president of consumer advocacy group Americas Watchdog.

“If they allow the dam essentially break. It could be a catastrophic disaster for your U.S. economy,” he was quoted saying, predicting that some major banks would fail and residential prices would nosedive by Twenty percent.

That doomsday scenario has many industry professionals supporting lenders’ tactics of possessing most of their REOs. Otherwise, they would be “causing a floor to fallout from beneath the entire market,” Faranda said. He added that banks don’t hold the manpower to push the paperwork needed to place all their foreclosures in the marketplace.

Indeed, lenders couldn’t list almost all their REOs even when they wished to. Fannie Mae, for one, reported within the first quarter of 2012 it had become unable to market 48 percent of their REO inventory because lots of the homes were either still occupied, under repair or being rented.

‘Slowly Pulling Back the Band-Aid’

Banks and investors will probably always withhold REOs before the rate from the properties appreciates, allowing them to sell the homes at higher prices. And that may be a winning strategy.

Fannie Mae, which owned 114,000 empty by March 31, reported in the first quarter there were “improved sales prices on dispositions in our REO properties, caused by strong demand in markets with limited REO supply.”

But at the same time, battening down REO inventory could prolong the housing slump, since the market must absorb the properties sooner or later anyway.

“As in opposition to ripping from the Band-Aid quickly, it’s kind of slowly pulling back the Band-Aid,” Blomquist said.

Either way, he was quoted saying, many lenders’ REO-disposal tactics remain obscure, and that will always “create a lot of uncertainty available in the market.”

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