Is supply drying up or are lenders just holding back? We’ve seen the ebb and flow of supply considering that the market crashed. Typically, lean times are followed by a rapid rise in foreclosures on the market. Analysts are reporting the floodgates are primed being opened in line with the number of homes in “shadow REO” inventory. See the article below to get a closer look:
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(Many homes are) section of what’s referred to as “shadow REO” inventory: repossessed homes across the country that banks or investors often purposely keep off the marketplace. The practice isn’t a secret, and refraining from dumping a big inventory of foreclosures in the marketplace keeps home values from crashing.
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Nevertheless the extent to which lenders keep their stock of REOs - industry parlance for “real estate owned” properties - off the market might be much larger than a lot of people think.
Up to Ninety percent of REOs are withheld from sale, based on estimates recently given to AOL Real Estate by two analytics firms. It’s a testament to lenders’ fears that flooding the market with empty could ruin their balance sheets and offer a danger to the housing marketplace as a whole.
Online foreclosure marketplace RealtyTrac recently discovered that just 15 % of REOs in the Washington, D.C., area were on the market, a statistic signifying nationwide numbers, the business said.
A Liability to Lenders
Analytics firm CoreLogic provided a level lower estimate, suggesting that merely 10 percent of REOs in the country are listed by people, which include mortgage giants Fannie Mae and Freddie Mac plus the Fha. By 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, vp of RealtyTrac, declared he was surprised by his company’s finding, especially since an identical analysis last year found that banks were attempting to sell nearly double the amount of the REO inventory in the past.
“It was surprising to see that that percentage had come down,” he explained, noting that many agents that his firm has spoken with “have mentioned that there’s actually a shortage of foreclosure inventory - and they’re wanting more.”
But Realtors who would like more bargain-priced homes to market may not get their way anytime soon. Foreclosed properties are a severe liability to lenders, holding the possibility not only to dent their profits but to really bankrupt them altogether.
That’s because when a lender carries an REO on its books, it is able to value the house on the price how the foreclosed-on borrower originally acquired it for. Once the lender sells your home, it should book a loss: the main difference between the original cost and also the current value. And also, since home values have fallen by nearly one third because the housing bust, that means huge losses for your bank.
“They’ve already taken a loss of revenue about the loan,” Khater said, “but they’re likely to have a loss around the asset once they dump it.” Adding insult to injury, REOs typically sell with a 33 percent discount.
Fears of a Domino Effect
Releasing REOs on the market also chips away at home prices generally, depressing value of the homes of other clients - who would be able to be teetering on the point of foreclosure - and the additional REOs that lenders hang on their books.
“Each REO links through includes a domino impact on properties which are near that property,” Khater said.
Actually, if lenders turn their REO release valve to full blast, the deluge of foreclosures cascading onto the market could plunge the united states into a recession, said Thomas Martin, president of consumer advocacy group Americas Watchdog.
“If they let the dam essentially break. It could be a catastrophic disaster for that U.S. economy,” he explained, predicting that some major banks would fail and residential prices would nosedive by Twenty percent.
That doomsday scenario has several industry professionals supporting lenders’ tactics of keeping nearly all of their REOs. Otherwise, they might be “causing the ground to fallout from under the entire market,” Faranda said. He added that banks don’t have the manpower to push the paperwork needed to place all their foreclosures on the market.
Indeed, lenders couldn’t list almost all their REOs even though they desired to. Fannie Mae, for starters, reported in the first quarter of 2012 it had become not able to market 48 percent of their REO inventory because many of the homes were either still occupied, under repair or becoming rented.
‘Slowly Pulling Back the Band-Aid’
Banks and investors will likely still withhold REOs before the market value of 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 as of March 31, reported within 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, considering that the market must absorb the properties at some time anyway.
“As opposed to ripping from the Band-Aid quickly, it’s kind of slowly pulling back the Band-Aid,” Blomquist said.
In any event, he explained, many lenders’ REO-disposal tactics remain obscure, and that will always “create a lot of uncertainty available in the market.”
