_REO Shadow Inventory: 90% of Foreclosed Properties Held Off Market
Real Estate Investment Coach - 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 sudden rise in foreclosures in the marketplace. Analysts are reporting how the floodgates are primed being opened based on the quantity of homes in “shadow REO” inventory. Browse the article below for any 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 maintain the market. The practice isn’t a secret, and refraining from dumping a large inventory of foreclosures available on the market keeps home prices from crashing.
But the extent this agreement lenders keep their stock of REOs - industry parlance for “real estate owned” properties - from the market could be bigger than a lot of people think.
Up to Ninety percent of REOs are withheld from sale, according to estimates recently provided to AOL Real-estate by two analytics firms. It’s proof of lenders’ fears that flooding the market with empty could ruin their balance sheets and provides some risk for the housing marketplace in general.
Online foreclosure marketplace RealtyTrac recently found that just 15 % of REOs within 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 an even lower estimate, suggesting that simply 10 percent of most REOs in the country are listed by their owners, which include mortgage giants Fannie Mae and Freddie Mac along with the Intended. At the time of April 2012, 390,000 repossessed homes sat in limbo, while about 39,000 were actually listed on the market, said Sam Khater, senior economist at CoreLogic.
Daren Blomquist, vp of RealtyTrac, said that he was surprised by his company’s finding, especially since the same analysis last year found out 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 come down,” he said, noting that numerous 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 not manage to get thier way soon. Foreclosed properties are an extreme liability to lenders, holding the possibility not just to dent their profits but to truly bankrupt them altogether.
That’s because whenever a lender carries an REO on its books, it's able to value the house in the price that the foreclosed-on borrower originally acquired it for. After the lender sells your home, it should book a loss of revenue: the real difference between your original price and also the current value. And also since house values have fallen by nearly one third because the housing bust, that translates into huge losses for that bank.
“They’ve already taken a loss on the loan,” Khater said, “but they’re going to have a loss about the asset after they dispose of it.” Adding insult to injury, REOs typically sell with a 33 percent discount.
Fears of your Domino Effect
Releasing REOs onto the market also chips away at home prices generally, depressing value of the homes of other clients - who could already be teetering getting ready to foreclosure - and also the additional REOs that lenders hold on their books.
“Each REO that comes through includes a domino influence on properties which are near that property,” Khater said.
In reality, if lenders turn their REO release valve to full blast, the deluge of foreclosures cascading on the market could plunge the united states into 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 explained, predicting that some major banks would fail and residential prices would nosedive by 20 %.
That doomsday scenario has many industry professionals supporting lenders’ tactics of keeping most of their REOs. Otherwise, they might be “causing the ground to drop out from under the entire market,” Faranda said. He added that banks don’t have the manpower to push the paperwork required to place all their foreclosures in the marketplace.
Indeed, lenders couldn’t list all of their REOs even if they wanted to. Fannie Mae, for just one, reported within the first quarter of 2012 it's struggling 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 more than likely still withhold REOs until the rate of the properties appreciates, allowing them to sell the homes at higher prices. Understanding that might be a winning strategy.
Fannie Mae, which owned 114,000 foreclosed homes at the time of March 31, reported inside the first quarter that there were “improved sales prices on dispositions of our own REO properties, as a result of 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 point anyway.
“As against ripping off the Band-Aid quickly, it’s sort of slowly pulling back the Band-Aid,” Blomquist said.
Either way, he was quoted saying, many lenders’ REO-disposal tactics remain obscure, which will always “create plenty of uncertainty available in the market.”