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

Is supply drying up or are lenders just holding back? We’ve seen the change of supply because the market crashed. Typically, lean times are followed by a sudden boost in foreclosures on the market. Analysts are reporting how the floodgates are primed to be opened in line with the number of homes in “shadow REO” inventory. See the article below for any closer look:

Real Estate Investment Mentor
(Many homes are) a part of what’s known as the “shadow REO” inventory: repossessed homes across the nation that banks or investors often purposely keep off the market. The practice isn’t a secret, and refraining from dumping a large inventory of foreclosures available on the market keeps home values from crashing.

Real Estate Investment Mentor
Nevertheless the extent to which lenders keep their stock of REOs - industry parlance for “real estate owned” properties - off the market may be much larger than many people think.

As many as 90 % of REOs are withheld from sale, in accordance with estimates recently provided to AOL Real-estate by two analytics firms. It’s proof of lenders’ fears that flooding the marketplace with empty could wreak havoc on their balance sheets and provides some risk for the housing marketplace in general.

Online foreclosure marketplace RealtyTrac recently found out that just 15 percent of REOs within 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 a much lower estimate, suggesting that simply 10 percent of most REOs in the country are listed by their owners, including mortgage giants Fannie Mae and Freddie Mac plus the Federal Housing Administration. 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, v . p . of RealtyTrac, asserted he was surprised at his company’s finding, especially since the same analysis last year found out that banks were trying to sell nearly twice as much of the REO inventory in the past.

“It was surprising to determine that that percentage had fall,” he said, noting that numerous 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 desire more bargain-priced homes to market may well not manage to get thier way soon. Foreclosed properties are a serious liability to lenders, holding the possibility not only to 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 permitted to value your home in the price that the foreclosed-on borrower originally paid for it. When the lender sells the home, it must book a loss of revenue: the real difference involving the original cost as well as the current value. And also, since house values have fallen by nearly a third considering that the housing bust, that translates into huge losses for your bank.

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

Fears of the Domino Effect

Releasing REOs to the market also chips away at home prices in general, depressing the need for the homes of other customers - who could already be teetering getting ready to foreclosure - as well as the additional REOs that lenders hold on tight their books.

“Each REO links through includes a domino effect 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 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 the U.S. economy,” he explained, predicting that some major banks would fail and home prices would nosedive by Twenty percent.

That doomsday scenario has several industry professionals supporting lenders’ tactics of possessing the majority of their REOs. Otherwise, they would be “causing a floor to drop out from underneath the entire market,” Faranda said. He added that banks don’t have the manpower to push the paperwork necessary to invest their foreclosures in the marketplace.

Indeed, lenders couldn’t list all their REOs even though they wished to. Fannie Mae, for starters, reported inside the first quarter of 2012 it's not able to market 48 percent of the REO inventory because many of the homes were either still occupied, under repair or just being rented.

‘Slowly Pulling Back the Band-Aid’

Banks and investors will likely continue to withhold REOs before rate of the properties appreciates, letting them sell the homes at higher prices. Understanding that might be a winning strategy.

Fannie Mae, which owned 114,000 foreclosed homes as of March 31, reported inside the first quarter that there were “improved sales prices on dispositions in our REO properties, resulting from strong demand in markets with limited REO supply.”

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

“As against ripping off of the Band-Aid quickly, it’s kind of slowly pulling back the Band-Aid,” Blomquist said.

In any event, he said, many lenders’ REO-disposal tactics remain obscure, which will always “create a lot of uncertainty in the market.”

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