Banks cut standing REO inventories by reducing new acquisitions by 50% in 2012

Foreclosure Radar just released its report on May foreclosures. The change in bank’s behavior since the beginning of the year is becoming apparent. Lenders are determined to steadily reduce their standing REO inventory. At current liquidation rates, they will have cleared out the backlog of standing inventory by the middle of next year. Of course, this comes at a price. Lenders are not making headway on shadow inventory, and those who have been delinquent on their mortgages for a long time are going to get to squat even longer. Lenders are hoping these people will opt to short sell their properties. In all likelihood, since doing nothing gets them month after month of free housing, most will stay committed to squatting until foreclosure. 2012 will be the golden age of delinquent mortgage squatting. When the standing inventory of REO is purged this year, 2013 will be the year lenders finally expunge the Ponzis.

Below is the chart and table of foreclosure inventories in California over the last year. Examine the slope of the red line and the numbers on the bottom of the table displaying total REO in the State. Starting in February, lenders have been steadily reducing their REO inventory by about 5,000 units per month. In a normal market environment, it would take four months to dispose an REO, so the number of REO will likely not fall below 20,000 as long as lenders are moving them through the system — which they will be doing for the next five to eight years. To reduce the total from 75,000 to 20,000 at the rate of 5,000 per month will take 11 months.

This same pattern of steady reductions in REO inventories can be seen in most counties and cities across California.

As we have all noticed, the reduction in REO inventory has not come about because lenders are selling more REO on the MLS. In fact, lenders have actually slowed the speed at which they sell properties they already own. Their REO processing went from a leisurely 7.5 months in May of 2011 to a sedate 8.7 months in May of 2012.

On interesting trend to note above is the sudden decrease in the time to foreclose. If they bother to issue a Notice of Default — and they still haven’t filed notice on the delinquent mortgage squatters with bubble-era loans — lenders are moving to auction much quicker. This is likely a recognition of the failure of loan modification programs that were delaying the process. Lenders are not delaying the process once they get started. However, they still are in no hurry to get started….

Filings ticked up in May, but they are still below last year’s levels. The slower pace of foreclosure filings drags out the processing time of shadow inventory. Lenders are barely treading water with regards to shadow inventory. By quickly foreclosing on new defaults, they aren’t adding to it, but by not foreclosing on old defaults, they are increasing the age of their delinquent loans and giving long-term squatters an enjoyable free ride (notice the recent upturn in aging).

So how are lenders reducing standing inventory?

They are not acquiring more properties at auction.

In January 2012, lenders acquired nearly 9,000 properties at auction. In May of 2012, they acquired about 4,500. That’s a 50% reduction in the number of properties acquired at auction. What is also interesting to those hedge funds looking to acquire properties at auction is that the number of third-party sales has held steady, and in May, they actually increased significantly from April’s numbers. Apparently, the banks don’t want these houses themselves, but they don’t mind selling them to others.

This trend is notable statewide. In Orange County, lenders have reduced their auction acquisitions by nearly 70% from last year’s tally. They are actually selling more to third parties than they are taking back themselves. This is very unusual. Banks typically take back two REO for every one they sell to a third party.

When will the MLS inventory return?

Nothing I see in the recent bank behavior suggests they are planning to put more properties on the MLS. The recent uptick in filings may be a start, but unless loan owners start opting for short sales or lenders become more motivated to clear out their existing REO inventory this year, I don’t see the MLS inventory returning any time soon. A recent report from CoreLogic suggested the lack of MLS inventory is due to the prevalence of negative equity. This is nonsense. We have had the same amount of negative equity for the last three years, and inventory only dried up this year. The real reason for the lack of MLS inventory is outlined above. Lenders simply aren’t buying more REO to replace the ones they are currently selling.

Why So Few Homes Are on the Market

By Karen Weise on June 11, 2012

For people looking to buy a home, pickings are slim these days. The number of existing homes for sale is at its lowest level in more than five years. In March the number of new homes for sale this spring was the lowest since the government started tracking the data in 1963, and rose just 1 percent in April. Inventories are so tight, buyers now face bidding wars in some cities.

Usually, low inventories would be a sign of strong demand, indicating that houses were selling as soon as they hit the market. Today’s low inventory, though, may not be the result of growing demand, but instead reflect a lack of supply—because some potential sellers aren’t putting their homes on the market at all.

This is a key point I have made a number of times. Strong demand would be a sign of market strength indicating the recent uptick in prices may actually signify the bottom of the market. Unfortunately, we don’t have strong demand. I have serious doubts about the durability of the recent spring bottom because the real reason for the uptick in prices is a lack of supply, which is a sign of market weakness.

In a new report, the housing data firm CoreLogic says inventory is low because so many homeowners have negative equity—they owe more on their mortgages than their homes are worth, so selling would not give them enough money to pay off their loans. CoreLogic analyzed data from the country’s 50 largest housing markets and found that areas with the lowest number of homes for sale also had the highest number of borrowers with negative equity. In markets where more than half of homeowners are underwater, there was just a 4.7-month supply of homes for sale. That’s about half as much inventory as in areas where less than 10 percent of homeowners are underwater.

It’s no surprise then that cities such as Bakersfield, Calif., and Phoenix have seen some of the sharpest decline in inventory over the past year, according to data from the National Association of Realtors. “The presence of negative equity … restricts the ability of owners to list their homes for sale as the demand side of the market improves,” Sam Khater, a senior economist at CoreLogic, says in the report.

Correlation is not causation. It sounds plausible that negative equity would be the culprit, but since negative equity has been around for three years and didn’t cause a drop in inventories, there must be another cause. The new causal factor responsible for the decline in inventory is the reduction in bank REO.