As strange as it sounds, most REO shouldn’t be listed for sale. REOs being processed for sale — the REO pipeline — is all banks are supposed to have. Once they finish processing, they are supposed to put them for sale and liquidate. It’s not unusual for a high percentage of REOs to be held by the banks. What is more telling about their policies is how long it takes them to sell a property, and how they classify the properties they hold. If all their properties are undergoing preparations for sale, and if sales are happening quickly, there is no problem. However, if it takes them a very long time to process, and if many properties are being held for no particular reason, then it becomes obvious lenders are withholding inventory for other purposes.
A recent AOL Real Estate blog post on bank-owned homes being held off the market raised a few eyebrows, even among those who acknowledge a so-called shadow inventory.
Citing data from RealtyTrac and CoreLogic, the article claimed that as many as 90 percent of all bank-owned homes are not listed for sale. That 90 percent number comes from CoreLogic. The RealtyTrac estimate is 85 percent of REOs are not listed for sale. …
Again, this is not unusual. If a higher percentage of REO were listed for sale, it would be a sign that lenders are asking too much and not selling them quickly enough.
So if there is strong demand for these properties in many markets, why are banks, lenders and other entities holding these properties not listing them for sale?
One of the reasons is that procedural and practical impediments prevent banks from listing their foreclosed homes for sale. RealtyTrac data shows that on average it takes more than six months, 195 days to be exact, from the time a bank repossess a property to when it sells that property. It’s not that the properties are never sold, but in many cases it simply takes time for the properties to be ready to sell.
Is 195 days a long time? It depends. Comparing how long it takes flippers to renovate and liquidate, provides a good indication of how motivated banks are. Flippers make money by turning properties over quickly. If banks felt they had a better use for the capital than leaving it in a non-performing asset, they would process REOs as quickly as flippers do. So how big is the difference?
If a bank reports they have a high percentage of their properties in the renovation pipeline, that is a ruse to disguise the fact they are dragging their feet on processing. It should take less than 45 days for banks to prepare a house for sale. Lenders should be turning these around faster than flippers do because lenders always take back the easiest properties at auction. If a property is really run down or requires special handling, they will lower their opening bid and let a third party buy it at auction. So even cherry-picking the easiest properties, it still takes them twice as long. That is disguising the inventory they don’t want to sell.
22 Percent of Fannie Mae REOs Listed for Sale
The procedural and practical impediments involved here are outlined nicely in the most recent quarterly 10-Q SEC filing from Fannie Mae, which acknowledges that as of the end of the first quarter of 2012 only 22 percent of the foreclosed properties it owns were available for sale.
An additional 20 percent had an offer accepted but were not yet sold, while a whopping 48 percent were listed in the category of “unable to market” for the following reasons:
1. Redemption status: 13 percent. These are properties where the homeowner or second lien holders still have the opportunity to redeem the property after it is foreclosed. Not all states have a redemption period, but a handful of states allow for a redemption period, ranging from a few months to a year.
2. Occupied status: 14 percent. These properties are still occupied and the eviction process is not yet complete.
3. Rental property: 8 percent. These are properties with a tenant living in the home under Fannie Mae’s “Tenant in Place” or “Deed for Lease” programs. Under the Helping Families Save Their Homes Act of 2009, all lenders who foreclose are required to honor the terms of the previous lease and if there is no lease in place to give current tenants who were renting the home at least 90 days before eviction.
4. Properties being repaired: 5 percent. Foreclosed homes can often be in bad shape, even vandalized by the former owners or others in some cases.
5. Other: 5 percent
This is the category for those intentionally being withheld from the market. For the GSEs, this is also a very small number. No big withholding here.
… While these practical impediments to listing REOs are more concrete and easier to grasp, two items in the most recent quarterly 10-Q SEC filing from Fannie Mae opens the possibility that lenders may be intentionally holding back REO inventory from being listed.
The first item is found in the list of reasons that Fannie gives for only 22 percent of its REO inventory being listed for sale: Other, accounting for 5 percent of the total 78 percent that are not listed.
The second is some version of the following phrase found several places in the report in reference to one of the strategies Fannie is taking to boost its bottom line: “Managing our REO inventory to minimize costs and maximize sales proceeds.”
At least they are openly admitting what they are doing. Apparently, despite the anti-trust violations, everyone is okay with the GSEs saving taxpayer’s money at the expense of future buyers. I am torn. I applauded DeMarco when he didn’t forgive principal to give loanowners money from taxpayer coffers. That’s different though because those people already made their decisions. Hurting those trying to get into the housing market is not so noble, but I guess you take the bad with the good.
This leads the door open to Fannie Mae and other lenders intentionally holding REO homes off the market if it somehow benefits them. And why might it benefit them? There are at least two reasons:
1.Deferring reported losses: lenders don’t realize the losses on a distressed loan — at least from an accounting perspective — until they sell the property at whatever price the market will bear. Thanks to changes to the so-called mark to market accounting rules back in early 2009 to try to stop the bleeding in the financial industry as the result of plummeting home prices and a flood of foreclosures. Up until the sale of that foreclosed home, banks may be able to justify a higher valuation of the asset because of the relaxed mark to market rules, but once that sale occurs there is no denying the full extent of the loss.
Many housing market observers have been pointing out this injustice for years. Without this arcane accounting rule, shadow inventory would not be possible, and lenders would have completed their liquidations a couple of years ago. Of course, prices would be at Las Vegas levels across the country, and our banking system would be bankrupt… I think there’s supposed to be a downside in there somewhere.
2. Preventing fire sales: Foreclosed homes, or REOs, sold for an average price that was 33 percent below the average price of a non-foreclosed home in the first quarter of 2012. These distressed sales have an impact on the values of surrounding homes and the future sales prices of surrounding homes as the distressed sales are used by appraisers and buyers in evaluating comparable sales. A market oversaturated with distressed homes for sale can turn into a feeding frenzy for buyers — especially if there are very few buyers looking to purchase. The basic law of supply and demand dictates that too much supply of these properties and low demand will result in plummeting prices. So to protect the prices of future REOs that they plan to sell, banks may be motivated to limit the supply of those REOs available at any given time — at least creating the perception that there is a limited supply and thereby tipping the balances back in favor of sellers rather than buyers.
The withholding of inventory to drive up prices is exactly what we are witnessing right now. Lenders simply stopped foreclosing on delinquent mortgage squatters in the Southwest in February of 2012. They did it primarily to comply with the attorneys general settlement agreement, but they have also been enjoying the side benefit of rising prices, so they have been in no hurry to speed up their foreclosure processing. Amend-extend-pretend is finally paying off.
This is the stuff conspiracy theorists latch on to, always looking for an opportunity to portray the big banks as malevolent masters of the housing market. … There are some rational reasons why banks would want to intentionally restrict the supply of bank-owned properties available for sale.
The big banks are malevolent masters of the housing market. It is a portrayal they earn with their reprehensible behavior. The people being foreclosed on hate them for taking their homes. The people waiting for these homes to be vacated hate them for not doing it fast enough. And everyone who has to pay the bills for their bailouts — which is everyone — hates them for taking their tax dollars to clean up a mess created by runaway greed and a complete abdication of responsibility for sound lending.
$1,000,000+ HELOC booty and three years squatting
The people who bought high end homes in the 90s really got a great ride, didn’t they? They were given unbelievable amounts of HELOC money, and when the Ponzi scheme imploded, rather than being foreclosed on, they were given years of free housing to help them out. If not for the terrible loss of entitlement, it would be too good to be true.
- Today’s featured property was purchased for 7/12/1999 for $710,000. The owner used a $568,000 first mortgage and a $142,000 down payment.
- On 10/25/2004 he refinanced with a $995,000 first mortgage. Apparently, he needed $400,000 for something.
- On 6/1/2006 he obtained a $125,000 HELOC.
- On 9/5/2006 he refinanced with a $1,397,500 Option ARM.
- On 12/8/2006 he opened a $250,000 HELOC.
- Total mortgage debt was $1,647,500 plus negative amortization assuming he maxed out the HELOC.
- Total mortgage equity withdrawal was $1,079,500.
- He was served a notice of default on 3/23/2009 which means he quit paying sometime in 2008. The bank didn’t take the property back until 10/21/2011 allowing this owner to squat for three years.
Does it really take nine months to prepare a house for sale? I imagine this was listed on their books as a renovation in progress. Either they have the worst renovation crews on the planet, or they are in no hurry to process these properties. I suspect it’s the latter.
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Proprietary OC Housing News home purchase analysis
$845,000 …….. Asking Price
$710,000 ………. Purchase Price
7/12/1999 ………. Purchase Date
$135,000 ………. Gross Gain (Loss)
($56,800) ………… Commissions and Costs at 8%
$78,200 ………. Net Gain (Loss)
19.0% ………. Gross Percent Change
11.0% ………. Net Percent Change
1.3% ………… Annual Appreciation
Cost of Home Ownership
$845,000 …….. Asking Price
$169,000 ………… 20% Down Conventional
3.64% …………. Mortgage Interest Rate
30 ……………… Number of Years
$676,000 …….. Mortgage
$159,724 ………. Income Requirement
$3,089 ………… Monthly Mortgage Payment
$732 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$211 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$94 ………… Homeowners Association Fees
$4,126 ………. Monthly Cash Outlays
($696) ………. Tax Savings
($1,038) ………. Equity Hidden in Payment
$201 ………….. Lost Income to Down Payment
$126 ………….. Maintenance and Replacement Reserves
$2,719 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$9,950 ………… Furnishing and Move In at 1% + $1,500
$9,950 ………… Closing Costs at 1% + $1,500
$6,760 ………… Interest Points
$169,000 ………… Down Payment
$195,660 ………. Total Cash Costs
$41,600 ………. Emergency Cash Reserves
$237,260 ………. Total Savings Needed
The property above is available for sale on the MLS.Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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