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Shadow Inventory about to See the Light

As I mentioned in a post earlier this month,  5 Keys to a Real Estate Recovery:

I believe both the increase of distressed properties and the timing of their release to the market will be the biggest real estate story of 2010 … Anytime the supply of an item increases and demand remains flat, pricing is adversely impacted. This supply will come at discounted prices. Its impact could be substantial.

There were four major news reports concerning foreclosures last week. None were good news to an anticipated housing recovery or to home values in 2010.

Let’s go over each news item:

RealtyTrac’s Foreclosure Market Report 1st Quarter 2010

RealtyTrac is one of the leading data resources for foreclosures in the country. Most main stream media see them as the major player when it comes to reporting on the foreclosure situation. In this quarter’s report, they stated:

Foreclosure filings were reported on 367,056 properties in March, an increase of nearly 19 percent from the previous month, an increase of nearly 8 percent from March 2009 and the highest monthly total since RealtyTrac began issuing its report in January 2005.

“Foreclosure activity in the first quarter of 2010 followed a very similar pattern to what we saw in the first quarter of 2009: a shallow trough in January and February followed by a substantial spike in March,” said James J. Saccacio, chief executive officer of RealtyTrac. “One difference, however, is that the increases were more tilted toward the final stage of foreclosure, with REOs increasing 9 percent on a quarterly basis in the first quarter of 2010 compared to a 13 percent quarterly decrease in REOs in the first quarter of 2009.

“This subtle shift in the numbers pushed REOs to the highest quarterly total we’ve ever seen in our report and may be further evidence that lenders are starting to make a dent in the backlog of distressed inventory that has built up over the last year as foreclosure prevention programs and processing delays slowed down the normal foreclosure timeline.”

… REOs also hit a record high for the report in the first quarter, with a total of 257,944 properties repossessed by the lender during the quarter.

A property is classified as REO after a bank forecloses and repossesses it. The banks are beginning to foreclose at greater rates and are actually taking possession of the houses. This is a sign that the banks are preparing larger foreclosure inventories to release to the market.

As a matter of fact it seems Bank of America is already beginning the process of releasing these properties in certain regions. The North Country Times reported last week:

Bank of America, the nation’s largest mortgage lender, ramped up its foreclosure activity in March, sending hundreds of letters warning delinquent borrowers in the region that it could sell their homes at auction in as little as three weeks, according to North County Times analysis of data from ForeclosureRadar.

The bank said the increased activity was a natural consequence of borrowers running out of options … Richard Simon, a Bank of America spokesman, wrote in an e-mail that he couldn’t speak to the sharp increase of notices in San Diego and Riverside counties, but that the bank has expected more foreclosure activity.

“We have reported recently that we anticipate a rise in foreclosure activity through the coming months as homeowners are unable to qualify for loan modifications, fall out of modification programs or go into delinquency due to the ongoing stress in the economy,” he said.

Analysts and real estate agents said the moves by the Charlotte, N.C., banking giant, which controls a large share of the Southern California mortgage market, could signal a final reckoning for homeowners who have been protected by government programs for months or even years.

Fannie & Freddie’s Foreclosure Report

In an article in Housing Wire, it was reported:

The government-sponsored enterprises Fannie Mae and Freddie Mac, like the banking industry, are preparing for a surge in foreclosures to hit already overloaded REO portfolios in 2010.

Freddie holds 45,000 real estate owned (REO) properties in its portfolio as of the end of 2009, according to a filing with a quarterly filing with the Securities and Exchange Commission (SEC).  And while Freddie expects the number of REO to continue to grow in 2010, exactly how much will depend on the pace of the economic recovery, according a spokesperson at Freddie.

Fannie currently holds 86,000 REO properties in its inventory as of the end of 2009, according to its report to the SEC. That number has more than doubled the 33,729 at the end of 2007 and grown another 35% from 63,538 in 2008.

“Although we have expanded our loan workout initiatives to keep borrowers in their homes, we expect our foreclosures to increase in 2010 as a result of the adverse impact that the weak economy and high unemployment have had and are expected to have on the financial condition of borrowers,” according to the SEC filing by Fannie.

First American Core Logic’s Distressed Sales Report

This report qualified the number of distressed sales already coming to market and talks to their impact on a recovery and on home prices:

The report indicates that distressed home sales – such as short sales and real estate owned (REO) sales – accounted for 29 percent of all sales in the U.S. in January: the highest level since April 2009.

Distressed sales are non?arms length transactions such as REO or short sales. Market sales are arms?length transactions between a willing buyer and willing seller and they exclude distressed sales. Distressed sales have a very strong influence on home price trends and are an indicator of a housing market’s health.

Lending Processing Services Mortgage Monitor

This report showed the percentage of loans 6 months or more delinquent which have not had foreclosure procedures even started yet. This represents future inventory of foreclosures that will come to market.

Here is a graph showing the percentages:

What does this mean to you?

We have told every seller for months that we believe the best chance you have to maximize the price you will receive for your house is to sell it before the ‘shadow inventory’ of distressed properties comes to market. It appears this is about to happen.

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