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The Trick Is To Not Flood the Valley

Banks and the government have struggled to get the current foreclosure situation under control. The modification programs have helped many families avoid foreclosure. However, the number is but a small percentage of those incapable or unwilling to pay their mortgage. This has resulted in an ever increasing number of bank owned foreclosures (REOs).

The banks are in a difficult situation. If they release this inventory of discounted properties to the market too quickly, it could crush prices causing even more foreclosures. If they release it too slowly, any housing recovery would be further delayed. Imagine a dam, and look at the foreclosures as water behind the dam. The banks needed to find the perfect amount of water they could release to feed the river below but not flood the valley.

This past summer banks finally found that perfect number – not too many, not too few – that the market could handle. Being confident that they had a handle on the challenge, banks increased their repossessions of delinquent properties. Repossessions were up 49 % in August. September set an all-time record for reposed homes. However, in their haste to build that inventory, they got sloppy with their procedures.

When this was revealed, both private and government institutions mandated that the banks declare a moratorium on foreclosures until the irregularities were corrected.

In essence, they put a cork in the dam.

The banks have now revised their procedures and feel comfortable with the accuracy of their paperwork. They will begin to release foreclosures after the first of the year.

The cork is about to be removed.

What will this do to prices?

Both the Bank of America and Fannie Mae have projected that house prices will fall dramatically at the end of the first quarter of 2011 and then slowly move upward through the rest of the year. Why the dramatic drop in values after the start of the year? Perhaps the people in control of the cork know exactly when it will be removed and realize the short term implications.

Bottom Line

There is currently a window of opportunity to sell your home before the discounted properties again re-enter the market and put downward pressure on prices. If you plan to sell within the next year, now might be the time.

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2 replies
  1. James K Barath in Northwest Indiana
    James K Barath in Northwest Indiana says:

    If the big banks were a little more forward thinking, they would come up with some creative way to create new jobs in markets where they have excess inventory. This would help absorb those foreclosures like a sponge to a spilled cup of water. It would definitely be in the big banks interest and make them even more interest. Food for thought if your reading this and your a big bank.


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