The banking system has begun to right itself and that's good news in terms of foreclosures, short sales
and foreclosure listings, or REOs (real estate owned).
According to the Federal Reserve, 15 of the nation's largest banks have met financial stress tests, which means they would likely survive a future economic meltdown without government help. Since 2009, major bank assets have increased from $420 billion to $759 billion, a huge achievement given the rocky condition of the banking system since the 2008 bailout.
At the same time, four major institutions — Citigroup, MetLife, SunTrust and Ally Financial — did not have sufficient capital to pass the Fed's required standards. This is a big deal when you consider that Citi is the nation's third-largest bank, while MetLife is the biggest life insurance provider.
But perhaps most importantly, buried in the results of the Federal Reserve test, are hints that some changes are now likely in the foreclosure market and the foreclosed home arena.
For the past few years, buyers and investors have widely complained about the difficulties they've encountered getting mortgages and buying foreclosed homes. Lengthy short sale negotiations have frequently been reported. Illogical foreclosure practices — such as rejecting buyer offers and later accepting far lower prices for the same property — have frustrated potential purchasers and slowed the recovery process.
But now things are changing. The stress test results suggest that short sale approvals may become faster, a new wave of foreclosures is surely ahead and that it will be far easier to buy foreclosed homes and HUD foreclosures. Foreclosure: Size Counts
The big institutions involved in the stress tests are crucial to the real estate marketplace. According to MortgageDaily.com, mortgages worth $381 billion were originated during the fourth quarter — including $120 billion just from Wells Fargo. Other top loan originators include stress-test participants Chase, BofA, Citi and U.S. Bancorp.
Big mortgage lenders do more than originate loans, they also service them. The Bank of America, JPMorgan Chase, Citibank, HSBC, MetLife, PNC, U.S. Bank and Wells Fargo service roughly 62 percent of all mortgages. The mortgages in their portfolios include 32.4 million loans worth $5.6 trillion as of late September, the latest figures now available.
In other words, the stress-test participants — the largest financial institutions we have — totally dominate the mortgage marketplace. Any change in their policies or practices impacts buyers and sellers nationwide. Short Sales
In many metro areas there are large numbers of foreclosed homes where property values have fallen while monthly mortgage costs have sharply risen. The combination of such circumstances can mean foreclosure unless a short sale can be worked out, an arrangement where the lender agrees to end the loan with less than a full pay back.
There's nothing in a short sale that thrills lenders. They see no reason why they should take a loss when the value of the property goes down if they can't also gain extra profit when the value of the property goes up. Faced with a short sale lenders will do everything to assure that the property is being sold at its highest possible price and that the borrower does not have other assets which can be used to offset their loss.
It can take months for lenders to respond to short sale offers as they check every financial nook and cranny for owner assets. One result has been an effort to force lender responses with legislation that would require a bank answer within 45 days or 75 days. Even with such rules, no legislation can compel lenders to make their answer yes, nor can any legislation dictate the discount to be offered in such transactions, if any.
The stress tests, however, suggest that in the future lender responses may be faster and more positive. The reason is that with massive capital reserves now established there's more incentive to accept short sale offers, avoid the time and cost of foreclosures, and get such loans off the books once and for all, even if prices cannot be maximized. Foreclosed Homes
Since late 2010 much of the foreclosure system has been stalled because of the robo-signing mess and the question of who actually owns the mortgage note, something necessary before a lender can foreclose.
Such questions have come before courts in various states with lenders winning some cases and losing others. With more and more court cases coming to an end it now seems that foreclosure activity in a number of states will suddenly increase as robo-signing and note issues begin to be resolved.
That's a problem because a quick increase in the supply of foreclosed homes means that a market which has begun to show some signs of stability will again face a bout of tough times.
For instance, RE/MAX reports that home prices in 53 cities rose 1.1 percent in February, while sales increased 8.7 percent.
"As a result of reduced foreclosure activity inventory continued a downward trend for the 20th straight month, 22.4 percent lower than the housing inventory in February 2011,” said RE/MAX.
But what happens when lenders begin to increase foreclosure activity? February's foreclosure activity was up 8 percent when compared with February 2011 according to the latest RealtyTrac foreclosure numbers
“February’s numbers point to a gradually rising foreclosure tide as some of the barriers that have been holding back foreclosures are removed,” said Brandon Moore, CEO of RealtyTrac
. “Although national foreclosure activity was pushed lower by decreases in a handful of larger states, 21 states posted annual increases in foreclosure activity, the most states with annual increases since November 2010. Foreclosure Listings
If it is true that we're likely to see a large increase in foreclosure filings as courts sort out the robo-signing and note ownership issues, then it's also true that a large number of distressed homes will not sell at auction. These unsold foreclosures will wind up in lender inventories as foreclosure listings, or "real estate owned" (REO) properties often available at substantial discount.
"We reported last August that the average sales price for homes in foreclosure or bank owned was typically 32 percent below the average sales price of homes not in foreclosure," said Daren Blomquist, vice president at RealtyTrac
. "These foreclosure discount
s are real but they're also variable. You'll see bigger discounts in major foreclosure areas and smaller concessions in areas where supply and demand are better matched."
With the latest stress tests now done lenders have less reason to hang on to foreclosed homes for sale than in the past. Because capital has been bulked up, the better bank option will be to dump foreclosure inventory, record the loss and move on while shareholders and regulators feel good about lender prospects.
Peter G. Miller is syndicated in newspapers nationwide and operates the consumer real estate site, OurBroker.com.