In the May 2012 issue of the Foreclosure News Report, real estate attorney, investor, author and trainer William Bronchick argues that banks are “hoarding foreclosure inventory” and overvaluing their real estate owned (REO) properties in an attempt to squeeze more money out of their distressed portfolios. Bronchick believes that the growing glut of REO is hurting real estate markets where inventory is tight.
Citing a Federal Reserve report — titled “Overvaluing Residential Properties and the Growing Glut of REO” — Bronchick claims that banks are deliberately seizing homes at auction by setting the minimum bid too high and repossessing the properties instead of selling the properties to investors or conducting short sales. He claims that overestimating the value of a foreclosed home leads lenders to set a high minimum bid at the auction, which lowers the chance that someone will buy the property at auction and take it off the lender’s hands.
“Make no mistake, setting the minimum bit too high is very much a deliberate decision,” argues Bronchick, referring to the common practice by lenders of setting the opening bid at auction higher than the market price.
Bronchick writes that if lenders would price REO competitively, they could speed up the clearing of REO inventories, save lenders money and help stabilize housing markets.
Nationwide, there are approximately 600,000 bank-owned REO properties, according to RealtyTrac. But there are also hundreds of thousands of properties that are considered shadow inventory. According to the Wall Street Journal, the size of distressed shadow inventory varies widely from 1.6 million (CoreLogic), to 3 million (Barclays Capital), to 4 million (LPS), to 8.2 million (Amherst Securities).
Bronchick suggests that the banks and servicers are stalling the foreclosure process, not taking title to and selling these distressed REOs in order to avoid the write-offs of both the negative equity as well as the worthless second liens.
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