Disposing of Distress Differently

In researching the May 2012 foreclosure data that RealtyTrac released today, we noticed some interesting numbers that clearly demonstrate how lenders are changing the way they dispose of distressed properties — moving away from bank repossession and moving toward short sales and other pre-foreclosure sales.

We’ve talked about short sales short-circuiting REOs before, but these new numbers demonstrate it even more clearly.

From January 2007 through March 2012, lenders have started the foreclosure process on more than 8.5 million U.S. properties. Of those 8.5 million foreclosure starts, 5.9 million (68 percent) have been disposed of either via pre-foreclosure sale — typically a short sale or a sale at the public foreclosure auction — or by bank repossession (REO). Those REOs eventually are re-sold by lenders to try to recover any losses on the loan.

The remaining 2.6 million properties (31 percent) that started the foreclosure process but were never disposed of presumably represent homeowners who were able to avoid foreclosure, most likely with a loan modification or refinancing.

Now focusing in the 5.9 million foreclosure dispositions, 1.7 million of those were sold via pre-foreclosure sale and 4.2 million of them were repossessed by the lender, becoming REO. That’s a ratio of 72 percent REO disposition to 28 percent pre-foreclosure disposition.

But if we dig into the monthly disposition ratios since the robo-signing controversy came to light around October 2008, we see a steady increase in the percentage of pre-foreclosure sale dispositions and a steady decrease in the percentage of REO dispositions. In March 2012, the most recently monthly data available for both types of dispositions, the ratio was 58 percent REO disposition to 42 percent pre-foreclosure sale disposition. It was the first time since January 2007 that the pre-foreclosure sale percentage broke above the 40 percent level.

If this trend continues over the next few years, it’s conceivable that the percentage of pre-foreclosure sales as a foreclosure disposition method will exceed the percentage of REOs.

In a future post I’ll explain why this shift toward pre-foreclosure sales could be benefitting banks’ bottom lines, but now we’d like to hear whether you think this shift toward short sales is good for the real estate market. Use the comments section below to post your opinion.

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Related News
REOs Short Circuited by Short Sales
REO Inventory Ballooning as Banks Hold Housing Back
REO Sales Rebounding in Some Markets

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