Where Have All the REOs Gone?

This is the second in a series of posts highlighting some of the findings from an in-depth report on REO trends and outlook that RealtyTrac released at the REO Expo conference on June 13, 2012. To download the full report for free, go to www.realtytrac.com/rebound.

Bank-owned (REO) inventory has decreased about 40 percent over the past in the past year and a half and continues to decrease despite a recent uptick in foreclosure starts.

More than 109,000 U.S. properties started the foreclosure process in May, a 12 percent increase from the previous month and a 16 percent increase from May 2011 — the first annual increase in foreclosure starts since January 2010.

Still, REO inventory continued to decline in May, down 5 percent from the previous month and down 31 percent from May 2011.

So where have all the REO homes gone? They are hiding beneath one of three probable shells:

  1. Short sales: even while REO activity and inventory has been decreasing, pre-foreclosure sales — typically short sales – have been on the upswing. More than 109,000 pre-foreclosure sales closed during the first quarter of 2012, a 25 percent increase from the previous year and a three-year high. This indicates lenders are becoming more willing to approve short sales as an alternative to foreclosure.
  2. Loan modification and refinancing: although loan modification programs have met with limited success over the past four years — more than 1 million of the 2.4 million loans modified from 2008  to 2011 have ended up back in delinquency or foreclosure, according to the Office of the Comptroller of the Currency — the five major lenders involved in the recently inked national mortgage settlement with state attorneys general have committed to $17 billion in loan modifications that include a reduction of the principal mortgage balance. In addition, the settlement requires lenders to offer refinance programs totaling at least $3 billion. (It also includes $5.2 billion for other forms of homeowner assistance, including short sales.)
  3. Foreclosure limbo: various foreclosure prevention programs, along with state legislation extending the foreclosure process and the sheer volume of distressed properties, have led to a much longer foreclosure process. In the first quarter of 2007, the average time to complete a foreclosure nationwide was 120 days. In the first quarter of 2012, that average time to foreclose had more than tripled to 370 days — and the timeline is much longer in some states. That means many properties that started the foreclosure process in 2011 or even 2010 may still be inching their way through foreclosure and may still end up as REOs in 2012 or beyond.

Of the three possible REO alternatives, only the short sale alternative will conclusively eliminate a property from potential REO inventory. The other two alternatives are shells that could be hiding significant numbers of future REO properties.

Given that logic, it’s not surprising that although REO activity continues to decline nationwide, REOs are starting to spill over the dam in some markets, a trend that we expect to continue erratically for the remainder of 2012 and into 2013.

We’ll look at the markets where REOs are starting to already spill over the dam in the next post.

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Related News
REO Shrinkage (Part 1)
Banks Outbidding Investors at Auction in Some Recovering Markets
4 Steps to Buying a Bank-Owned (REO) Home

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