Why Lenders Don’t List REOs: The Conspiracy Theories

A previous post addressed some of the more practical reasons that lenders may not be listing the majority of REO inventory on their books.

While these practical impediments to listing REOs are more concrete and easier to grasp, two items in the most recent quarterly 10-Q SEC filing from Fannie Mae opens the possibility that lenders may be intentionally holding back REO inventory from being listed.

The first item is found in the list of reasons that Fannie gives for only 22 percent of its REO inventory being listed for sale: Other, accounting for 5 percent of the total 78 percent that are not listed.

The second is some version of the following phrase found several places in the report in reference to one of the strategies Fannie is taking to boost its bottom line: “Managing our REO inventory to minimize costs and maximize sales proceeds.”

This leads the door open to Fannie Mae and other lenders intentionally holding REO homes off the market if it somehow benefits them. And why might it benefit them? There are at least two reasons:

1.Deferring reported losses: lenders don’t realize the losses on a distressed loan — at least from an accounting perspective — until they sell the property at whatever price the market will bear. Thanks to changes to the so-called mark to market accounting rules back in early 2009 to try to stop the bleeding in the financial industry as the result of plummeting home prices and a flood of foreclosures. Up until the sale of that foreclosed home, banks may be able to justify a higher valuation of the asset because of the relaxed mark to market rules, but once that sale occurs there is no denying the full extent of the loss.

2. Preventing fire sales: Foreclosed homes, or REOs, sold for an average price that was 33 percent below the average price of a non-foreclosed home in the first quarter of 2012. These distressed sales have an impact on the values of surrounding homes and the future sales prices of surrounding homes as the distressed sales are used by appraisers and buyers in evaluating comparable sales. A market oversaturated with distressed homes for sale can turn into a feeding frenzy for buyers — especially if there are very few buyers looking to purchase. The basic law of supply and demand dictates that too much supply of these properties and low demand will result in plummeting prices. So to protect the prices of future REOs that they plan to sell, banks may be motivated to limit the supply of those REOs available at any given time — at least creating the perception that there is a limited supply and thereby tipping the balances back in favor of sellers rather than buyers. 

This is the stuff conspiracy theorists latch on to, always looking for an opportunity to portray the big banks as malevolent masters of the housing market. While many of the conspiracy theories involving the big banks are unfounded, there are some rational reasons why banks would want to intentionally restrict the supply of bank-owned properties available for sale.

We’d like to get your opinion on this hot-button issue. Use the comments section below to share.
 Find foreclosures, short sales and bank-owned REOs nationwide with a free foreclosure search on RealtyTrac.

Related Articles
Why Lenders Don’t List REOs: Procedural and Practical Impediments
Turning REO Trash Into Treasure
5 Best Banks to Buy From

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