REOs Short Circuited by Short Sales

During a frenetic one-day New York media tour last week, I got the chance to sit down with Fred Katayama of Reuters to discuss the foreclosure numbers, which show that bank repossessions (REOs) dropped to a 49-month low in April.

Banks seized a total of 51,415 U.S. properties during the month, down 7 percent from March and down 26 percent from April 2011. It was the lowest number of new REO homes reported since March 2008.

Those low numbers don’t match what many, including myself, expected to see this year. I expected to see many of the REOs deferred last year by delays in the foreclosure process to start showing up in elevated REO numbers this year. And while that is happening in some states — Georgia REO numbers increased 81 percent annually, New Jersey REO numbers were up 45 percent, and Florida REO numbers were up 34 percent — we haven’t seen that expected wave of REO properties hit on a national level.

One of the major reasons for the drop-off in bank repossessions is a corresponding increase in short sales, where banks agree to allow the homeowner in foreclosure to sell for less than what is owed on the mortgage. The most recent short sale data from RealtyTrac shows more than 35,000 pre-foreclosure (short) sales nationwide in January, a 33 percent increase from January 2011.

So more of the distressed loans are being diverted down the short sale path rather than down the foreclosure path. That trend is shrinking the gap between short sales and bank repossessions. In January 2011 there were more than 78,000 bank repossessions, nearly three times the 27,000 short sales that occurred that month. But a year later, the 35,000 short sales in January 2012 was just 30 percent lower than the REO total of 51,000.

I do anticipate that we’ll eventually see at least a modest jump in REO numbers later this year as some distressed properties being pushed down the short sale or loan modification path don’t qualify for either of those foreclosure alternatives and eventually end up as bank-owned homes.

Related Articles
U.S. Foreclosure Activity Shifts Eastward in April
A Shift Toward Short Sales in 2012
Looking for Light at the End of the Foreclosure Tunnel

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