Why Lenders Don’t List REOs: The Conspiracy Theories
A recent AOL Real Estate blog post on bank-owned homes being held
off the market raised a few eyebrows, even among those who acknowledge a
so-called shadow inventory.
Citing data from RealtyTrac and CoreLogic, the article claimed that as many as 90 percent of all bank-owned homes are not listed for sale. That 90 percent number comes from CoreLogic. The RealtyTrac estimate is 85 percent of REOs are not listed for sale.
Both firms’ numbers paint a very similar picture: the vast majority of REO homes are not listed for sale. That doesn’t seem to make a whole lot of sense given that many Realtors I’ve talked to are asking for more inventory of properties to sell — particularly the lower-priced foreclosed homes that attract the bargain buyers and investors dominating today’s real estate market.
“We need more inventory,” said Lan Smith, Realtor with RE/MAX Assured Properties in Charlottesville, Virginia. “I need more homes to show my buyers. … We are seeing multiple offers on everything. As much as I hate to see people lose their homes in foreclosure, we need more inventory from some place.”
So if there is strong demand for these properties in
many markets, why are banks, lenders and other entities holding these
properties not listing them for sale?
One of the reasons is that procedural and practical impediments prevent banks from listing their foreclosed homes for sale. RealtyTrac data shows that on average it takes more than six months, 195 days to be exact, from the time a bank repossess a property to when it sells that property. It’s not that the properties are never sold, but in many cases it simply takes time for the properties to be ready to sell.
3. Rental property: 8 percent. These are properties with a tenant living in the home under Fannie Mae’s “Tenant in Place” or “Deed for Lease” programs. Under the Helping Families Save Their Homes Act of 2009, all lenders who foreclose are required to honor the terms of the previous lease and if there is no lease in place to give current tenants who were renting the home at least 90 days before eviction.
4. Properties being repaired: 5 percent. Foreclosed homes can often be in bad shape, even vandalized by the former owners or others in some cases.
5. Other: 5 percent
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 search
Author Bio: Rob Alley earned a bachelors degree at Virginia Tech, in Blacksburg, VA in Biology. Rob Alley consults with homeowners regarding Real Estate transactions and speciliazes in listing and selling Charlottesville Real Estate. Realtor/Owner of Virginia Real Estate Solutions at RE/MAX Assured Properties
Charlottesville Real Estate Experts
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Citing data from RealtyTrac and CoreLogic, the article claimed that as many as 90 percent of all bank-owned homes are not listed for sale. That 90 percent number comes from CoreLogic. The RealtyTrac estimate is 85 percent of REOs are not listed for sale.
Both firms’ numbers paint a very similar picture: the vast majority of REO homes are not listed for sale. That doesn’t seem to make a whole lot of sense given that many Realtors I’ve talked to are asking for more inventory of properties to sell — particularly the lower-priced foreclosed homes that attract the bargain buyers and investors dominating today’s real estate market.
“We need more inventory,” said Lan Smith, Realtor with RE/MAX Assured Properties in Charlottesville, Virginia. “I need more homes to show my buyers. … We are seeing multiple offers on everything. As much as I hate to see people lose their homes in foreclosure, we need more inventory from some place.”
One of the reasons is that procedural and practical impediments prevent banks from listing their foreclosed homes for sale. RealtyTrac data shows that on average it takes more than six months, 195 days to be exact, from the time a bank repossess a property to when it sells that property. It’s not that the properties are never sold, but in many cases it simply takes time for the properties to be ready to sell.
22 Percent of Fannie Mae REOs Listed for Sale
The procedural and practical impediments involved here are outlined nicely in the most recent quarterly 10-Q SEC filing from Fannie Mae, which acknowledges that as of the end of the first quarter of 2012 only 22 percent of the foreclosed properties it owns were available for sale.
The procedural and practical impediments involved here are outlined nicely in the most recent quarterly 10-Q SEC filing from Fannie Mae, which acknowledges that as of the end of the first quarter of 2012 only 22 percent of the foreclosed properties it owns were available for sale.
An additional 20 percent had an offer accepted but
were not yet sold, while a whopping 48 percent were listed in the category of
“unable to market” for the following reasons:
1. Redemption status: 13 percent.
These are properties where the homeowner or second lien holders still have the
opportunity to redeem the property after it is foreclosed. Not all states have
a redemption period, but a handful of states allow for a redemption period,
ranging from a few months to a year.
2. Occupied status: 14 percent.
These properties are still occupied and the eviction process is not yet
complete.3. Rental property: 8 percent. These are properties with a tenant living in the home under Fannie Mae’s “Tenant in Place” or “Deed for Lease” programs. Under the Helping Families Save Their Homes Act of 2009, all lenders who foreclose are required to honor the terms of the previous lease and if there is no lease in place to give current tenants who were renting the home at least 90 days before eviction.
4. Properties being repaired: 5 percent. Foreclosed homes can often be in bad shape, even vandalized by the former owners or others in some cases.
5. Other: 5 percent
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 search
Author Bio: Rob Alley earned a bachelors degree at Virginia Tech, in Blacksburg, VA in Biology. Rob Alley consults with homeowners regarding Real Estate transactions and speciliazes in listing and selling Charlottesville Real Estate. Realtor/Owner of Virginia Real Estate Solutions at RE/MAX Assured Properties
Charlottesville Real Estate Experts
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