Soaking Up REO Inventory Like a Sponge By Daren Blomquist he perception continues to persist that bank-owned properties are saturating the housing market nationwide, making it difficult for banks to unload these properties and giving buyers the upper hand in submitting lowball offers. I overheard a conversation at lunch recently confirming this. A group of businessmen were talking about a real estate-owned (REO) property just listed for sale in Ladera Ranch, Calif., a large development in Orange County sold at the peak of the boom and now littered with foreclosures. One gentleman said he was surprised at the asking price per square foot of just $183, which he considered a bargain. But one of his lunch buddies chimed in and recommended that he should still come in with an offer well below the asking price—and move on to another property if that offer was rejected. But trends in REO inventory (http://goo.gl/yg76B) suggest this climate may be changing—at least in some local markets. In the Orange County market, for example, REO inventory decreased 12 percent from the beginning of 2011 to the end of November, according to RealtyTrac data. We estimate that REO inventory in Orange County now represents a 12.5-month supply—certainly on the high side but not the towering tsunami that some reports of shadow inventory conjure up.
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Dwindling REO inventory Nationwide, REO inventory shrunk 35 percent from January to November and now represents an estimated 12-month supply based on the sales pace of REOs. In some states the estimated supply of REO inventory is down to less than 10 months—states like Idaho, Arizona and Virginia (seven-month supply) and Missouri, Colorado and Nevada (eight-month supply). This dwindling supply of REO inventory in many areas is the result of delays in the foreclosure process slowing down the pace at which lenders foreclose. The average time
it takes to foreclose nationwide (http://goo.gl/xlI19) has increased by 19 percent over the past year, from 281 days in the third quarter of 2010 to 336 days in the third quarter of 2011, according to RealtyTrac data. The average time it takes to foreclose nationally is up more than twofold from the third quarter of 2007, when it was 140 days. These delays were caused by a firestorm of controversy surrounding the propriety and legality of the foreclosure process itself, in some cases calling into question whether an REO property can be sold to a third party or obtain clear title. One recent example of this was a Sept. 29 bankruptcy court ruling in Arkansas that found some lenders are not properly authorized to do business in the state and therefore are in violation of the state’s non-judicial foreclosure statutes. As a result of the ruling, now under appeal, some title companies in the state no longer issue title insurance for foreclosed properties. But despite some extreme examples like the Arkansas case, lenders appear to be ramping up foreclosure activity in select areas and for select portions of their distressed portfolios that will presumably stand up to increased scrutiny. Evidence of this ramp up is a recent surge in the earlier foreclosure filings that start the foreclosure process. These default filings spiked 33 percent back in August (http://goo.gl/a32yV) and have remained elevated since then, RealtyTrac data show. Scheduled foreclosure auctions, the second stage of the foreclosure process in most states, reached a nine-month high in November (http://goo.gl/t15uX), indicating this wave of delayed foreclosures is gradually making its way through the foreclosure process. Many of these delayed foreclosures will eventually become REOs, meaning an increase in REO inventory. But that won’t necessarily be a terrible thing for many markets that are primed to quickly absorb addi-
tional REO inventory— particularly if that inventory is in reasonably good condition. In contrast, some other local markets are in still saddled with a large inventory of REOs. In these REO saturated markets, lenders and servicers should think twice before adding more bank-owned properties to the backlog. Instead they may need to more seriously consider foreclosure alternatives such as loan modification, short sale or even donating property to local land banks.
27,307 properties as of the end of November, the blazing pace of REO sales in the city is helping to keep its estimated monthly supply of REO inventory at 6.28 months—enough to be third place on our list of REO absorbent markets. Other top REO absorbent markets were Modesto, Calif.; Sacramento, Calif.; Richmond, Va.; Lakeland, Fla.; Stockton, Calif.; Denver and Akron, Ohio.
“Nationwide, REO inventory shrunk 35 percent from January to November and now represents an estimated 12-month Top REO saturated supply based on the sales pace of REOs.” markets
Top REO absorbent markets All of these markets had REO inventory representing less than eight months as of the end of November and at least 400 REO sales in the second quarter of 2011, according to the RealtyTrac U.S. Foreclosure Sales Report (http://goo.gl/CdgGP). The Virginia Beach-NorfolkNewport News metro area topped the list, with 1,250 REO properties representing a 3.07-month supply. Boise was second on the list, with 812 REO properties representing a 3.66-month supply. Even though the Phoenix metro area posted a massive REO inventory of
All of these markets had an active REO inventory of more than 4,000 properties as of the end of November, representing at least a 15-month supply. The BostonCambridge-Quincy metro area led the pack with 5,678 active REOs representing a whopping 133-month supply because of an anemic REO sales pace. Some landmark rulings by the Massachusetts Supreme Judicial Court in 2011 have largely frozen up sales of foreclosed property in the state. Most recently, the court ruled in October that the purchaser of a property in a flawed foreclosure sale is not the true owner of that property. This October ruling, in the case of