While the government’s efforts to keep lenders solvent may have allowed them to hold off on selling some properties at fire-sale prices in 2008, real estate brokers and auctioneers expect REOs to be big business in many markets this year.
FDIC-insured banks had $23 billion of REO inventory on their books at the end of September – a 134 percent increase from a year ago. That includes $11.5 billion in one- to four-family homes and $1.5 billion in property purchased with FHA-backed loans securitized by Ginnie Mae.
According to the latest quarterly report from the Federal Deposit Insurance Corp., three quarters of those one- to four-family REO properties were in the hands of very large banks, with assets greater than $10 billion.
In addition to the fear of selling properties in down markets for pennies on the dollar, lenders face other obstacles to liquidating their REO inventories that can vary from market to market. Some states, for example, have new laws that slow the foreclosure process, while others are dealing with an unprecedented volume of bank repossessions that has strained the capacity of the system.
In Florida, lenders are motivated to move properties off of their books, but are often thwarted by an overburdened court system that can leave properties in need of extensive repairs by the time they are back in the bank’s hands, said Ann Stickel, vice president of affiliated services with Sarasota, Fla.-based brokerage Michael Saunders and Co.
“The national lenders don’t want to hold the inventory any longer than they have to,” Stickel said, but bankrupt builders often try to delay the foreclosure process in court, and homeowners may fight eviction.
“Courts have said we don’t want to kick homeowners out, so we’re not going to create an express lane” to facilitate evictions and foreclosures, Stickel said. “The banks will say, ‘We have 50 properties for you (to list), but we can’t get a hold of them.’ “
Stickel is not unsympathetic to the plight of troubled borrowers – she thinks keeping more of them in their homes is a key to stabilizing housing markets — but said that the lengthy foreclosure process often leaves homes vacant and in disrepair.
In Florida’s tropical climate, vacant homes can easily become infested with mold, and other damage and deferred maintenance issues can add significantly to the time and cost of prepping a home for sale, she said.
While Michael Saunders’ newly created REO department is up to the challenge of rehabbing a mold-infested condo, “there is so much front-end prep on these properties, it’s not very realistic to have an individual agent handle the process,” Stickel said.
Once the lenders working with Michael Saunders have properties in their inventory, she said, “They are actually going to market very aggressively in price, and our inventory of REO properties turns very quickly – in days, or hours — rarely more than three or four weeks.”
L.J. Jennings, an Oakland, Calif.-based broker-owner whose firm, Pyramid Real Estate and Investments, specializes in REO properties, also believes banks are motivated to get foreclosed properties off their books.
“Banks are not in the property ownership business, and I don’t think philosophically they’re going to change that position,” Jennings said. “They will continue to dispose of them as quickly as they can.”
But Jennings said that in California, the typical turnaround time for a bank to put a foreclosed property on the market has lengthened from 60 days to six months or more.
“I have some properties I’ve been managing for six or seven months that are not on the market because of tenant-related issues,” Jennings said. Problems clearing title because notes have been sold and resold on Wall Street are also common, Jennings said.
Scott Thompson of Mortgage Resolution Services Inc. said that in many markets, asset managers for lenders and loan servicers are acutely aware that their actions can have an influence on prices.
Thompson said an employee at one of the nation’s five biggest loan servicers has acknowledged to him that “the volume of foreclosures they have in the pipeline needs to be managed carefully” to avoid flooding the market.
MRS, a Fidelity National Financial Co., helps real estate brokers and agents work with lenders and loan servicers to complete distressed property sales. Before founding the predecessor of MRS and becoming its vice president of sales, Thompson did hundreds of short sales as a broker-owner.
“I have been in the business for 20 years, and never seen anything like this,” Thompson said. Even though many markets are seeing houses changing hands at the same frenzied pace seen at the height of the boom, prices continue to fall. “Large transaction volumes, declining prices – it’s an oxymoron,” Thompson said.
Asset managers are bidding prices down to keep buyers in the marketplace, “because they know what’s coming down the pike, and how many more assets are about to be dumped on their desk.”
In order to keep a floor under prices, “You have to move properties onto the market at a measured rate.”
By disposing of some properties through auctions, asset managers can keep them out of the MLS, Thompson said. That way, agents running comps on their other properties don’t have to factor in those discounted sales. This could be one partial explanation for RealtyTrac’s discovery that as many as three out of four REO properties are not listed in the MLS, he said.
“Lenders have turned much more immediately to auctioneers as the best way to get rid of properties quickly,” said Joshua Olshin, president of New York, N.Y.-based Tranzon Integrated Property Group. “When they realize the waiting game is a losing game, they are much more willing to move in to auctions.”
Stickel said some banks may want to sell their REOs themselves because they don’t want to pay a Realtor’s commission.
“So it’s not necessarily that the house is not on the market, it’s just not in the MLS,” she said.
