Home Repossessions Rising As Banks Convert Shadow Inventory to Real Inventory

by devteam June 10th, 2010 | Share

Accordingrnto Realty Trac's U.S.rn Foreclosure Market ReportTM for May, a total of 322,920 propertiesrnnationwide were the subject of a foreclosure filing during the month comparedrnto 333,837 in April.  This is one inrnevery 400 U.S. housing units. The new figure represents a 3 percent decrease in foreclosure filings vs. April and a 1 percent increasernover the filings reported in May 2009.   </p

RealtyTrac’s report incorporates documents filed in all three phasesrn of foreclosure: </p<ol

  • Notice of Default (NOD)</a and Lis Pendens (LIS). This is the first legal notification from a lender that the borrower on a mortgage loan has defaulted under the terms of their mortgage and the lender intends to foreclose unless the loan is brought current.
  • Auction — Notice of Trustee Sale and Notice of Foreclosure Sale (NTS andrn NFS); If the borrower does not catch up on their payments the lender will file a notice of sale (the lender intends to sell the property). This notice is published in local paper and contains information pertaining to the date, time and subject property address.
  • Real Estate Owned or REO properties : “REO” stands for “real estate owned” and typically refers to the inventory of real estate that banks and mortgage companiesrn have foreclosed on and subsequently purchased through the foreclosure auction if there was no offer higher than the minimum bid.</li</ol

    Notices of Default and Lis Pendens were received on 96,462 properties, a decrease of 7 percent from April and a 22 percent decline vs. May 2009. This is good news as it implies less borrowers are fallingrn behind on their payments.</p

    New Foreclosure auctions were scheduled on 132,681 properties.rn This represents a 4 percent decrease from April, a 1 percent decline vs. May 2009, and a 16 percent improvement from the peak of 158,105 seenrn in March 2010. This is also good news but possibly a factor of the expiration of the homebuyer tax credit.</p

    Bank repossessions (REOs)rnwere carried out on 93,777 properties in May. This is 1 percent worse than April and a 44 percent increase vs. May 2009. This is the second month in a row where bank reposessions hit a new record high.  All 50 states reported year-over-yearrnincreases in bank repossessions. This is bad new as it implies more homeowners are being forced out of their home and bank balance sheets are filling with distressed housing inventory. This is shadow inventory being converted to actual inventory!</p

    James J.rnSaccacio, chief executive officer of RealtyTrac said, “The numbers in Mayrncontinued and confirmed the trends we noticed in April: overall foreclosurernactivity leveling off while lenders work through the backlog of distressedrnproperties that have built up over the past 20 months.  Defaults and scheduled auctions combinedrnincreased by 28 percent from 2007 to 2008 and another 32 percent from 2008 torn2009 – creating a build-up of delayed bank repossessions. Lenders appearrn to bernramping up the pace of completing those forestalled foreclosures even while therninflow of delinquencies into the foreclosure process has slowed.” </p

    As has become the norm, Nevada, Arizona, and Florida topped the list ofrnstates in per capita foreclosure activity. rnIn Nevada one in every 79 housing unit received a foreclosure filing inrnMay, nearly twice the ratio of Arizona the second ranked state.  Still, things are improving in Nevada asrnwell.  May numbers were down 12 percent fromrnApril and 16 percent from one year earlier. rnIn Arizona, where one of every 169 properties saw a filing, the rate wasrnup less than one percent during the month and down 5 percent from May 2009.</p

    Also in the top five werernFlorida where one in every 174 Florida properties received a notice; California,rnone in 186; and Michigan which was up nearly 6 percent in the month and wherernone in every 223 properties received a foreclosure filing</p

    In terms of actual numbers,rnten states accounted for over 70 percent of all filings in the nation.  California alone accounted for 22 percentrnwith 72,030 filings, up 3 percent for the month but down 22 percentrnyear-over-year.  Florida had 16 percentrnof the nation's filings, a 5 percent increase from April; Michigan was thirdrnwith 20,322 properties, 6 percent of the nation's total.  The remaining states were Illinois withrn15,061 filings; Nevada (14,346), Georgia (13,778), Texas (11,137), Ohiorn(10,379), and New Jersey (7993)</p

    Amongrnmetropolitan areas, Las Vegas had the highest rate of filings followed byrnMerced, Modesto, and Vallejo-Fairfield, California, and Cape Coral-Fort Myers,rnFlorida.  All but one of the metropolitanrnareas in the top ten (Vallejo-Fairfield) had a lower rate of filings than onernyear earlier. </p

    Plain and Simple: The good news is it seems like the worst is behind us in terms of new defaults. Plus the modest decline in newly scheduled auctions helps out housing on the excess supply front as banksrn are choosing to hold onto their inventory instead of flood the market with distressed supply (which would drive prices even lower). Perhaps this is a factor of the expiration of the homebuyer tax credit? Now for the bad news. Over the past year, to give HAMP a chance to “work its magic” (which servicers have little incentive to do ) and to reduce the cost of maintaining the condition of foreclosed properties, banks were delaying the foreclosed home liquidation process. This allowed delinquent borrowers to stay in theirrn houses and also allowed banks to avoid asset value write-downs. Unfortunately, with HAMP running out of qualified borrowers, that trend is starting to reversern course. Bank balance sheets are beginning to balloon with REO, shadow inventory is being converted to actual inventory! </p

    This is a negative for two reasons. First it implies more people are being put outrn of their home and onto the street and second, at some point, the distressed homes banks are adding to their balance sheets will need to be put back up for sale. Once the housing market starts to pick up recovery momentum, banks will begin to slowly liquidate their inventory of foreclosed properties. Hopefully they will do so in a manner that does not greatly disrupt local supply/demand and push prices even lower (which would hurt their own cause). Growing “shadow inventory” is one ofrn two reasons why the housing recovery will likely be a very long processrn (the other being long term unemployment). </p

    THE BIG QUESTION:rn Will the housing recovery only be slow in the hardest hit states? Real estate is after all….”all about location location location”</p




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  • About the Author


    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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