Thursday, April 9, 2009

Banks Believed To Be Holding Around 600,000 Foreclosure Properties Off Market

RealtyTrac believes that banks are keeping around 600,000 foreclosure properties nationwide off the market. This number would represent a huge portion of the available housing stock, and it is believed that banks could be strategically withholding these properties in order to prevent the housing market from collapsing even further. For more on this, read the following blog post from Tim Iacono.

If ever there were a "squishy" data set, one that is quite difficult to get a good handle on due to the paucity of reliable, publicly available data, it is the inventory of foreclosed homes that have yet to make it onto the resale market.

A report by Carolyn Said in the San Francisco Chronicle provided the first graphic on the subject that I've seen, an image that was splashed across the front page of yesterday's paper.
IMAGE With bank repossessions and notices of default set to pick up dramatically in some parts of the country as detailed by Mr. Mortgage the other day, all the prognosticators with rosy housing outlooks for 2009 may be in for a wake up call come summer time.

If the Alt-A and Option ARM loans begin to sour in large numbers (as many predict) at about the same time that banks look to unload some of their inventory after all the recent optimism, there could be another big leg down in home prices.

Some details from the SF Gate story:
A vast "shadow inventory" of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say.

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as "shadow inventory."
You have to wonder about a bank like BofA, after having acquired Countrywide and their stable of bank owned properties, as to exactly how these properties are being valued in light of changing mark-to-market rules and critical earnings announcements.

Everyone seems to be sooooo anxious for the banking sector to show some stability so we can all get on with our stock investing lives again but, if it is coming via the accounting "sleight of hand" that some believe is the real reason for holding back these properties (i.e., valuing them much higher than today's market would), we may all be in for a big letdown.

This post can also be viewed on


Lance W. Newton said...

At I have refocused on the shenanigans related to loan modifications in that blog and that topic relates to the shadow inventory problem because banks, servicers and investors are still not recognizing reality with respect to values in the bubble areas and have refused to reduce principal on over 97% of modification requests. While foreclosure may be the path of least resistance for lenders, producing less liability from MBS investors and resulting (on paper) in the highest NPV of all potential scenarios (Deed in Lieu, Short Sale etc.) The intransigence of the lenders toward principal reductions (regardless of the reasons, valid or invalid) and the tepid federal regulation requesting, but not mandating principal reductions is perpetuating a negative downward spiral in pricing in many areas of the country. I guess the law of unintended consequences applies but that seems to be the case with most of Obama’s initiatives anyway. Home Affordable is a joke in the bubble areas.

I am also a realtor working for a Broker who specializes in SoCal REO properties and we are now seeing shrinking inventories of REO’s, in part due to the moratorium and in part due to the other issues you mention. There are a ton of first time buyers looking for properties in areas where the price has retreated to a sustainable (2.6-3x annual income) level at the current subsidized interest rates. Any clean livable property sells in a few days with multiple offers over listing price (but not excessively over) . The banks take their sweet time about responding to offers and sometimes don’t respond at all. Since demand is high and supply is down, clean inventory is moving, leaving homes that are unbelievably filthy or poorly maintained sitting. They banks are only rarely investing in rehabs in our area. The house must be utterly destroyed to merit a clean-up to standards that will allow it to be FHA financed. Houses in working class areas that cannot be FHA financed do not sell. There is no rhyme or reason to pricing and I have seen two nearly identical houses in the same tract, one utterly destroyed by pets and filth and the other made pristine by the lender with fresh paint, carpet, tile, cabinets etc. both listed for the exact same price.

Eventually the shadow inventory will hit the market, but I do not believe holding it will keep prices up.

Anonymous said...

My small business tanked last year along with the economy. My husband had half of his hours cut. So we lost about 60% of our income over a 4 month time period. We haven't made the mortgage payment on our home since September of 2008. We have not received a formal foreclosure notice. Citi Mortgage says they have a loan modification offer on the way to us. They told us that about 2 months ago. Fedex has not arrived yet with those papers. I know of 4 other people in similiar positions as us. All 5 of us will most likely lose our homes. I just wonder how many Americans are sitting in these future bank owned homes like us. I think there is a crazy large number of inventory the bank has yet to list for sale. The home next to us is bank owned, and for sale. The sign went up 10 months after the family was evicted. That bank owned home next to me has 3 more bedrooms than my house, 1 more bath, 1500sf bigger than my house, and 18 years newer. Same amount of land, and is listed for $90,000 less than what I currently owe on my house. WOW I live in Southern California. We had a 6% fixed rate 30 year mortgage. No arms or legs or options. Just a regular good loan.

The Wolf said...

Check out Ivy Zellmans comments on this, this is only part of the issue. The banks are keeping the commercial developers on life support so they don't have to write down the assets.

That's thirty minutes away. I'll be there in ten.

Anonymous said...

They have to hold them, otherwise their best guesstimates of loan portfolio values for their books blow up (as opposed to marking them to market).

I'm a prospective bidder and I know the bottom isn't in. There are still way too many people in the market bidding on overvalued properties against the banks' shill bidders

I'll pass.