No Flood of REOs Seen Following the Multi-state Mortgage Settlement

Local markets will probably not be swamped by waves of foreclosures following the multi-state mortgage settlement announced yesterday. Rather, the huge inventory of one to two million foreclosures will enter markets gradually.

Leading housing economists and experts who follow foreclosures closely said they expect that after new processing standards are put in place in the next few months as a result of the agreement, servicers will begin processing properties that have been in limbo but will avoid disrupting local real estate markets.

“Right now the drain is still clogged and I think the market will move sideways after the agreement takes effect. Some places, like many Florida markets, have bottomed out. Elsewhere, there are so many variables I don’t see foreclosures all hitting at once. Rather, it will be a flat economy with foreclosures siphoned into markets over an extended period of time,” said Tom O’Grady, chief executive officer of Pro-Teck Valuation Services in Waltham. MA.

In a recent analysis, Pro-Teck said one of the key questions about the current housing crisis is how the inventory of distressed real estate is affecting the path to recovery and the “new normal” for the housing market.

“A possible headline of the current crisis is that the stage after foreclosure has taken place and properties are awaiting transition back to the market via an REO (real estate owned sale) has become a critical ingredient in any forecast on the pace of the housing recovery and the return to the “new normal”. The rise in the prominence of this dimension of the broader distressed inventory stems from the unprecedented growth in the number of foreclosures and the slow and uneven pace at which they are placed on the market to ultimately become REO sales,” the analysis stated.

Mark Fleming, chief economist at CoreLogic, who estimates the size of the inventory at 1.6 million properties, said that home prices overall fell 4.1 percent last year. But if you removed all distressed sales?foreclosures, short sales and deed in lieu transactions?prices would have fallen only about 1 percent.

Speaking today at a Capitol Hill briefing sponsored by Radian Guaranty, Fleming said the agreement will “create a set of certainties in the servicing world” and before the agreement servicers were afraid to do anything that might put them in the gray area. Now, they won’t want to do anything that would disrupt prices. Pointing out that about half the foreclosures are owned by Fannie Mae and Freddie Mac, he suggested that Fannie and Freddie, who recently announced a pilot project to sell foreclosures in bulk to inventors as rental properties, might do more even rental or lease-to-purchase bulk sales to reduce REO inventory processed after the agreement. Fleming admitted it could take several years for the market to absorb the new inventory.

Hope Schwartz, executive director of the Hope Now Alliance, agreed and that private sector servicers might also do rental-to-own or bulk rental transactions to reduce their inventory without impacting local housing values. She added that new standards being developed by the Consumer Financial Protection Bureau will help reduce foreclosures among borrowers at risk. One important change will require lenders to provide consumers a single point of contact.

2 Comments For This Post

  1. Real Estate Bargains and Deals Says:

    Who, exactly, is going to pay for this mortgage fund? Will it be the banks? No, it will be the bank customers, in the form of higher fees. Those of us who were responsible and who did not take out mortgages we could not afford are the ones who are going to pay for it. Now how fair does that sound?

  2. Nilesh Says:

    feds have no business ettsing up any criteria save for loans that end up with the GSEs, FHA and Ginnie (VA). In that case, they are only laying out guidelines for lenders that tell them know what loans they will accept for approved purchase on the secondary market. This is what the secondary mortgage market does. Their criteria is key. This is why the housing market bubbled and burst; because the secondary mortgage market lowered their standards to a ridiculous level. It makes no sense to say government cannot set these criteria that is what FNMA and FHLMC do. Since they guarantee 90% of the housing inventory, this is not a business they can no longer be in. Until these institutions disappear, that is what they do. That is a part of their responsibility. I agree that they should not be there and that this should be done by someone not in government, but that option does not exist for us until these houses are taken off their books. Not only must the houses be sold, but the mortgages for those houses must be sold. Now, if we ever reach a point where there is no more FNMA or FHLMC, then we can say, Government should not be ettsing these standards. As long as those entities exist, they will be ettsing lending standards, like it or not.Reply

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