How Many Homes Do Banks Have Up Their Sleeves?
By James R. Hagerty
The Wall Street Journal
March 19, 2010
For those trying to figure out how much further U.S. house prices could fall, it would help to know how many more foreclosed homes banks need to sell.
Alas, no one has found a way to track precisely how many of those properties are owned by banks, the U.S. Department of Housing and Urban Development (which ends up with homes when FHA-insured loans go bad) and mortgage investors, including securitization trusts and the government-controlled mortgage firms Fannie Mae and Freddie Mac. All of these entities report data on their holdings of foreclosed homes – known in the trade as REO, short for “real estate owned” – but they do so in their own disparate ways.
The accompanying chart shows three laudable attempts to track the REO inventory.
Barclays Capital, an investment banking firm, uses foreclosure-related data from private-label mortgage securities (those not backed by any government-related entity) and extrapolates from that to estimate the entire market. The risk with this approach is that the behavior of borrowers whose loans are in private-label mortgage securities may diverge from the behavior of those with other types of loans.
RealtyTrac Inc., a provider of foreclosure data, examines public records on mortgages and real estate transactions across the country and says it covers 92% of all U.S. homes. In theory, that should allow for a very good estimate, but it can be tricky to determine in some cases whether a home has gone into bank ownership or been sold to an investor on the courthouse steps. Rick Sharga, a senior vice president at RealtyTrac, says he believes the firm’s estimate of the REO inventory modestly understates the true total.
Tom Lawler, an independent housing economist in Leesburg, Va., is working on his own REO tally by combining data reported by Fannie Mae, Freddie Mac, the FHA, the Federal Deposit Insurance Corp. and private-label securitization trusts. Mr. Lawler says he hasn’t yet found a way to measure the entire market, though his current tally appears to include the bulk of it.
One thing is clear: The REO supply is rising again after dropping in 2009.
Why did REO supply drop last year even as more and more people fell behind on their mortgage payments? Because the flow of homes into bank ownership was slowed by time-consuming efforts to figure out which distressed borrowers could qualify for programs that shrink monthly payments in an attempt to avert, or at least delay, foreclosures.
At the same time, brisk demand from investors and first-time home buyers helped banks sell many REO homes. Indeed, many investors are hopping mad about what they see as an REO shortage and want the government to let banks foreclose faster so they can grab more bargains.
Though the foreclosure process remains very slow, the REO supply is rising again because banks now have had time to determine that many homeowners don’t qualify for loan modifications. That means more foreclosures are proceeding.
Barclays projects that the supply of foreclosed homes will rise to about 733,000 in April, then begin to decline again gradually.
But estimating how many homes will turn into REO is even trickier than measuring the current REO inventory.
The outlook depends hugely on whether the economy continues to heal and creates enough jobs to increase housing demand. It also depends on how many delinquent borrowers can be rescued from foreclosure through loan modifications. Nearly eight million households, or 15% of those with mortgages, are behind on mortgage payments or in the foreclosure process. Many of them will be offered loan mods, but a big share of those borrowers are likely to default again later.
Housing construction is very low by historical standards now, and that should help support prices. But a much stronger economy may be needed if banks are to unload all of their REO over the next few years without causing another steep fall in prices.
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