Banks Reduce Their Foreclosure and REO Portfolios

by 30 Aug 2012

(TheNicheReport) - Real estate investors eager to snap up foreclosed properties encountered fewer opportunities during the second quarter, mostly due to banks controlling the number of Real Estate Owned (REO) properties listed for sale. According to a recent report by real estate analytics firm RealtyTrac, banks are currently holding more than 620,000 properties acquired through the foreclosure process, but they are choosing to list only 1 percent of them.

Sales of REO properties have played a major part in the slight recovery of the housing market this year. In some regional markets, foreclosed properties and short sales have made up almost half of all purchase transactions. Real estate investors have been the major players in this small recovery, and they are drawn towards the bargains presented by REO portfolios.

The current situation recalls the uptick in sales seen in early 2009. Bargain-seeking investors back then did not have access to as many short sales as they do now, and the brief buying frenzy back then did not translate into a price increase. Banks are more willing to allow short sales now, a fact that has translated into an improvement of home sales and a tangible recovery of prices.

The average discount of a foreclosed home these days is 32 percent. The average price of a foreclosure deal is $170,400 –a 7 percent improvement over last year. Foreclosure sales represented 23 percent of all real estate transactions this year. 

According to statements made to the Associated Press by a RealtyTrac vice president, banks are now in a position to hold on to their REO assets a little longer. In Nevada, one of the ground zero states of the housing crash, investors are taking part in bidding wars over REO listings. Banks are very likely to grow their REO portfolios as more foreclosures are completed, but the number will be lower than expected.

After a period of inactivity due to an investigation by several state attorneys into the questionable practices of the major American mortgage lenders and servicing institutions, the backlog of foreclosures is expected to resume processing, but the banks now have to spend about $25 billion in writing down principal mortgage balances. This will prevent REO portfolios from growing too large.

A significant number of foreclosures are expected to be conveyed to the banks next year. While many investors will probably wait until more REO listings become available, those who participate in bidding battles will contribute to the improvement of pricing and of the overall housing market.

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