As banks have been foreclosing on delinquent mortgages, the numbers of properties they are holding as "REO" (Real Estate Owned) assets is swelling. According to Carter,
The article goes on to suggest that 75% of all distressed properties have yet to hit the market.
The value of REO property on the books of FDIC-insured banks at the end of the third quarter surged 21 percent from the previous quarter, to $23 billion. That total -- which includes single-family to four-family homes valued at $11.5 billion and another $1.5 billion in property purchased with FHA-backed loans securitized by Ginnie Mae -- represents a 134 percent increase from a year ago, according to the latest quarterly report from the Federal Deposit Insurance Corp.
Repossessions by Fannie Mae and Freddie Mac grew by nearly 25 percent from the second quarter to the third quarter of 2008, hitting 15,196 homes, according to a recent foreclosure prevention report by the Federal Housing Finance Agency (FHFA). With Fannie and Freddie repossessing homes faster than they could sell them, the companies were left with 95,553 REO properties to dispose of at the end of September -- a 25.5 percent increase in just three months.
We are cautioned that banks are going to start offering these properties for sale in large numbers. The author describes this as a coming "flood." Another pundit calls it a "tsunami." Whatever spectacular term you care to use, certainly a rapid influx of new properties on the market is going depress market prices even further, much to the dismay of homeowners and holders of existing mortgage paper. On the other hand, when coupled with cheap mortgage money, this should create remarkable opportunities for well qualified buyers.
Buyers and sellers are faced with additional challenges when dealing with REO and short sale / pre-foreclosure transactions. As the market roils, it is going to become increasingly important for buyers and sellers to work with highly trained and knowledgeable real estate agents, mortgage brokers and related professionals. I hope to explore some of the reasons why in the coming weeks.