REOs: Looking Ahead to 2010

September 25, 2009

by Scott Sambucci

8 comments

Interest

Some quick thoughts on REOs and Bank-owned sales —

At this week’s Five-Star Default Servicing Conference, the chatter centered on the “next wave of REOs” and the “tsunami of foreclosure sales” coming in 2010.  The Home Affordable Modification Program (HAMP) issued in March focuses on providing loan modifications to those in default or imminent default.  The US Treasury July report indicated that less than 10% (approximately 235,000) of the 2.7 million that could be eligible were modified under this program.

According to RealtyTrac, foreclosures have continued to rise in July and August but REO sales dropped below 2008 levels because of the federal and state foreclosure moratorium programs implemented throughout the year.  This is causing rising housing inventory on bank balance sheets that should result in greater REO inventory starting in late 2009 and in 2010.

However, there’s a counter argument that REOs will enter the marke at higher levels in late 2009 and 2010 but in a more controlled flow than a “tsunami” as discussed frequently at the Five-Star conference:

  1. Banks aren’t in any rush to offload their non-performing assets and REOs at today’s price levels. Right now, losses on housing assets are book losses even with mark-to-market accounting rules, so until they begin selling these assets to hedge funds and other investors, they’ll remain as non-cash losses.  Banks are well-capitalized right now, so they have less incentive to move these assets from their books while price levels are depressed.
  2. Organic” sellers remain inactive. While there is usually a normal amount of housing activity  every year, many would-be sellers are sitting out of the market. While these sellers might be able to get a great deal on the buy-side move-up, the losses they would take on their current home are likely to wipe out any equity they may have built over time with today’s depressed price levels.  With cash constrained, households are hard-pressed to come up with the money needed for the next move.  The “wealth affect” also has some affect, as households are simply playing it conservative before expanding their monthly bills.  The stock market has risen nicely since it’s lows in March but is reaching the psychological ceiling of 10,000 while unemployment continues to rise.
  3. The $8500 home-buyer tax credit is likely to be extended. There’s talk about the upcoming December deadline, but it is far too politically advantageous to simply allow this to expire.  Providing additional support to the housing market through Spring 2010 would expectedly offer some positive economic news for the 2010 election cycle. (Whether or not you think that an extension will have diminishing effects is another conversation.)  My guess is that this extension will get passed in late November, making it appear that lawmakers were sweating it out until the file hour to make it work.  It needs to look good and passing it too soon will cause Fall 2009 sales to slow since most people would prefer to buy and sell in Spring.
  4. It’s politically advantageous for the government to deter banks from foreclosing. See above comment about the 2010 election cycle.
  5. National housing supply has declined month-on-month since January 2009 while prices have strengthened throughout the year:
US Housing Supply since September 2008

US Housing Supply since September 2008

US Housing Price Trends since September 2008

US Housing Price Trends since September 2008

Give the banks a little credit.  A tightening housing supply is a contributing factor to higher prices in 2009.  Releasing large quantities of REOs to the market would cause a housing supply shock and tremendous downward price pressure for housing.  This would result in even higher realized losses for the banks, placing them back into operational stress.  Instead, expect the “wave of REOs” to instead trickle moderately to enable price level support and mute realized losses by the banks.

Based on the number of real estate agents and brokers attended the Five-Star Conference, industry expectations are bullish for the number of REOs that will hit the market in 2010.  I’m not wholly convinced quite yet.

Previous post:

Next post: