Posted on June 2nd, 2008 in Daily Mortgage/Housing News - The Real Story
New Bank REO, or ‘Shadow Inventory’,is continuing to surge and in my opinion, is the real threat to values across the nation. On average, banks are discounting this inventory by 25% of the original NOTE value with nearly half experiencing discounts of 30% or more. Remember, most first mortgage note values were originally at 80% loan-to-value, meaning many homes are being discounted nearly 50% from the original appraised value at the time the loan was done. What about all the comparable property owners who bought at the same time and are now 50% upside down in their home, and not in default? Yet.
The Wall Street Journal put out a story last night citing…
“Lenders and investors in mortgages owned about 660,000 foreclosed homes in April, up from 493,000 in January and 231,000 in January 2007, according to First American CoreLogic, a research firm based in Santa Ana, Calif., that collects data from lenders and county clerks. The April total works out to about one in seven previously occupied homes available for sale nationwide.”
Bank REO inventory is now ‘the market’. Banks are the market maker. According to DataQuick, in March and April 2008 Foreclosure Resale’s were responsible for 38.4% and 37.7% of Total Sales respectively. Last April, Foreclosure Resale’s were 5% of Total Sales.
Even worse, Notices-of-Default (NOD) counts, which is the first stage of forecosure, are also surging. In CA for example. NOD’s stood at a record 44,101 in the month of April. About 70% of these make it all the way to REO, meaning that in four months there should continue to be record REO counts.
Below is from Foreclosure Radar’s April CA Monthly Foreclosure Report.
High-level findings include:
- Notices of Default – the filings for the first step in California’s foreclosure process increased only slightly to set a new record of 44,101 new filings.
- Notices of Trustee Sale, which are issued approximately 3 months following a Notice of Default, increased 7.8 percent in April surpassing the previous record with a total of 29,892 new filings.
- April foreclosure sales at auction jumped 44 percent over March to a record 22,838 sales, with a combined loan value of $9.45 Billion. The majority of these sales received no third party bid and reverted back to the lender despite the largest across the board discounts ever offered at trustee sale auctions.
With discounts as large as banks are offering, entire neighborhoods and regions are being marked-to-market overnight. This is pulling thousands of other home owner’s values down sharply forcing them into a negative equity position, heightening their chances of loan default.
The Wall Street Journal says…
“The REO glut is weighing on house prices in many areas, as banks tend to cut prices faster than other sellers. A new set of local home-price indexes, to be introduced this week by Integrated Asset Services, shows that the median price of homes sold in Riverside County, Calif., in April was down about 29% from a year earlier. The median price fell about 13% in Clark County, Nev., and 12% in Arizona’s Maricopa and Pima counties. Median-price comparisons can be skewed by shifts in the proportions of high- and lower-priced homes sold from one year to the next but provide a broad indication of market trends.”
In a nutshell and simplistically speaking if 10k people get a ‘great buy’ on REO, 100k home owners could have the value of their homes fall by 30-50% overnight. Of those 100k, 35% get thrown into a negative equity position, 35% of those experience loan default and 75% of those (9,200) go back the bank as REO. The banks sell at a 30-50% discount and the process repeats. Again, no inventory has moved. Values just continue to fall. It is a vicious cycle. –Best, Mr Mortgage
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