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The increased presence of lender-owned homes in the market – known in the banking industry as REOs, for “real estate owned” – is fallout from the real estate fervor that marked the first half of this decade. Loans were easy to get, adjustable rates made monthly costs more bearable, home values were rising, and many homeowners leveraged themselves to the maximum. But conditions have changed and foreclosures have risen. REOs, once rare in Silicon Valley, may soon contribute to lower home prices in some neighborhoods.
One of the reasons so many foreclosure properties fail to find buyers is because the bidding typically starts at the amount of the unpaid balance on the first mortgage, and in a soft market, some homes are no longer worth that much. When that’s true, no one bids. “There’s no quick upside for the investor,” said Greg McBride of Bankrate.com.
In May, $2.8 billion worth of California real estate went up for sale in foreclosure auctions, according to ForeclosureRadar.com, a Discovery Bay company that sells foreclosure information to subscribers. Of that amount, about $2.6 billion worth failed to find buyers, and so became bank-owned. The figures represent the total value of the outstanding loans that went up for auction.
Those figures are way up from early this year. In January, for example, $1.49 billion worth of property was auctioned statewide, and $1.32 billion went back to banks. January is typically a busy month because trustees usually refrain from foreclosing during the December holidays.
With so much property be ing foreclosed upon, “Even if every one of them was a great deal, I don’t know that we’d have enough investors to buy them,” said Sean O’Toole, ForeclosureRadar’s founder. “As the banks take back $2.6 billion a month, they’re going to get more motivated to get a short sale done,” he said. “The conditions are ripe right now for them to start discounting.”
Short sales occur when a lender agrees to let owners sell a home for less than they owe on the mortgage, to avoid costly foreclosure proceedings.
When banks take back foreclosed-upon homes, they sometimes hire auction houses to unload properties. Several companies specialize in showcasing REO or foreclosure properties, said Laura Pephens, a director of the California Mortgage Bankers Association and a mortgage-industry consultant in San Clemente. Among the sites with California listings are www.kwiauctions.com and www.ushomeauction.com.
Lenders also list homes with realty agents who specialize in REO transactions, which can take much longer than normal sales. Every aspect of the sale – and preparation for it – must be vetted by the lender or mortgage servicer that holds the property.
