The Case of the Missing REO Inventory

Rick Sharga - Realtytrac - October 7th, 2009

Certain things in life are simply meant to be mysteries. There are age-old philosophical questions that have kept philosophers busy for millennia: What is the sound of one hand clapping? If a tree falls in the forest and no one is there, does it still make a sound? Other mysteries hang heavy with intrigue: What really happened to Amelia Earhart? And who really kidnapped the Lindbergh baby? And still others simply defy logic: If Denny’s is open 24 hours a day, 365 days a year, why are there locks on the doors?

Now we can add another question to the list of ongoing mysteries: With foreclosure activity breaking records nearly every month, where are all the REOs?It’s a fair question. In normal market situations, a bank will repossess a home and usually process it through to a listing agent to put on the MLS within 30 days.

In a relatively short period of time, virtually every marketable REO property finds itself listed for sale on the local MLS. Today, that’s simply not the case; it’s likely that between 450,000 and 500,000 properties repossessed over the past year are still not on the market. And with buyers hungry for housing bargains, and agents and brokers champing at the bit ready to sell the properties, it begs for a reasonable answer.

Lenders and servicers admit that it’s taking longer to process REOs than it has in the past, and they offer a number of legitimate reasons:

-Many of the properties have title issues that need to be resolved
-Many of the properties are in states of utter disrepair
-A number of states have strict redemption rights periods, which prevents the lender from reselling the property
-A few states have extended the length of eviction proceedings
-The sheer volume of REO activity has created a “pig in the python” phenomena, (to put this in perspective, there will be roughly four times the number of REOs this year as in the last “normal” year, 2005)

What else could be slowing things down? A popular theory is that many banks are holding the properties off the market in order to defer losses. There is some accounting logic to this theory, as in most cases banks aren’t required to adjust asset prices until the actual resale of the property.

Another idea is that the industry is holding back the inventory to create leverage with the government in order to force the creation of a “toxic bank” or RTC-like entity that would buy the distressed assets at 50 to 60 cents on the dollar rather than the 30 to 35 cents available on the market today.

This theory suggests that, seeing the threat of a massive inventory of distressed homes being released all at once, the government would “blink” rather than risk another housing market meltdown.

Whatever the reason — process issues or conspiracies — we’re going to continue to see record-breaking numbers of REOs for at least the next year, and will all be watching to see when these sought-after homes finally make their way to the market.