The Housing Chronicles Blog: Wave of Foreclosures Impacting Multiple Markets

Monday, March 24, 2008

Wave of Foreclosures Impacting Multiple Markets

Given today's report by the NAR on a rise in existing home sales but a decline in median prices, it's not hard to imagine the reason for the trend: sellers -- including many banks owning foreclosed properties -- have reduced prices to move inventory. Now that the number of foreclosed properties is growing, lenders are growing increasingly serious about ensuring that the number of vacant homes on their hands doesn't become an unmanageable avalanche.

What's somewhat surprising are the regions in which the percentage of foreclosed homes to all housing units is relatively high: such as Chicago (2.5%), Atlanta (1.8%), New York (1.2%) and Denver (2.4%).

From a Wall Street Journal story:

A glut of foreclosed homes of historic proportions is starting to drive down U.S. home prices faster as lenders put more properties on the market and buyers show signs of interest.

The ability of America's lenders to manage this fire sale will be crucial to determining how long the housing market stays in the dumps -- and how quickly blighted neighborhoods can heal. The oversupply is severe: In some major markets, including Las Vegas and San Diego, foreclosure-related sales have accounted for more than 40% of all sales in recent months.

On Monday, new data suggested that pressures like these are starting to drive prices low enough to attract some buyers back into the market. Sales of previously occupied homes jumped 2.9% in February from the month before, the National Association of Realtors said, the first increase since July....

Banks and others holding foreclosed property have concluded "we've got to move things" and are finally willing to slash prices, says Thomas Lawler, a housing economist in Leesburg, Va.

The supply is piling up fast. Overall, the total number of lender-owned homes doubled last year but sales grew only 4.4%.

At the same time, the specialist firms that sell foreclosed homes for lenders say banks are sending them additional properties much faster than they can be sold. "They're coming in [at a rate of] two new properties for every sale," said Claudia Smith, vice president of operations for First American REO Outsourcing, which is handling roughly 8,000 foreclosed homes for lenders.

First American CoreLogic, a research firm based in Santa Ana, Calif., that collects data from lenders and county clerks, estimates that foreclosed properties held by lenders accounted for 493,000 of all homes on the market in January, up from 231,000 a year before. Properties like these represent roughly one of nine currently listed for sale nationwide, compared with a one-in-15 ratio a year earlier....

But foreclosures also can help bring prices in high-cost areas down to levels that are affordable to teachers, fire fighters and other middle-class buyers who may have been priced out of the market during the housing boom.

U.S. Rep. Barney Frank, a Massachusetts Democrat, recently announced plans for legislation to provide $10 billion of federal loans and grants to help local government and nonprofit groups buy and renovate vacant foreclosed homes. The homes would have to be sold or rented to people with low or moderate incomes....

Prospects for the housing market also depend heavily on the job market. As measured by the S&P/Case-Shiller national index, home prices jumped 74% in the six years through 2006. During the same period, U.S. median household income rose just 15%. (Neither figure is adjusted for inflation.) That discrepancy made housing unaffordable for many Americans....

Lenders face dueling pressures when deciding how quickly to sell foreclosed properties. On the one hand, foreclosed homes tend to depreciate faster than occupied ones because they get less maintenance and quickly look forlorn. And the longer they sit unsold, the longer the lender must keep paying monthly expenses, including insurance and property taxes.

On the other hand, lenders must balance the pressure to clear their books with the fact that selling too quickly -- and at deep discounts -- could trigger big write-downs and devastate their quarterly results...

The fastest way to move foreclosed homes might be to sell in bulk to big investors, although that kind of transaction is highly unusual in the real-estate business. Nevertheless, some hedge-fund operators, including New York-based Paulson & Co., are considering whether to seek deals like these. There are big obstacles, however. One problem: Hedge funds aren't equipped to manage small properties scattered over large areas.

Another sticking point is price. Mary Coffin, an executive vice president who heads the loan-servicing business of Wells Fargo, says investors have approached her bank to discuss "fire-sale" bulk purchases of homes, at as little as 20% to 30% of what the bank thinks the properties are worth.

"We're not there," Ms. Coffin says.

She thinks Wells can do better than that by selling homes one by one. Still, she says, Wells needs to prepare for the possibility of doing some bulk sales....

One big problem for sellers is that mortgage lenders have severely tightened their terms, requiring larger down payments and better credit records. As a result, many people interested in buying foreclosed homes can't get loans.

Another hurdle is that the lenders responsible for selling the homes don't own all of them. That's because many mortgages are sold to investors in the form of securities; therefore, the investors in those securities actually own the homes. The trust agreements that create securities like these require lenders to show that they are getting the best price possible for the homes. That makes it tough to cut deals with potential buyers seeking huge discounts.

Among the big owners of foreclosed properties are government-sponsored mortgage investors Fannie Mae and Freddie Mac, along with the biggest lenders, Countrywide Financial Corp. and Wells Fargo. Fannie Mae owned 33,729 homes at the end of 2007, up 34% from a year earlier.

Another big seller is the Department of Housing and Urban Development, or HUD, which operates the Federal Housing Administration. The FHA insures banks and investors against losses on mortgages, and ends up owning foreclosed homes. The average time it takes to sell has grown to 196 days from 175 a year earlier, says Laurie Maggiano, a HUD official.

About 30% of HUD's homes are in Ohio and Michigan. In those states, HUD late last year began offering a $2,500 rebate to buyers. HUD also has programs that allow buyers to make down payments of as little as $100...

HUD also has programs under which it sells homes at deep discounts, and sometimes for as little as $1, to local nonprofit developers who provide housing for low-income people. Ms. Maggiano says HUD is looking at ways of letting investors bid for large groups of homes.

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