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TheStreet Open House

'Shadow REO': As Many as 90% of Foreclosed Properties Held Off the Market

By Teke Wiggin

A pretty, manicured home sits six doors down from Phil Faranda's in Briarcliff Manor, N.Y.

To look at it, most passersby would think that the tidy house is occupied by a nice family that gives it a good amount of TLC: The lawn is mowed, the bushes trimmed, and the siding has what looks like a fresh paint job.

But Faranda knows better.

The bank-owned house has been vacant for 18 months, according to Faranda, a Realtor specializing in distressed properties. Just two notices taped to a window are the only indications that the home is unoccupied.

It might seem curious that such a well-maintained home doesn't have a For Sale sign on its front yard. But it's certainly not unusual.

This home is part of what's known as the "shadow REO" inventory: repossessed homes across the country that banks or investors often purposely keep off the market. The practice isn't a secret, and refraining from dumping a large inventory of foreclosures on the market helps to keep home prices from crashing.

But the extent to which lenders keep their stock of REOs -- industry parlance for "real estate owned" properties -- off the market may be much larger than most people think.

As many as 90 percent of REOs are withheld from sale, according to estimates recently provided to AOL Real Estate by two analytics firms. It's a testament to lenders' fears that flooding the market with foreclosed homes could wreak havoc on their balance sheets and present a danger to the housing market as a whole.

Online foreclosure marketplace RealtyTrac recently found that just 15% of REOs in the Washington, D.C., area were for sale, a statistic that is representative of nationwide numbers, the company said.

A Liability to Lenders

Analytics firm CoreLogic provided an even lower estimate, suggesting that just 10% of all REOs in the country are listed by their owners, which include mortgage giants Fannie Mae and Freddie Mac as well as the Federal Housing Administration. As of April 2012, 390,000 repossessed homes sat in limbo, while about 39,000 were actually listed for sale, said Sam Khater, senior economist at CoreLogic.

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