'Shadow REO': As Many as 90% of Foreclosed Properties Held Off the Market
Daren Blomquist, vice president of RealtyTrac, said that he was surprised by his company's finding, especially since a similar analysis in 2009 found that banks were attempting to sell nearly twice as much of their REO inventory back then.
"It was surprising to see that that percentage had come down," he said, noting that many agents that his firm has spoken to "have mentioned that there's actually a shortage of foreclosure inventory -- and they're wanting more."
But Realtors who want more bargain-priced homes to sell may not get their way anytime soon. Foreclosed properties are an extreme liability to lenders, holding the potential not just to dent their profits but to actually bankrupt them altogether.
That's because when a lender carries an REO on its books, it is allowed to value the home at the price that the foreclosed-on borrower originally paid for it. Once the lender sells the home, it must book a loss: the difference between the original purchase price and the current value. And since home values have fallen by nearly a third since the housing bust, that translates into huge losses for the bank."They've already taken a loss on the loan," Khater said, "but they're going to take a loss on the asset once they dispose of it." Adding insult to injury, REOs typically sell at a 33% discount. Fears of a Domino Effect Releasing REOs onto the market also chips away at home prices in general, depressing the value of the homes of other customers -- who could already be teetering on the brink of foreclosure -- and the additional REOs that lenders hold on their books. "Each REO that comes through has a domino impact on properties that are very close to that property," Khater said. In fact, if lenders turn their REO release valve to full blast, the deluge of foreclosures cascading onto the market could plunge the country into a recession, said Thomas Martin, president of consumer advocacy group Americas Watchdog. "If they let the dam essentially break. It could be a catastrophic disaster for the U.S. economy," he said, predicting that some major banks would fail and home prices would nosedive by 20 percent.
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