'Shadow REO': As Many as 90% of Foreclosed Properties Held Off the Market
That doomsday scenario has many industry professionals supporting lenders' tactics of holding onto most of their REOs. Otherwise, they would be "causing the floor to fall out from underneath the entire market," Faranda said. He added that banks don't have the manpower to push the paperwork required to put all their foreclosures on the market.
Indeed, lenders couldn't list all their REOs even if they wanted to. Fannie Mae, for one, reported in the first quarter of 2012 that it was unable to market 48% of its REO inventory because many of the homes were either still occupied, under repair or being rented.
'Slowly Pulling Back the Band-Aid'
Banks and investors will likely continue to withhold REOs until the market value of the properties appreciates, allowing them to sell the homes at higher prices. And that may be a winning strategy.Fannie Mae, which owned 114,000 foreclosed homes as of March 31, reported in the first quarter that there were "improved sales prices on dispositions of our REO properties, resulting from strong demand in markets with limited REO supply." But at the same time, battening down REO inventory could prolong the housing slump, since the market must absorb the properties at some point anyway. "As opposed to ripping off the Band-Aid quickly, it's kind of slowly pulling back the Band-Aid," Blomquist said. Either way, he said, many lenders' REO-disposal tactics remain obscure, and that will continue to "create a lot of uncertainty in the market."
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