A year ago experts were predicted record REO’s to hit the market in 2012. That didn’t happen as planned for many reasons. Below is an article I wrote for RIS Media on what happened to the expected flood of REO’s.
Unmet Expectations: The REO Flood of 2012
Industry experts predicted a flood of foreclosures in 2012, leading to hundreds of thousands of REO properties entering the market and massive business opportunities for real estate brokers and agents.
The anticipated flood, however, turned out to be little more than a trickle. After peaking at nearly 100,000 bank repossessions a month in 2010, the number of REOs fell dramatically in 2011, and has continued to decline throughout 2012, despite a backlog of approximately three million seriously delinquent loans. Recent reports by RealtyTrac and LPS show REO activity ranging from 55,000 to 60,000 homes a month. So, what happened that made all the predictions wrong? There are several possible reasons that the numbers were so far off.
Blame Linda Green
The robo-signing scandal, where mortgage servicers were accused of falsifying signatures on documents that were part of the judicial foreclosure process, essentially shut down foreclosures in late 2010. In one of the more egregious examples, the signature of an employee named Linda Green was found on several hundred thousand mortgage documents. An investigator claimed to find at least 33 completely different versions of “Linda’s” signature on paperwork representing more than 20 different banks. Judicial foreclosures ground to a halt as judges demanded reviews of all documentation. These reviews led to the discovery of other paperwork issues, which led to even more reviews. Attorney firms were forced to cancel and re-file foreclosure actions, backing up the court system and delaying proceedings on hundreds of thousands of delinquent loans. REO activity in states like Florida, New York, New Jersey and Illinois fell by more than 50 percent.
Blame Tom Miller
Iowa’s peripatetic Attorney General led the charge of 49 state AGs in crafting a $25 billion settlement with the five largest mortgage servicing firms for robo-signing and other alleged wrongdoings. The negotiations, which resulted in changes to loan servicing practices and nearly $20 billion in mandatory principal balance reductions, dragged on for more than a year, effectively freezing foreclosure activity by these servicers. After the agreement was reached, it slowed down foreclosures again, as servicers re-evaluated their loan portfolios to see which borrowers might qualify for the principal balance reductions.
Blame Short Sales
One of the unexpected effects of the national mortgage settlement was an explosion in the number of short sales. Short sales count as principal balance forgiveness, and servicers have aggressively begun moving in that direction rather than attempting to modify loans for borrowers who, in many cases, haven’t made a payment in more than two years. We’re on pace to see more than 500,000 short sales in 2012, which will represent an unprecedented 10-12 percent of all existing home sales. Every short sale, which is generally a better alternative for the borrower and the lender, basically eliminates a potential REO.
Blame the Process
Because of delays caused by new legislative and regulatory requirements, the average foreclosure now takes more than a year to execute. In Florida, it takes more than 900 days, and in New York and New Jersey, the timeline is more than 1,000 days. So even with foreclosure starts beginning to pick up, it will be many months before we see those properties enter the market as REOs.
While we didn’t see the flood of REO properties predicted this year, it’s important to remember that there will still be more than 500,000 REO sales in 2012. This is an important segment of our market and will continue to be for years to come.
Wendy Forsythe, executive vice president/head of global operations at Atlantic & Pacific Real Estate, has leveraged her passion for real estate and technology to help build national real estate brands in both Canada and the U.S.