The Real Estate Owned marketplace will most likely expand for at least two years. With foreclosures at abnormally high levels and with one in nine homeowners currently delinquent on their mortgages, 2010 and 2011 should produce a wave of REO activity.
Despite numerous government initiatives aimed at keeping struggling homeowners in their homes, lenders often have no option other than foreclosure. In the early stages of the recession, lenders attempted modifications but 43% resulted in delinquencies within six months.
The bottom line is that lenders are making the difficult decision to foreclose. Lenders proceed with foreclosure in hopes of getting through the process sooner rather than later.
The Obama Administration and the Treasury Department as well as the Mortgage Bankers Association (MBA) have been stunned by the aggressive way lenders have proceeded. This newest home loan modification program looks good on paper but is cumbersome for the borrower. Time is short at lending institutions where foreclosure departments are more active than loan departments.
When a property is classified as Real Estate Owned, it has already been through foreclosure. Lenders are in the unfamiliar position of owning, maintaining and managing residential properties. As more and more REOs arrive as inventory, the lender’s losses just keep mounting.
Many of these lenders are seeking to establish ongoing relationships with qualified REO purchasers. For the purchaser who can arrange financing, become familiar with REO purchasing practices and who have a well-designed investment strategy, opportunities are abundant.
The real estate market is busy with distressed sales, including short sales. According to the National Association of Realtors, 35 percent of the country’s pending sales for existing homes are short sales. A high percentage of these sales fail before closing. When the short sale falls through, the next step is foreclosure. While investors can purchase during the foreclosure stages, they are more inclined to await the REO, or failed auction.
In today’s real estate market, this occurs because fair market value no longer surpasses the amount of secured debt. In the U.S. today, more than 20 percent of homes are in this “underwater” situation. This is bad news for lenders and borrowers but is causing the explosion in REO purchases.