Distressed Property Sales, Discounts Steady in Third Quarter

Sales of distressed homes, those in some
stage of foreclosure or bank owned (REO), accounted to 20 percent of all U.S.
home sales during the third quarter of 2011
compared to 22 percent of sales in
the second quarter according to information released Thursday by
RealtyTrac.  One year earlier such
distressed sales represented 30 percent of the housing market.

There were 221,536 such distressed
property sales to third parties, 11 percent fewer than revised second quarter
figures and 5 percent fewer than in the third quarter of 2010.  Pre-foreclosure sales (generally referred to
as short sales) totaled 92,824 sales or 9 percent of all sales, down 9 percent
from the second quarter and nearly identical to the number one year earlier
when pre-foreclosure sales represented 12 percent of the market.  Sales of REO totaled 128,712 properties, down
13 percent quarter over quarter and 8 percent from the previous year.  REO sales made up 12 percent of all sales in
the quarter compared to 13 percent in Q2 and 18 percent of sales a year
earlier.

Prices for distressed homes averaged
$165,322, up one percent from Q2 but down 3 percent from one year earlier.  The average discount from the market price
for distressed properties was 34 percent, the same as in the second quarter of
2011.  The discount one year earlier
averaged 37 percent.  There were
substantial differences, however, between the prices for pre-foreclosure
properties which averaged $191,119, a discount of 24 percent below the average
market price, and REO.  The latter had an
average sales price of $146,437 in the third quarter, a discount of nearly 42
percent, unchanged from Q2 and down from 45 percent a year earlier.  In the second quarter the discount for pre-foreclosed
properties was 23 percent and was it 24 percent in the third quarter of
2011. 

In six states distressed properties
sales accounted for a larger share of the market than the 20 percent national
average.  The states were Nevada (57
percent), California (44 percent), Arizona (43 percent), Georgia (34 percent),
Colorado (26 percent) and Michigan (23 percent).

The states with the largest
discounts for distressed property sales were Missouri (56.5 percent) and Massachusetts
(51 percent.)

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Lenders Approving More Short Sales, Pricing Aggressively

Sales of distressed properties once again accounted for more than a quarter of all home sales during the first quarter of 2012.   Twenty-six percent of residential real estate sales during the quarter were of homes that were in some stage of foreclosure or bank-owned (REO).  This is up from 22 percent of sales in the fourth quarter of 2011 and a slight increase from the first quarter of 2011 when distressed properties held a 25 percent market share.

RealtyTrac, which released its first quarter Foreclosure Sales ReportTM Thursday morning, said that a total of 233,299 residential properties that were pre- or post-foreclosure sold during the quarter, an increase of 8 percent from the previous quarter and virtually unchanged from one year earlier.

Pre-foreclosures sales, usually short-sales in which the bank agrees to take less than the full payoff of the mortgage, increased 16 percent from the previous quarter and 25 percent on an annual basis.  There were a total of 109,521 pre-foreclosure sales during the quarter, the highest number since the first quarter of 2009, and they accounted for 12 percent of all sales during the quarter.  In the fourth quarter of 2011 these sales took a 10 percent market share and 9 percent one year earlier.  

Banks sold 123,778 homes out of their REO inventory during the quarter, a 2 percent increase from the fourth quarter but down 15 percent year-over-year.  REO sales accounted for 14 percent of all sales compared to 13 and 15 percent of sales in the previous periods.

“Foreclosure-related sales picked up in the first quarter, particularly pre-foreclosure sales where a distressed homeowner is selling to avoid foreclosure – typically via short sale,” said Brandon Moore, chief executive officer of RealtyTrac. “Those pre-foreclosure sales hit a three-year high in the first quarter even as the average pre-foreclosure sales price dropped to a record low for our report. Lenders are approving more aggressively priced short sales, which in turn is resulting in more successful short sale transactions.

“Meanwhile the average price of a bank-owned home is stabilizing and even increasing in some areas where a slowdown in REO activity over the past year has resulted in a restricted supply of REO homes available,” Moore continued. “Still, REO sales did increase on a quarterly basis in 21 states, indicating that lenders are still working through a bottleneck of unsold REO inventory in many areas.”

The average sales price of homes sold pre-foreclosure or out of ORE was $161,214, 1 percent lower than the previous quarter and down 2 percent on an annual basis.  This represented a discount of 27 percent from the average price of non-distressed properties, unchanged from the fourth quarter and down from a 29 percent discount a year earlier.

There was a significant difference between the average price paid pre-foreclosure and for REO.  The average pre-foreclosure or short-sale price was $175,461 compared to $147,995 for a bank-owned property.  The short sale price was down 4 percent from Quarter 4 and 10 percent from a year earlier and was the lowest average price for a short sale since RealtyTrac started tracking them in 2005.   The REO figure was essentially unchanged from the previous quarter and down only 2 percent on an annual basis.

Pre-foreclosure sales typically gave buyers a 21 percent discount from a market-priced home in the first quarter compared to 19 percent and 16 percent in the two earlier periods.  The discount for REO was 33 percent, down from 34 percent and 37 percent respectively.

It took a home that sold pre-foreclosure an average of 306 days to sell once the foreclosure process began compared to 256 days a year earlier.  REOs sold in an average of 178 days after completing the foreclosure process, an increase of less than half a week from the earlier periods.

Pre-foreclosure sales increased on an annual basis in 27 states with dramatic increases in several such as Wisconsin (94 percent), Michigan (81 percent), and Georgia (80 percent.)  REO sales were up in 21 states with Oregon (41 percent), North Carolina (23 percent), and Ohio (21 percent) showing the greatest year-over-year increases.

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CoreLogic Home Prices Show First Increase in 10 Months

House prices reflected in CoreLogic’s March Home Price Index which was released today increased on a month-over-month basis for the first time in nearly a year.  The Index which measures home prices including sales of distressed properties increased by 0.6 percent from February, the first such increase since July 2011.  The Index, however, was down the by the identical number from the Index in March 2011.  When distressed sales (short sales and sales of lender-owned properties (REO)) are excluded, the month-over-month number was up for the third consecutive month and was 0.9 percent higher than the corresponding number in March 2011.

The national HPI including distressed sales has decreased 33.7 percent from its peak in April 2006 to present.  When distressed sales are excluded the peak-to-current change in the HPI was -24.5 percent.

“This spring the housing market is responding to an improving balance between real estate supply and demand which is causing stabilization in house prices,” said Mark Fleming, chief economist for CoreLogic. “Although this has been the case in each of the last two years, the difference this year is that stabilization is occurring without the support of tax credits and in spite of a declining share of REO sales.”

The states with the highest level of appreciation in the Index, including distressed sales, were Wyoming (+5.9 percent), West Virginia (+5.3 percent), and Arizona (+5.1 percent).  When distressed sales are not included the greatest appreciation occurred in Idaho (+5.4 percent) North Dakota (+5.1 percent), and South Carolina (+4.7 percent).

States with the largest decrease including distressed sales were Delaware (-10.6 percent), Illinois (-8.3 percent), and Alabama (-8.0 percent).  Excluding distressed sales the depreciation was greatest in Delaware (-7.6 percent), Alabama (-4.1 percent), and Nevada (-3.9 percent.)

Of the top 100 Core Based Statistical Areas as measured by population 57 had annual declines as of March, eight fewer than in February.

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REO-to-Rental Pilot Details Presented to Congressional Committee

Members of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises were told details Monday of the Federal Housing Finance Agency’s (FHFA) plan to convert owned real estate (REO) to rental property.   Meg Burns, FHFA’s Senior Associate Director for Housing and Regulatory Policy, told committee members that the program is aimed at some of the 180,000 REO properties owned by the two government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae.  

Burns said that approximately one-half of those properties are available for sale at any given time and preparing them for sale often takes several months because of state mandated redemption periods or the need for repairs.  Sales of these properties has picked up over the past few months, she said, indicating that the excess supplies will decline, but there are an additional 1.3 million non-performing loans owned or guaranteed by the GSEs, the majority of which have been delinquent for over a year.  Despite the many efforts of FHFA and the GSEs to resolve these delinquencies provisions must be made to handle any resulting REO in a manner that is most beneficial for both the GSEs and the neighborhoods where the properties are located.

To date the GSEs have relied on retail sales strategies, selling properties one at a time, most often to borrowers who will use them as a primary residence – the case in 65 percent of the sales in 2011.  The majority of properties sell within 60 days at close to market value.  Both companies have also worked to sell properties to nonprofits and local governments for mission-oriented community stabilization.  When properties are not sold within six months or so the GSEs have utilized small bulk sales usually of lower-valued properties and mostly to non-profits, local governments, or regional investors.

FHFA’s REO-to-Rental Initiative, Burns said, is meant to complement the primary disposition strategies used by the GSEs and is intended as a pilot.  Its goals are fairly limited:

  • To gauge investor appetite for scattered site single-family rental housing and their price sensitivity;
  • To determine whether disposing of properties in bulk presents an opportunity for well-capitalized investors to partner with regional and local property management companies and other community organizations to create appropriate economies of scale while providing civic-minded approaches that can stabilize and improve market conditions;
  • To assess whether the model can be replicated to make it a worthwhile addition to the standard retail and small-bulk sales strategies of the GSEs and other financial institutions with large inventories of REO.

Burns addressed what she said were misconceptions regarding FHFA’s intent and goals for the rental pilot.  First, it is highly targeted and focused only on markets that provide an opportunity to correct a fundamental supply-demand imbalance.  “This type of intervention would be highly inappropriate on a national scale and the program was never intended to be offered nationally,” she said.  Second, the pilot will not result in severely discounted sales.  If the properties cannot be sold at close to what they would bring through retail execution then they will not be sold.

Because there are so many uncertainties, the pilot is initially limited to Fannie Mae properties because of its greater concentration of homes in the selected markets and because it seemed most reasonable to expand the capabilities of only one company to executive the program and meet the significant legal and operational challenges involved.

Also because of the uncertain outcomes the first pool of properties includes a large number of properties that are already rented to tenants who were in place when the properties were conveyed to Fannie Mae.  This will minimize the time that properties are held off the market and help to test one of the key objectives of the pilot – to determine investor appetite for this asset class.

Another misconception, she said, is that FHFA is using the program to address long-standing rental housing issues.  It was never intended as a vehicle to increase the national supply of affordable rentals nor to improve the housing stock though energy efficient improvements.  The variability of the properties make it impossible to engage in large scale upgrades as would the geographic distance between properties.  While it is possible that expanding rental housing in the target communities could have a beneficial impact on price and provide better alternatives for larger families and that any improvements to individual properties could ultimately improve the overall housing stock, these are not the primary goals of the program.

FHFA invited several federal agencies with experience in asset disposition and REO sales to participate in a working group which now includes the FDIC, Departments of Housing and Urban Development and Treasury, and the Federal Reserve, as well as Fannie Mae and Freddie Mac.  Their input has been helpful and FHFA adopted a version of the FDIC approach to asset disposition for banks as a model for the pilot.

The communities (Las Vegas, Phoenix, several communities in Florida, Chicago, Riverside and Los Angeles, California, and Atlanta) have been identified as have 2,500 properties.  Interested investors who survived prequalification have submitted applications to participate in the auction and evaluation of those applications is now underway.

Burns stressed that the application process is demanding and rigorous and designed to insure that only those investors with sufficient capital and operational expertise will be included in the auction.  Potential investors were also required to detail their plans for operating a first-rate rental program, explaining how they will involve local organizations and tailor programs to meet local needs.  They had to describe what resources they will employ to make sure properties are repaired, leased quickly, and well maintained and that residents receive services as needed.  The approval process should be completed in the next few weeks and FHFA’s goal is to complete the first pilot transaction in the next few months.

Burse said that the future benefit of the program may ultimately prove to be more applicable to private financial institutions that choose to sell their inventory in this manner.  At the same time that FHFA is moving forward on the pilot it is continuing to work with the GSEs to enhance their retail sales approaches, improving and expanding specialized financing programs available for both homebuyers and small investors.

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CoreLogic Notes Most Foreclosure Activity Down Year-over-Year

Most measures of foreclosure activity in March remained at February levels but showed significant improvement from one year earlier according to the National Foreclosure Report for the month, released by CoreLogic today.  The report tracks completed foreclosures, the foreclosure inventory, delinquencies and a measure CoreLogic calls the distressed clearing ratio.  

The number of foreclosures completed in March dropped to 66,000 from 69,000 in February and 85,000 one year earlier.  During the first quarter of the year there were 198,000 completed foreclosures compared to 232,000 during the first quarter of 2011. 

The foreclosure inventory – homes in process of foreclosure – now constitutes 3.4 percent of all mortgaged homes in the U.S., a total of 1.4 million homes.  This number is essentially unchanged from February but is down 100,000 homes compared to March 2011, a decline of 6 percent.

The total number of distressed assets, including seriously delinquent loans (more than 90 days in arrears), homes in foreclosure, and lender-owned real estate (REO) now represented 7.0 percent of homes, unchanged from February but down from 7.5 percent in March 2011.

“The overall delinquency level was unchanged in March, remaining at its lowest point since July 2009,” said Mark Fleming, chief economist for CoreLogic. “Non-judicial foreclosure markets like Nevada, Arizona, and California are experiencing significant improvements in their shares of delinquent borrowers. Some judicial foreclosure states are also improving, like Florida, but not to the extent of non-judicial markets.”

The distressed clearing ratio which is calculated by dividing the number of REO sales by the number of completed foreclosures rose from 0.76 to 0.81 in March.  A higher pace indicates a more rapidly clearing inventory.

Compared to a year ago, the number of completed foreclosures has slowed,” said Anand Nallathambi, chief executive officer of CoreLogic. “Since the foreclosure inventory is also coming down, this suggests that loan modifications, short sales, deeds-in-lieu are increasingly being used as an alternative to foreclosures to clear distressed assets in our communities. This is what was envisioned with the recent National Foreclosure Settlement, and can often be a better outcome for both borrowers and investors.”

California, Florida, Michigan, Arizona and Texas had the highest number of completed foreclosures in the 12 months ended in March.  The five states accounted for nearly half of all foreclosures in the nation.   The highest foreclosure rate was in Florida at 12.1 percent, nearly twice that of the second highest state, New Jersey.  Other states in the top five were Illinois, Nevada, and New York.

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