More than 8 in 10 real estate owned (REO) properties — 500,000-plus homes that could ease today’s sharp inventory shortage — are unlisted foreclosure, according to an estimate provided to Inman News by data aggregator RealtyTrac.
And more than 9 in 10 of the estimated 844,000 homes that are in the foreclosure process but not yet repossessed are also sitting on the sidelines, according to RealtyTrac.
The estimates highlight a reality that may be frustrating to many buyers and agents scrambling to find homes in inventory-starved markets: An ample supply of homes that would help relieve the inventory shortage exists — it’s just challenging to coax them from the hands of the distressed homeowners, lenders and government entities that own them.
But thanks partly to rapidly rising home prices, agents and investors are reportedly having an easier time snatching up these homes before they hit the market.
‘Using data to create inventory’
Leveraging services provided by data aggregators, enterprising real estate professionals are increasingly “using data to create inventory,” said Jamie Moyle, CEO of RealtyTrac, which offers a service that enables users to identify unlisted foreclosures.
PropertyRadar and Foreclosure.com are among others that help real estate professionals hone in on unlisted foreclosures.
They aren’t new: Agents and investors have been using such services for a few years to find unlisted properties.
But recently, experts familiar with the foreclosure market say successfully targeting unlisted foreclosures has grown easier because a recovering overall housing market has brought home values closer to the loan balances currently or once attached to the properties.
They note that in a growing number of cases, some homes whose current or former mortgage balances were once higher than their values are actually now worth more than those loans, making it easier and more palatable for distressed homeowners or REO owners to shed the properties.
Cream of the crop
Among unlisted foreclosures, there is a category that is particularly ripe for the picking: vacant homes in foreclosure that have not yet been repossessed by financial institutions.
They account for about 90 percent of the 168,000 vacant, non-REO foreclosures, RealtyTrac told Inman News. They are reportedly easier to purchase or sell then many other foreclosures because they are unoccupied.
Some of them, in fact, are now worth more than the mortgages owed on them, even though their owners may not know it, Moyle said. That makes them particularly easy to harvest, he said.
“If a homeowner is in distress but LTV [loan to value ratio] says that he’s still in the money, it doesn’t have to be a short sale,” Moyle said. “So he could be approached by a Realtor or investor and not have to do a foreclosure, not have to do a bankruptcy, and potentially walk away with a little bit of cash.”
Returning to a healthier market
Fabi Soliemani, owner of Los Gatos, Calif.-based Synoptic Real Estate Group, was able to pull off such a deal this year.
After identifying an unlisted home in foreclosure with RealtyTrac’s search engine in early 2012, Synoptic tried but failed to negotiate a short sale with the homeowner’s lender.
But in March 2013, after a leap in home prices, Synoptic pulled off a sale. And it wasn’t a short one: The seller actually pocketed money.
“When we first started talking to them they were underwater, but by the time we closed escrow, they had proceeds coming out of transaction,” she said.
Soliemani said that Synoptic has helped sell four other homes this year by pinpointing distressed homeowners and persuading them to list their homes.
Rick Sharga, executive vice president at Carrington Holding Co., said that’s the sort of occurrence that suggests “we may be starting to see what typically happens in a healthier housing market: Distressed borrowers are able to avoid a foreclosure by selling the home and using the proceeds to pay off their debt.”
Carrington procures REO and short-sale listings for agents through its relationships with financial institutions and by acquiring and processing nonperforming loans.
Sharga added that many financial entities once reluctant to incur steep losses by selling their REOs are also now “happily unloading unlisted REOs to investors, who are paying … usually more than estimated market value.”
Why REOs languish
But then why is it that banks, many investors and government entities Fannie Mae, Freddie Mac and the Federal Housing Administration are not listing more of their REO properties?
RealtyTrac told Inman News that about 84 percent of REOs, or 544,000 homes, are not on the market. That percentage is up slightly from last year, the firm reported.
“Many would say the market would benefit from more inventory available for sale,” said Daren Blomquist, vice president at RealtyTrac.
Even if unlisted REOs and the 844,000 non-REO foreclosures were dumped onto the market all at once, he said, “I don’t think you’d see that the market would crash or even take a huge hit to home prices.”
Housing observers and financial institutions cite a wide array of reasons for why REO owners aren’t listing more of their properties. Some of them are unquestionably true, while others are just educated speculation.
RealtyTrac’s estimate of unlisted REO properties may exaggerate the scope of untapped REOs, since it includes unlisted REO properties that are under contract or have had an offer made on them.
Excluding that category of REOs, the share of REO properties that are unlisted falls to about two-thirds of all REOs, Blomquist said.
“If we extrapolate the Fannie Mae percentages on the entire market, we could say roughly the same percentage of REOs are in the ‘offer accepted’ status as are actively listed for sale — making those two categories combined about one-third of all REOs. That then brings this new definition of unlisted down to about two-thirds,” Blomquist said.
But even absent unlisted REO properties in the process of selling, the share of unlisted REOs captured by RealtyTrac’s numbers tended to be higher than what financial institutions reported. The source of the discrepancy is unclear.
Excluding homes that are under contract, 52 percent of Fannie Mae’s REO inventory and 59 percent of Freddie Mac’s REOs were unlisted at the end of March, according to the companies’ 10-Qs. A little under 30 percent of Federal Housing Administration (FHA) REOs fall into the same category, with just under half of its REO inventory under contract or having received a preliminary offer, according to numbers provided to Inman News by the FHA.
A spokesperson for Wells Fargo acknowledged that a “relatively small percentage” of its REO properties were in active listing status. He added that many of its REOs weren’t listed because they were under contract, in a state where an offer had been accepted, under repair, or unsellable due to a statutory redemption period.
In response to an inquiry about its unlisted REOs, a spokesperson for Citigroup said about 50 percent of its REO properties are listed “or currently available for sale.” The spokesperson did not offer additional information on those homes that are currently available for sale, but perhaps not listed.
Blomquist noted that RealtyTrac’s REO numbers are checked against the MLS. “If the property is not listed on the MLS but somehow being made available for sale at an auction or to bulk buyers only, then we are not counting it as listed,” he said.
When asked about Bank of America’s REO inventory, a spokesperson said, “We don’t generally involve ourselves in confirming or commenting on specific third-party and media surveys and speculation regarding foreclosures and REOs.”
She added that most of the REOs that Bank of America oversees are owned by outside investors, and that the bank has a responsibility to dispose of them as quickly as possible.
JPMorgan Chase and Ally Financial did not return requests for comment on their REO portfolios.
Either way, there are a number of clearly established obstacles that keep financial institutions from listing more of their REOs.
In many states, REO owners must wait for a redemption period — when a former owner has a chance to repurchase his or her home — to elapse before putting an REO up for sale. In other cases, REOs are occupied, and financial institutions must wait for the occupants to either vacate or be evicted. REO owners also must wait if they decide to repair REOs before listing them.
There are also reasons for not listing REOs that are commonly put forward by housing observers but sometimes denied by financial institutions.
The more accepted of two main theories is that REO owners do not list more REOs in order to avoid flooding the market and driving down prices.
The other theory postulates that financial institutions sometimes withhold REOs because, under accounting rules, they are able to justify a higher value for REOs on their books than what they would actually sell for on the market.
“There can be more wiggle room in establishing that value,” Blomquist said.
How to ‘short circuit that whole REO quagmire’
But while the REO pipeline may remain clogged for some time to come, if real estate professionals continue to turn their focus away from REOs and toward foreclosures that have yet to be repossessed, it could cut down on the number of homes that flow into the REO stock, according to Blomquist.
Ninety-four percent of the 844,000 homes that are in foreclosure but not yet repossessed are unlisted, according to RealtyTrac. And a large swath of them are harvestable, none more so than those that have moved into positive equity.
“They think they’re underwater even if they’re not,” Moyle said of the segment of borrowers who own those homes.
Preforeclosures — properties in the foreclosure process but not yet seized by financial institutions – ”could help kind of short circuit that whole REO quagmire if agents go out there and proactively work with those homeowners,” Blomquist said.
Editor’s note: This story has been updated to include information provided by Citigroup and FHA about their REO inventories and additional comments from RealtyTrac.
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