BORROWERS DEFAULT. LENDERS FORECLOSE, OWN YOUR HOME. Then What?
SURGE IN FORECLOSURES PUT LENDERS IN ANOTHER BIND!
At the end of 2007, banks nationwide owned about $12 Billion worth of foreclosed property - double the amount owned one year earlier. Of this, roughly $6.6 Billion is Residential Property between one and four dwelling units, according to the American Bankers Association.
In Chicago, foreclosed property now owned by banks, commonly called REO Property (for Real Estate Owned) increased about the same amount, year over year, according to California Housing Data Firm Firs American Core Logic. Today, a staggering 2.5% of housing in the Chicago Metro Area can be classified as REO!
Here is the dilemma for banks with owned foreclosure property - if they sell what they own, for whatever they can get for the property, they might, as a group, be hurting the local housing market - immediately pulling average neighborhood prices down. Should the banks instead hold the properties, with plans to sell them later on as the Real Estate Market improves, they have to add significant carrying charges to their balance sheet.
As a significant side effect, dozens of vacant, boarded up properties, owned by the foreclosing institutions, have begun to blight the neighborhoods in which they are located - further dampening housing market recovery.
Although Chicago is not immune to this side of the Credit Market Meltdown, it is most decidedly in far better shape than other markets where heavy investment and speculation spiraled prices upward during the market boom of a couple of years ago. In these markets, prices have fallen considerably over the last year, and many lenders are dumping REO homes for what ever they can sell them for, fearing further, even deeper price drops.
Many banks operating in Chicago and its nearby suburbs seem to be taking title to foreclosed properties, yet holding on to them a while expecting a housing market rebound here. Of course, that doesn't eliminate plywood-over-windows on many REO homes, but it reduces the price-killing effect of selling these bank-owned homes at rock-bottom prices, according to Geoff Smith, of the Woodstock Institute of Chicago, which has studied the effect of home foreclosures and predatory lending practices on local communities.
In some of the weakest areas of the country, where lenders see little hope for price growth mid-term, some homes now sit abandoned - the banks don't even take title to the property, to avoid heavy carrying and maintenance expenses. Says Smith, "In some cities that have low property values, where there are dense concentrations of foreclosures, you see lenders who file foreclosure proceedings but don't actually take control of the properties, because the lenders have to maintain them and pay taxes on them."
In Chicago, HUD foreclosure inventory of FHA-insured homes has gone up roughly 6% over the past year, compared to a 62% rise in such hard-hit cities as Detroit. Fewer HUD foreclosures in Chicago were counterbalanced by the high foreclosure rates on sub-prime and exotic mortgage loan products over the last few years, however.
Harris Bank, a mid-sized Chicago lending institution with over $41 Billion in assets, saw their REO portfolio grow to $11.5 Million at the end of last year, from $4.9 Million at the end of 2006. However, this local Chicago institution is sensitive to the effect drastically-reduced selling prices could have on the local market. Recently, they have held their REO homes longer, expecting better days ahead, and absorb extending carrying costs.
Integrated Asset Services LLC of Denver manages and sells of Real Estate Owned by banks. They estimate a three to five year inventory of REO properties. This one company currently inventories 7,500 foreclosed homes. At the end of 2006, their inventory was approximately half that amount.
"Some lenders want to explore leasing properties in hopes the market will turn around, and others are just churn-and-burn, get it off the books," particularly in struggling housing markets such as Detroit and Cleveland, according to David McCarthy, Integrated Asset Services' Chief Executive.
Eventually, all bank-owned property must be sold to get it off their books. However, it seems, the timing can be tweaked somewhat, to benefit the bank, or the local communities affected.
In reality, the current Mortgage Market is full of potential potholes unpredicted as recently as a year ago.
For more, please read Mary Umberger's column in Monday's Chicago Tribune.
DEAN MOSS & DEAN'S TEAM CHICAGO
