The Reasons Why We Do Not Have High REO Inventories

The business head lines today read, “US Labor Participation Rate at Lowest Level in 30 Years” or “US Labor Participation Rate at Lowest Rate Since Carter Administration” and yet, I am trying to figure out why my REO inventory this year has shrunk to pre 2007 bubble bursting levels. To make this point a little more pointed, let me share a little statistic from the Bureau of Labor Statistics. Our current unemployment rate is 7.3% and the last time we were at 7.3% was December of 2008. Now, think back to December of 2008, think of your REO inventory….are you at that level today? I would venture to say, likely not. Are you still confused as to what my point is? Well, let me say it this way. If you add in the participation rate with the unemployment numbers, you get a “real” unemployment number of 9.4% and the last time we were at 9.4% or higher was May of 2009 thru November 2010 so, think back to you REO inventory then….are you at those same levels today? Once again, I venture to say….likely not.

So, how is it that we have a “real” unemployment rate at or higher than the worse unemployment we have had accordingly to the Bureau of Labor Statistics in the past 4-5 years and yet, we don’t have a correlated REO inventory?

Well, I am no economist however, I have some speculative theories, let me share.

Obama Administration Homeowner Assistance Programs: Obama has directed HUD and the US Department of Treasury to stop the foreclosure crisis by implementing several foreclosure avoidance programs through joint department efforts like the Making Home Affordable programs. Do you know how many entitlement programs there are? Likely you don’t so, let me share…..
1. HAMP (Home Affordable Modification Program)
2. PRA (Principal Reduction Alternative)
3. 2MP (Second Lien Modification Program)
4. HARP (Home Affordable Refinance Program)
5. FHA2LP (Treasury / FHA Second Lien Program)
6. UP (Home Affordable Unemployment Program)
7. EHLP (Emergency Homeowner’s Loan Program)
8. FHA Forbearance
9. HECM (Home Equity Conversion Mortgage)

So, you had no idea…did you? Granted, my blog isn’t long enough to go into details on each of these programs with you however, for more information you can call the NSC at 1-877-622-8525. The Obama administration has used all of these foreclosure avoidance strategies in a very similar way the Community Reinvestment Act set up , built up and ultimately collapsed our economy in 2007 with the bursting of the real estate bubble. Oooops, “did I say that?” HELL yes, I did.

That’s right, the reason we don’t have REO inventory as REO Professionals is because our President has decimated our industry by artificially and manipulatively used foreclosures as a political tool for re-election of himself and his party. Sadly, most of the American public don’t understand what this does to home values……so, let me explain. It artificially inflates home prices by restricting legitimate inventory from hitting the market place. It sets up our country for a 10(+) year trickling of these vacant, distressed, properties to the market place. Ok..sure, it can be argued that by doing this we are stabilizing the housing market and sure, I will relent and say….it does however, only for the short term. In fact, it makes things a little worse because, we end up sitting on inventory and God forbid, another economic crisis hits or the current one drags on for longer than expected and we end up with more and more and more and more water behind an aging, over burdened, crippled, dilapidated damn that is ready to blow.

Think of the housing crisis as a man mad lake with one side plugged up by a huge damn. Think of the water in the lake as all of the houses that are distressed, under water, risk of foreclosure. Right now, our lake is so full, we have foreclosures literally spilling over the top. Our economy…the damn, is barely holding and with a growing “Shadow” inventory of REO homes, high unemployment, high “real” unemployment and these continuing foreclosure avoidance / rescue programs……we will have a seriously problem, eventually.

I am not pro lender/ investors OR Government in this case. Each has a big responsibility in creating the mess we see ourselves in in the housing industry IMO. As an active REO agent I see what a lot of REO agents see, the banks hand in holding the foreclosure process up. I also have to say that foreclosing attorneys also have a part in this mess too. I have looked at his from all sides and feel there is an angle no one seems to be addressing right now. The banks got bailed out prior to this administration. The deregulation was also prior to this administration. So those 2 major occurrences did not happen during this administration. Both had a major impact on the REO market. Then we come to the modifications and the special programs to “protect” the American dream. These occurred during the current admiration and have ALSO had a large impact on the situation we see today. (As already noted)The administrations have changed but the investors/lenders have remained the same. The banking industry has benefited from a lot of what has occurred in the past 10 years. (Again in my opinion) We know many of the mandated loan mods were nothing more than a joke. Some lowered the home owners payments by so little that they were not modifications at all but a simple appeasement to make it look like they were trying to comply. Same with the short sales. We all know most were nothing but an attempt by the lenders to seem like they were trying to help resolve the crisis. The truth is short sales were easier and more successful in the late 90’s than they were in 2008 through 2012. They took a while but most were approved. Today they are very different in my experience.

Anyway back to the REOs. If all the lenders were forced to put all the properties that have already completed the foreclosure process on and have been confirmed, into the lenders name, we would see the truer picture of the situation. Most banks as all REO agents know do not even put the properties in their name until just prior to closing the REO sale. This is the real hidden inventory. Now why do the lenders do this? It causes delays in closings and even lost contracts at times. There has to be a good reason they do not get all of these properties in their name ASAP after confirmation. Many go 1, 2 or even three years before the transfer is finally completed. I feel this is a way to keep them off the books for the lenders. The reasons they do this appears to me is to askew the numbers for many reasons. It is hard to really know how many properties that the lenders really have waiting in the wings to be transferred into their name. They show up in the previous owner’s name long after confirmation. This is not done to “save costs”. These properties loose value every day when left empty. Cities and counties access high fees for mowing, boarding and code violations that become liens on these assets. So what is the real reason they don’t transfer them? For me the answer is simple. As long as they do not have the deed then they are still in loss mitigation and not really in their REO inventory. As I suggested before in another article, call the local Sheriff’s office and see how many deeds they are processing per month. Check the Sheriff’s sale list and see how many sales have been completed and how many are scheduled. Check how many have been delayed by the attorney filing Bankruptcy or other legal filings. Finally check how many lender owned properties show up in your County. I will bet the numbers will show the banks are hiding the real REO story. The supply and demand principal also comes into play here in my opinion. The asset owners know when they flooded the market they lost a lot more money than if they slowly release their inventory. Their investors are happier. The Government is happier; the REOs are lower in number on the books than the real number hidden by not filing the deeds. I am no expert in lending or Government logic for sure and really not anyone other than an REO agent who sees some pretty big unanswered questions in the way things are being done. But in my mind I do feel that the answers may be less complex than many people believe. In my opinion it all ends up back at the lender/investors themselves.

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Comments

Robyn Huffar September 9, 2013 at 3:53am

I am with you buddy. This whole thing is just a mess. No one wants to clean this mess up. Just kick the can as we have for several years. Do not take our medicine. Several entities are the reason we are here. WE are here because our leaders want us here. If they wanted to change,you better believe it would change. AS they changed the REO practice. The WORLD is not the same as it was just 6 years ago. As you know!
Thomas Keats September 9, 2013 at 2:53am

So true. It is good to do traditional business and short sales as well to keep a balanced inventory for when the market shifts. - Tom Keats / Maryland.
Jesus (Jesse) Gonzalez September 9, 2013 at 2:17am

Hi Claudio,

Blame Obama....yeah, I absolutely blame Obama for the Homeowner Assistance Programs because, they are his programs. If you don't believe me, go to www.WhiteHouse.gov and in the "search" space type, Making Home Affordable. You can see for yourself, Obama is proud of these programs and what they have done.
Claudio Leiter September 9, 2013 at 2:12am

Blame it on Obama

Remember who got us into this mess? Obama was not the president then.

Jesse what you wrote is your personal opinion based on your political beliefs.
Richard & Mary Ann Houle September 9, 2013 at 1:52am

Hesse thanks for putting this situation so concisely and accurately into a short paragraph...you are on it..
Jesus (Jesse) Gonzalez September 8, 2013 at 7:21am

Hey Barbara,

Yes, it highly depends on where you are located because, as we all know, real estate is highly localized. True, some local communities are seeing high REO inventories however, the vast majority of the country isn't.
barbara scarbrough September 7, 2013 at 5:37pm

On the REO subject. Here in Ohio there are many REO agent that have 50 to 75 listings at this time.As I mentioned in an earlier post, I spoke to a regional mgr who said she normally had a page of assignments and that day she was overloaded with 9 pages of REOs and not enough agents to assign them to. So I am assuming it is where you are located. I am also pretty sure if we could really get to the bottom of it all we would see the banking industry is controlling the hidden inventory and they are doing it for a reason. We will see what next year brings. I say next year because we are only about two months away from the banks imposing their "Holiday moratorium".

time.as is parked
Alison Swain September 7, 2013 at 11:31am

The Community Reinvestment Act and its lion's share of the responsibility for this mess are well known to most anyone who consumes news from sources other than network news and "mainstream" newspapers. As for HuffPo, they'd never publish what Jesse wrote --- too many "inconvenient truths", to coin a phrase.

As for previous administrations, yes, there were other bad actors. And some who tried to sound the warning bells. George W. Bush, for one --- he warned of Fannie and Freddie's loose lending practices and of the coming catastrophe if they didn't tighten up. For his trouble, he was called a racist by the likes of Maxine Waters and Barney Frank. You can see both defending Franklin Raines' (Fannie's then director) crooked ways on youtube. Now that said, GWB also pushed the broadening of homeownership.

With Clinton, well, google Brooksley Born, the former chair of the Commodity Futures Trading Commission. She really sounded the warning bells early and was pretty much shut out by the Clinton White House.

And it was Clinton (near the end of his presidency) who signed the legislation destroying the barriers between banks, securities firms and insurance companies. There's some deregulation for you.

For those of us old enough to remember, the 80's were a high-riding boom decade. Reagan inherited a far worse economy than Obama, yet half way in to his first term, he unleashed the economy, it came roaring back and the good times stretched well into Clinton's time. There were minor recessions here and there, but crippling inflation and interest rates were lowered. By contrast, Obama has now had 4 1/2 years, yet there's nothing to suggest that lasting improvement is ahead of us. In fact, there are knowledgeable financial people who are predicting a 1987 style crash coming this fall. So when Clinton said at the Democrat convention last year that no president could have done better with the economy Obama took over, that was simply and demonstrably false (and he knew it).
Dottie Greco September 7, 2013 at 10:06am

Jesse, you are right o target. The CRA id directly to blame. It is hard to believe anyone in our industry has never heard of this.
barbara scarbrough September 7, 2013 at 8:20am

I am not pro lender/ investors OR Government in this case. Each has a big responsibility in creating the mess we see ourselves in in the housing industry IMO. As an active REO agent I see what a lot of REO agents see, the banks hand in holding the foreclosure process up. I also have to say that foreclosing attorneys also have a part in this mess too. I have looked at his from all sides and feel there is an angle no one seems to be addressing right now. The banks got bailed out prior to this administration. The deregulation was also prior to this administration. So those 2 major occurrences did not happen during this administration. Both had a major impact on the REO market. Then we come to the modifications and the special programs to “protect” the American dream. These occurred during the current admiration and have ALSO had a large impact on the situation we see today. (As already noted)The administrations have changed but the investors/lenders have remained the same. The banking industry has benefited from a lot of what has occurred in the past 10 years. (Again in my opinion) We know many of the mandated loan mods were nothing more than a joke. Some lowered the home owners payments by so little that they were not modifications at all but a simple appeasement to make it look like they were trying to comply. Same with the short sales. We all know most were nothing but an attempt by the lenders to seem like they were trying to help resolve the crisis. The truth is short sales were easier and more successful in the late 90’s than they were in 2008 through 2012. They took a while but most were approved. Today they are very different in my experience.

Anyway back to the REOs. If all the lenders were forced to put all the properties that have already completed the foreclosure process on and have been confirmed, into the lenders name, we would see the truer picture of the situation. Most banks as all REO agents know do not even put the properties in their name until just prior to closing the REO sale. This is the real hidden inventory. Now why do the lenders do this? It causes delays in closings and even lost contracts at times. There has to be a good reason they do not get all of these properties in their name ASAP after confirmation. Many go 1, 2 or even three years before the transfer is finally completed. I feel this is a way to keep them off the books for the lenders. The reasons they do this appears to me is to askew the numbers for many reasons. It is hard to really know how many properties that the lenders really have waiting in the wings to be transferred into their name. They show up in the previous owner’s name long after confirmation. This is not done to “save costs”. These properties loose value every day when left empty. Cities and counties access high fees for mowing, boarding and code violations that become liens on these assets. So what is the real reason they don’t transfer them? For me the answer is simple. As long as they do not have the deed then they are still in loss mitigation and not really in their REO inventory. As I suggested before in another article, call the local Sheriff’s office and see how many deeds they are processing per month. Check the Sheriff’s sale list and see how many sales have been completed and how many are scheduled. Check how many have been delayed by the attorney filing Bankruptcy or other legal filings. Finally check how many lender owned properties show up in your County. I will bet the numbers will show the banks are hiding the real REO story. The supply and demand principal also comes into play here in my opinion. The asset owners know when they flooded the market they lost a lot more money than if they slowly release their inventory. Their investors are happier. The Government is happier; the REOs are lower in number on the books than the real number hidden by not filing the deeds. I am no expert in lending or Government logic for sure and really not anyone other than an REO agent who sees some pretty big unanswered questions in the way things are being done. But in my mind I do feel that the answers may be less complex than many people believe. In my opinion it all ends up back at the lender/investors themselves.

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