Are the banks still holding onto foreclosures?

Question

What do you guys think about banks still holding onto some REO's?  I think here in Chicago that this is true as well as a few other investors in my area. Looking for an overall view of the situation though from around the country as well.

Mark Ferguson · Answer

Scott W.
Almost half of the shadow inventory in the US is in four states where the foreclosure process takes the longest.  That would indicate the foreclosure process is creating the zombies, not the banks holding back.  If the banks were holding back, then now would be the perfect time to release more inventory, but they are not.

Statistics show the shadow inventory has decreased significantly the last two years as prices have increased and the economy has gotten better.  The shadow inventory numbers they use are not all properties that have been foreclosed on, but properties that are in default or behind on payments. When prices go up those numbers go way down.

The other issue that caused a severe backlog was the robo signing lawsuits.  Many banks stopped all foreclosures in 2010-2012 until that mess was figured out.  It was settled in 2012 and banks began the foreclosure process again.  In states like Illinois and New York where is takes over two years to foreclose those properties still won't be on the market until next year!

That is why decreasing the time to foreclose will increase the amount of inventory and decease the zombies.

Account Closed · Answer

In my experience, lenders are not intentionally holding onto properties after they finish the foreclosure process, conduct a public foreclosure/sheriff auction, receive the deed, and evict the former occupants.  Once a lender becomes the legal owner of a vacant property, they usually attempt to dispose of it (via the MLS or other methods) fairly quickly.

The problem is that in many judicial foreclosure states, such as Illinois, the process of repossessing a property and evicting the former owners can take several years.

Cook County, IL serves as a good example of how slow the process can be:

- In 2012, the average time from when a lender filed a foreclosure lawsuit to the date the property was offered for sale at a foreclosure/sheriff’s auction equaled 682 days in Cook County.

- If no third party bidder purchases the property at the foreclosure auction, the lender is then required to schedule another court date and have the sale approved by a Judge before receiving a Sheriff’s Deed to the property.  In Cook County, it takes another 30 to 120 days after the sale to schedule a court date to have the sale approved.

- If the former owner shows up in court and protests the sale, the Judge will often refuse to confirm the sale and continue the case.

- Once the sale is approved and the lender receives a Sheriff’s Deed, then the lender must get the former owners to vacate the property.  They can either offer “Cash for Keys” or file an eviction.  An eviction in Cook County can take 180 days or more depending on the time of year.

- Frequently, the former owner will rent out the property before the lender receives a deed.  The lender is often forced to honor the existing lease and let the tenant stay in the property for some time.

- Finally, after the lender obtains the deed and the former owners or tenants vacate, they can market the property for sale as an “REO”.

- Before selling the property the lender must clear up any liens or encumbrances to title.  In order to obtain marketable title, they have to negotiate or pay off: municipal liens, water & scavenger liens, mechanic liens, property tax liens, HOA liens, building code violations, etc.  This whole process can take several more months.

It may appear that lenders are deliberately “holding” properties and simply choosing not to dispose of them.  However, in many states it just takes several years for a lender to repossess a property and obtain marketable title.

Phil S. · Answer

I do believe that the banks are holding back together as a whole. It seems all these continued meetings in Washington have something to do with what is still going on. As a whole, it seems to be stabilizing the home values. But how will the rest be introduced again into the market without causing another influx? Or will the market at that time be able to withstand it?

Those other companies buying everything up as @Tim Breems has said is putting a damper on smaller investors making most of us to look for other areas to continue to grow our portfolios as well. I don't see that slowing down at all because of the great value they are picking these properties up for. I read somewhere that bigger investment firms such as Berkshire Hathaway is on the verge of doing the same.

Bill Gulley · Answer

WOW, Cook County, sounds like they aren't paying the right politician to me!

In Mo. you should have the non-judicial process totally done within 45 days, 30 if you don't wait for payment and no bond is filed for redemption.

As soon as a bank gets the property they will get it inspected, evict if necessary, winterize if necessary and turn it over for a listing, they have I believe 30 days (or per state law) to list it or begin marketing it (auction). So no, they are not holding them, generally. If there is preceived equity they may be slower to sell, stripping equity with fees/expenses. :)

Phil S. · Answer

Thanks all for all the great replies. The zombie mortgages in only two Chicago neighborhoods seem to be the worst.  Englewood and Roseland. The banks don't see the upside in foreclosing all the way because the costs to finish the foreclosure is more then what the current value of the property is worth. Even though the current values will return to past values over time because of the rental income these properties bring in, the banks still refuse to complete the process. Here is the story: http://wgntv.com/2013/04/15/how-to-avoid-zombie-mortgages/#xQAI3XkHhGPS4TGV.01

Robert Steele · Answer

I don't know .. it has kind of worked out really good for the central planners.

Dion DePaoli · Answer

I agree with Tim Breems.  I do not believe it is a super conspiracy, although I will add the affects of the events have brought about solutions to rapid declines in real property values.  That said, the process is still what takes long and it has not been an unchanged process.

The bill passed in Illinois is for abandoned property only.  Which I think is a make sense law.  It is sort of the definition of "Walking Away", right?

On top of the process in its normal procedure from state to state.  Remember the legislation that has come such Tenant Protection and the rest of the bill in Illinois as an example which says the Mortgagee must show that all alternatives to foreclosure have been exhausted.  This is also on top of the operational issues such as the 'Robo Signing"  and "MERs Debate" and trying to force modifications which many re-defaulted, all of which created stalls which still ripple through the industry.

Not more than a couple months ago we just barely started cracking the 50% mark of the defaulted mortgages.  We still have a ways to go and the process is not really faster.

The slow drip of inventory into the market does benefit the mortgagee from real property value decline but it also helps the community.  You only need to look to Detroit to be reminded that you don't want a tsunami of foreclosures hitting your community, especially when most communities struggle economically still.

Account Closed · Answer

Scott W.

The Chicagoland market has been flooded with institutional buyers over the past 12 months.  The two biggest entrants have been The Blackstone Group and American Homes 4 Rent.

They are making the biggest impact at the Sheriff/Foreclosure auctions, which is their main method of acquisition.  They showed up at the auctions last summer and started buying almost everything under $250,000.

Prior to their arrival, local investors would not bid over 65% - 70% of conservative market value for a property at auction.  A small percentage of properties were bought by local investors at auction, and a majority of the properties went back to the lenders and eventually became REOs.  Accordingly, from 2007 to mid-2012 there was a healthy supply of REOs available.

Currently, the institutional buyers are bidding up to 100% (or more) of market value at the Foreclosure/Sheriff auctions.  The percentage of properties purchased by 3rd party bidders at auction has increased dramatically.  So, fewer properties are going back to the lenders, and the REO inventory has been shrinking by the day.

The institutional buyers are also buying directly off the MLS.  They have teams of agents who scour the MLS non-stop.  They are willing pay more than most retail buyers and experienced local investors for MLS deals.  This is another reason why inventory continues to dwindle.

I just checked the MLS, and as of today there is a 4.5 month supply of inventory available in our MLS area.  At the end of March 2011 there was a 13.5 month supply.  So, the total inventory is exactly one third of what it was two years ago.

Scott W. · Answer

Tim Breems just curious, how do you explain there being so much inventory in the past several years and then BAM! it goes to nil?

Mark  Ferguson  it will speed up foreclosures but the thinking is these banks are intentionally holding off on releasing inventory in order to increase the real estate market prices (if true, not a good strategy as they have holding costs).

Mark Ferguson · Answer

Scott W., actually that will help speed up the foreclosure process and decrease the number of zombie foreclosures.  Like it was previously mentioned the states with the highest number of shadow inventory are the states with the most cumbersome and longest foreclosure processes.

Are the banks still holding onto foreclosures?

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