Sunday, August 14, 2011

Foreclosed Home Glut

This consideration in the blog naked capitalism by Yves Smith,of the problem posed by unsold and likely not very saleable empty homes. Bank of America has taken to looking like crap by selling foreclosed homes for demolition, thus depriving people of a place to live. On the other hand these empty homes can't be sold not least because loans can't be had. What to do? No one yet knows what is to be done. Here in the Keys we hear that real estate values in Key West are rising which sounds very odd but we know they are plummeting elsewhere, consider Big Pine for example. Foreclosed homes are part of the never ending inventory of Keys homes for sale but this is a problem that will plague vast swaths of the country far beyond what we see in these small, expensive islands.

From a NYC reader via e-mail:

My good friend is a real estate broker in Westchester/Dutchess County. He said he is seeing a real problem growing with title insurance. He said a large number of the REO properties banks try to get him to sell cannot close because of title problems. He’s worried about the growing number of vacant homes which may be impossible to sell.

For those who don’t know the New York area, Westchester County is full of wealthy bedroom communities like Scarsdale; Dutchess County is further out but well off by national standards. The unemployment rate for the state is better than the national average, and with New York famously having the longest foreclosure clearing time in the US (as in the number of defaulted homes versus throughput rates in the courts), the state is not a prime candidate for a huge inventory of unsold homes.

Put more simply, if you are seeing a significant overhang of unsold, and perhaps more important, unsellable, houses in two relatively well off counties in New York, it’s likely that the same problem exists elsewhere.

We noted last October that Bank of America was now eating title insurance liability on foreclosed properties sold by its servicer. Perhaps BofA has since reversed course, but it may be that other major servicers have not followed suit. We’ve also been told by real estate attorneys of title insurers offering policies for foreclosed properties with significant carveouts, making them more or less useless for the buyer.

One of the notions you often hear voiced is that the residential real estate market won’t recover until it “clears”. That belief is then used to argue for faster foreclosures, when foreclosures are certain to result in lower prices than modifications (to the extent that borrowers have enough income to be viable with a deep mod; there is no point in trying to rescue those beyond salvation). But whatever form of “let’s get this over with” you believe in, whether the Mellonite “liquidate homeowners” or a mix of foreclosures and mortgage mods, the tacit assumption is that the foreclosed homes will be sold in an orderly manner (or in cases where communities have shrunken, razed).

But what happens when you have unsellable homes, becoming havens for squatters or targets for vandals? They not only pull down the values of properties nearby, but they also represent a safety risk.

To put it bluntly: vacant homes are crackhouse futures.

This puts quite another complexion on the story of Fannie and Freddie’s interest in renting homes. Per the Wall Street Journal:

Mortgage giants Fannie Mae and Freddie Mac sold a record 100,000 homes during the second quarter. Together with the Federal Housing Administration, the entities owned about 250,000 homes at the end of June, or around half of all unsold, repossessed properties. Another 830,000 homes backed by the entities are in some stage of foreclosure, according to Barclays Capital.

The GSEs have been pushing banks to foreclose faster, and one has to wonder how many of those 250,000 unsold homes have clouded title that is deterring buyers. The story puts a spin on the logic of renting:

Banks are usually faster than mom-and-pop sellers to cut prices in order to unload properties quickly. In many hard-hit markets, more than half the sales have been made to non-owner-occupant investors—at discounts. The upshot is that home prices will continue to fall if many properties continue to be sold out of foreclosure. That has made it harder for traditional sellers to sell their homes at prices potential buyers have agreed to because foreclosures are driving down appraised values, killing some agreed-upon deals at the closing table.

So investor bottom fishers are important buyers. And they are also probably professional enough not to buy a property with dubious title when there are plenty of home on offer.

And notice how many they want to offload:

One proposal would sell packages of hundreds or thousands of foreclosed properties in bulk to investors that agree to rent them out. That approach is preferred by the Department of Housing and Urban Development, which is taking back properties as defaults mount on loans backed by the FHA.

Another approach would let investors enter joint ventures with Fannie or Freddie to invest in a pool of converted rental homes. A national property-management business would handle day-to-day landlord responsibilities. Investors would pay for rehabbing and maintaining properties and would share revenue from monthly rental income and the ultimate sale of the property. Such a joint venture would be modeled on the Resolution Trust Corp., which sold failed banks’ assets in the early 1990s.

See how large scale these measures are. And notice the complete absence of any discussion as to why it is better to convert these homes to rentals (as in it is not driven by any analysis of local rental needs or a change in national priorities to favor more renting). Just because speculators are buying does not mean all of them intend to be landlords. Some may simply hope to catch a bottom or near bottom and flip the homes when conditions improve.

I hope readers will provide input on whether they see a growing inventory of unsold, and particularly unsellable homes in their community. This looks to be a development worth monitoring.

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