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A second wave of foreclosures? A silver lining?

By Carl Horst

A recent report from RealtyTrac indicates that the number of foreclosures across the nation may once again be on the upswing — jumping 9 percent in May from the number posted in April.

Not good. But it’s worth noting that May’s foreclosure filings — default notices, scheduled auctions and bank repossessions — did actually drop by 4 percent when compared to May 2011, marking 20 straight monthly declines.   

So is the latest report good news or bad news?

One of the leading economic observers, Barry Ritholtz at The Big Picture, offers an interesting take on why foreclosures have slowed for the better part of two years — pointing to the robo-signing scandal that surfaced in late 2010.

In short, Ritholtz says that banks and leading financial institutions voluntarily put the brakes on things until they could figure out what was happening.

Fast forward to the national robo-signer giveaway settlement. With that now behind them, the voluntary foreclosure abatements have come to an end. There was an 18 month period where banks had stopped actively processing these properties. That ended earlier this year. As the creaky, wheezy, inadequate machinery of processing defaulted mortgages rumbles back to life, you would expect to see signs of increasing foreclosures and distressed sales begin any day now.

Even RealtyTrac agrees that there will be volatility in the foreclosure area in the near-term…but offers a silver lining of hope in terms of how lenders might be dealing with the situation — namely a willingness to agree to short sales in lieu of repossession.

“U.S. foreclosure activity has now decreased on a year-over-basis for 20 straight months including May, but the jump in May foreclosure starts shows that it’s going to be a bumpy ride down to the bottom of this foreclosure cycle,” said Brandon Moore, CEO of RealtyTrac. “Based on the rise in pre-foreclosure sales we’ve seen so far this year, a higher percentage of these new foreclosure starts will likely end up as short sales or auction sales to third parties rather than bank repossessions going forward. While pre-foreclosure sales have less of a negative impact on home values than bank-owned sales, they still represent a discounted sale where a distressed homeowner is losing his or her home.

“Disposing of distressed homes by pre-foreclosure sale can also benefit lenders and servicers because pre-foreclosure homes sell at a higher average price point than bank-owned homes,” Moore continued. “Our first quarter foreclosure sales report showed that the average price of a pre-foreclosure home was more than $27,000 higher than the average price of a bank-owned home — which quickly adds up given that there have been an average of 1.6 million nationwide foreclosure starts per year for the past five years.

“More banks are now recognizing that treating the problem of delinquent mortgages with short sales rather than bank repossessions can help them minimize their losses and also avoid taking on more REOs, which they then have to manage, maintain and market for sale.”

If banks really are looking to go the short sale route, it could be a real positive especially here in the Buckeye State.

According to the latest report, Ohio posted a 32 percent increase in foreclosure starts since the beginning of the year. Additionally, we rank seventh nationally in foreclosures per capita — with one in every 495 homeowners in foreclosure. As a comparison, the national average is one in every 639 homeowners.

Says Ritholtz:

Banks seem to be getting religion about doing more distressed/short sales than outright foreclosures, as they generate higher priced sales — meaning a greater recovery for the lender, and less of a writedown.

It’s great that they may be more willing to opt for the short sale approach. The bigger question, will they be more willing to act…or at least respond? Stay tuned…


UPDATE:  OAR’s Professional Development Department reminds us that they are hosting a very timely class — Short Sale & Foreclosure Resource Certification — on June 28, from 9 a.m. to 4:30 p.m., in Columbus. The program is designed to help REALTORS better understand the short sale process and gain a competitive edge in developing packages to present to lenders, protecting your commission and limiting risk. For more details click here.


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