There is still a substantial inventory of foreclosures that banks are holding off the market for various reasons. In some cases the foreclosure procedure has been stalled for over a year just to avoid the repossession and the financial consequences that it would bring. Banks are in the money business and need to show profits to their stock holders as well as protect their balance sheets. As long as a house is in the foreclosure process but has not been repossessed yet, or sold as a short sale, the bank can still keep it in its books at its initial loan value.
Bank are still holding off many foreclosure so to avoid to repossess many houses at the same time.
Only when the repossession happens, the value has then to be readjusted by carrying a loss on the balance sheet and reducing the value of the asset. In such a scenario the bank has three bad effects combined: it has a loss, it is forced to keep more money blocked in its reserved and its lending capability is reduced. When the number of houses pending foreclosure becomes massive (900,000 is the number that circulates amongst experienced investors) then the banking system can become unstable unless it regulates very closely the release of these properties on the market.
At the current sale rate, the analysts company Standard & Poor’s estimates that it will take 3 years before the whole inventory gets cleared up, for a total of 7 million of worth (see original article).
S&P estimates that more houses are falling in delinquency (more than 13% of mortgages delinquent in November 2009) than transactions get closed on bank owned properties (the so called REO’s). There is some effort in try to avoid foreclosure through loan modification, but it is not as effective as it could be.
Lot of play ground still available for investors dealing with bank owned properties, although the trickle of repossessed houses that trickle back on the market will affect values in some areas for still some time.
Roberto Mazzoni
Recent Comments