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REO Inventory Rising Once Again

Recent Improvement in the Stock of REO Properties Fades in 2014

Sam Khater    |    Housing Trends

After reaching a trough of 375,000 homes in August 2013, the number of real estate owned (REO) properties in the U.S. grew 15 percent to 430,000 as of March 2014 (Figure 1). The increase was broad-based, rising in 46 states. While the increase was moderate nationally, some states saw larger increases than others. Idaho led the way with the stock of REO properties nearly doubling between August 2013 and March 2014. Maryland had the second-largest increase, up 78 percent, followed by Nevada (+ 70 percent), Oregon (+47 percent) and North Dakota (+42 percent) (Figure 2).

 This rise in REOs across most states reflects several inter-related factors stemming from the financial crisis. The “robo-signing” scandal in the fall of 2010 first caused servicers to delay the foreclosure process, therefore increasing foreclosure timelines. Then, when the issue became public in September, the number of completed foreclosures immediately fell by one-third the following month and remained low. That caused a rapid fall off in REO properties until very late 2011 and early 2012, when the number began to go back up. Not surprisingly, that rise coincided with the National Mortgage Settlement, which was signed in February 2012 to provide more clarity and establish standards for foreclosure resolutions.

With the settlement in place and as lenders started to accelerate the foreclosure process in early 2012, investor demand for REO properties grew rapidly, more than offsetting the increase in foreclosure resolutions and leading to a quick decline in the REO stock. However, investor demand began to drop back off last September, partly in response to the twin impact of fast-rising home prices and mortgage rates. In addition, short sale activity reached its peak in late 2012/early 2013, and has continued to decline in subsequent months due to the Mortgage Forgiveness Debt Relief Act of 2007. Some properties that may have avoided foreclosure as short sales instead entered the foreclosure process, feeding into the REO stock once again.

These major factors began to coalesce during the fall of 2013 and, collectively, led to the rise in REO inventory we’re seeing now. While the current level is still lower than it was during its peak in the crisis, it signals that the rapid improvement in the REO stock of the last two years is over and the market has entered a new phase as it continues to process the legacy of the foreclosure crisis.