As real estate gains value nationwide, banks are acting more quickly on delinquent loans and repossessing more homes.
For years the process has been slow and arduous, with hundreds of thousands of borrowers living in homes for months, even years after they had stopped paying the mortgage. That is now changing.
So-called REO (real estate owned) activity by banks, when the bank takes ownership of the property, increased 11 percent in May from the previous month, according to RealtyTrac.
“You have an environment now with rising home prices in most markets,” said Daren Blomquist of RealtyTrac. “That gives the banks more incentive to go ahead and foreclose on these homes because they know they can turn around and sell them quickly for a price that is higher than what they would have been able to sell them a year ago.”
The nation’s five largest banks have also largely fulfilled their monetary obligations under the $25 billion National Mortgage Settlement, signed in early 2012. This required them to forgive mortgage principal and do more aggressive modifications on troubled loans as a result of improper handling of the foreclosure process, or so-called, “robo-signing.”
Now they are more comfortable with new procedures and possibly more confident in pulling the trigger and completing the foreclosures process on homes that have been in limbo, according to Blomquist.
There was increased REO activity in 33 states, including those that do and those that do not use a judge in the foreclosure process, according to RealtyTrac. Some were quite dramatic: North Carolina (up 60 percent;) Oregon (up 57 percent;) Wisconsin (up 44 percent;) Illinois (up 44 percent;) Colorado (up 23 percent;) and Michigan (up 19 percent).
REO activity increased 9 percent from the previous month in non-judicial states and was up 13 percent from the previous month in judicial states.
“I think this is the leading edge of a trend,” said Blomquist. “We’re not going to see bank repossessions as high as we did at the peak in September of 2010, when we saw over 100,000 in one month, but those numbers are going to inch up because this is a market where it just makes sense for banks to get rid of this distressed inventory and to sell it.”
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These new REOs will add to a now-growing supply of homes for sale. While inventories are still well below where they were a year ago, the shortfall is shrinking as rising prices lure more sellers. The overall number of listings on Zillow.com was down 12.2 percent in June from a year ago, but that is an improvement over the 17.5 percent drop in January, according to a new report from the online real estate company.
“Inventory will likely remain below year-ago levels for a while yet, as builders ramp up capacity and sellers wait to squeeze every drop of equity from their home before listing,” Zillow’s chief economist Stan Humphries said in a release. “But a corner has been turned. Going forward, as this new supply makes its way to market, we expect the pace of home value appreciation to slow down from unsustainably high annual levels of 5 percent or above to more moderate levels closer to historic norms of 3 percent or 4 percent.”
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While Humphries does not make the connection to rising bank repossessions in the report, his numbers do. They show inventory easing much more on the low end of the market, where distressed homes tend to be.
“The greatest year-over-year decreases in inventory were among more expensive homes, with the availability of top-tier and middle-tier properties each falling 15.7 percent year over year. The number of bottom-tier properties for sale on Zillow nationwide fell only 2.5 percent in early June compared to June 2012.”
As more bank-owned homes hit the market, inventories are likely to turn positive again in the near future.
—Follow Diana Olick on Twitter @Diana_Olick