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Monday, May 23, 2011

The Foreclosure Pipeline

by Calculated Risk on 5/23/2011 05:01:00 PM

Last night we discussed the NY Times article: Banks Amass Glut of Homes, Chilling Sales

I pointed out that the RealtyTrac estimate of 872,000 REO (lender Real Estate Owned) was probably too high, and I also noted that there are approximately 2.25 million homes currently in the foreclosure process. There are another 1.8 million homes with the borrower more than 90 days delinquent - so there is more to come.

I'd like to add these two table to hopefully clarify the situation. The first table shows REO inventory in Q1 2011 by Fannie, Freddie, FHA, PLS (Private Label Securities). Tom Lawler sent me the FHA data (released today) and the PLS data (an estimate from Barclays Capital).

Single Family REO Inventory: Number of Properties
 Q1 2011Peak QuarterPeak
Fannie Mae153,224Q3 2010166,787
Freddie Mac65,159Q3 201074,897
FHA68,997Current quarter68,997
PLS171,566Q3 2008436,270
Subtotal458,946Q3 2008570,634
Banks & Thrifts???  

Note: The banks and thrifts will be added when the Q1 Quarterly Banking Profile is released this week. Last quarter the total of all REO was close to 600 thousand, and this quarter will probably be a little lower.

The peak for PLS was in Q3 2008, and their REO inventory has been declining steadily. It now appears both Fannie and Freddie are selling more REO than they are acquiring.

However it is important to note that foreclosing isn't the only solution. Some loans are cured by the borrower, other loans are modified (with various methods), and some homes are "short sales" with the lender agreeing to sell for less than the amount owed.

Single Family Activity in Q1 2011
REOs Acquired24,70953,54923,739101,997
REOs Sold31,62862,81415,581110,023
Mods and Short Sales162,64178,07960,0002200,720

1Includes a few deed-in-lieu of foreclosure that become REO.
2Estimated based on last 6 months.

First, the F's (Fannie, Freddie and the FHA) will probably foreclose on close to 500 thousand homes this year since they are picking up the pace. So they will also sell 500+ thousand homes this year - they sold 110,000 in Q1 alone.

But notice that modifications and short sales are twice the number of foreclosures. So if the F's foreclose and sell 500 thousand homes, they might modify/short sell another 1,000,000 (this is mostly modifications, and of course short sales are distressed sales too, but they usually sell for more than REO).

If we add in the PLS and banks and thrifts, the lenders will probably make significant progress on delinquencies this year (and again in 2012). Of course some of the modifications will redefault and end up as REO too, but I just wanted to make sure everyone knows that all of these properties won't end up as REO.