Tuesday, May 24, 2011

Lawler: FDIC-insured institutions’ Real Estate Owned (REO) decrease in Q1

by Calculated Risk on 5/24/2011 02:51:00 PM

From economist Tom Lawler:

The FDIC released its Quarterly Banking Profile for the first quarter of 2011. ... On the REO front [lender Real Estate Owned], the carrying value of 1-4 family residential real estate owned on FDIC-insured institutions’ balance sheet on 3/31/11 was $13.2795 billion, down from $14.0498 billion on 12/31/10 and $14.5527 billion last March. The steep drop suggests that banks probably increased the pace at which they sold SF REO properties last quarter.

FDIC insured Institutions REO Dollars Click on graph for larger image in new window.

As I have noted before, it is unfortunate that the FDIC does not collect data on the NUMBER of REO properties held, and there are actually significantly different estimates across analysts of the average carrying value of 1-4-family REO properties at FDIC-insured institutions. If one were to assume an average carrying value of about $150,000 – which is slightly over 50% above that for Fannie and Freddie – then FDIC-insured institutions would have owned about 88,530 residential REO properties last quarter. (Barclays Capital analysts believe the average carrying value is higher, and as a result the number of properties would be lower).

Using the $150,000 number, here is a chart of REO holdings of Fannie, Freddie, FHA, and FDIC-insured institutions.

Fannie Freddie FHA PLS FDIC insured REO InventoryNote that this is NOT an estimate of total residential REO, as it excludes non-FHA government REO (VA, USDA, etc.), credit unions, finance companies, non-FDIC-insured banks and thrifts, and a few other lender categories. At the end of last year Fannie, Freddie, FDIC-insured institutions, FHA, and private-label RMBS accounted for approximately 89% of the dollar balance of 1-4 family first-lien mortgage debt outstanding. If one “grossed up” the estimates shown in the chart by this factor – which probably produces a “too high” number – then one estimate of the total REO inventory for 1-4 family properties would be around 615,000.

Of course, such an estimate probably understates the effective number of REO properties. E.g., institutions could well have unloaded properties in bulk sales to private entities looking to fix up and then sell and/or rent the properties but who have not yet done so. However, at least based on available lender data, estimates of the number of REO properties from RealtyTrac look materially too high, and overall REO inventories have clearly declined over the last two quarters.

CR Note: this is probably a good estimate of REO inventory. The key is REO inventory is declining again even though some organizations have significantly increased their foreclosure activity and are working through the backlog of seriously delinquent mortgages.