Thursday, August 25, 2011

Update on Q2 REO Inventory

by Calculated Risk on 8/25/2011 04:40:00 PM

With the release of the Q2 FDIC Quarterly Banking Profile, we can estimate the number of REOs held by FDIC insured banks and thrifts. From economist Tom Lawler:

"On the residential REO front, FDIC-insured institutions’ 1-4 family property REO holdings (in $’s of carrying value) declined to $12.0895 billion on June 30th, 2011 from $13.2795 billion on March 31st, 2011 and $13.7221 billion last June. The drop reflected the continued slow pace of REO acquisitions related to foreclosure delays, as well as a likely pick-up in REO dispositions last quarter.

While the FDIC does not collect data on the NUMBER of properties held by FDIC-insured institutions, a reasonable “guess” is that their average carrying value is about 50% higher than the GSEs, or in recent years around $150,000."

This gives an estimate of 80.6 thousand REO at FDIC insured institutions at the end of Q2, down from 88.5 thousand in Q1.

This graph shows REO inventory for Fannie, Freddie, FHA, Private Label Securities (PLS), and FDIC insured institutions. (economist Tom Lawler has provided some of this data).

Fannie Freddie FHA PLS FDIC insured REO InventoryTotal REO decreased to 493,000 in Q2 from almost 550,000 in Q1.

As Tom Lawler noted: "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." However this is the bulk of the REO - probably 90% or more. Rounding up the estimate (using 90%) suggests total REO is around 548,000 in Q2.

Important: REO inventories have declined over the last couple of quarters. This is a combination of more sales and fewer acquisitions due to the slowdown in the foreclosure process. There are many more foreclosures coming - see my earlier post on Mortgage Delinquencies and REOs.

Tom Lawler wrote today: "[I]f in fact REO inventories have declined in line with the Fannie, Freddie, FHA, and bank/thrift data, one shouldn’t view that as a “bullish” signal – after all, the main reason for the drop has been the artificially low pace of REO acquisitions associated with increasing foreclosure timelines/delays.

[I]n quite a few markets the lower REO inventories have reduce the REO shares of overall sales as well as the number of REO properties for sale, which has temporarily improved various measures of home prices. Many markets in Florida are prime examples, as judicial foreclosure delays have reduced substantially the pace of REO acquisitions as well as the inventory of REO properties for sale, even as the number of properties in the foreclosure process has remained at nosebleed levels."