The liquidation prices of REO properties and strong competition for buyers in markets with extraordinarily high numbers of REO properties is driving the 'fair market value' of homes to new lows and the liquidation of REO properties will probably cause an over-correction in the housing market.
According to the Dictionary of Real Estate Appraisal 'liquidation value' is the likely price of an asset when there is insufficient time to sell on the open market thus reducing its exposure to potential buyers? Illiquid assets like real estate often require a period of several months in order to obtain their 'fair market value' in a sale. Real Property Assets sold through a forced liquidation or through an orderly liquidation to be completed within a shortened time frame will generally sell for a significantly lower price due to the shorter time frame. Consequently, 'liquidation value' is typically lower than 'fair market value.'
Secretary Geithner developed the TAP to buy illiquid toxic assets from banks and firms in the financial market to protect and preserve the value of these toxic assets, to isolate toxic assets, stabilize the market, and to restore liquidity. The orderly liquidation conducted in an extended time frame with government assistance, favorable loan terms, and government guarantees will enable the sale of these assets at prices higher than they could fetch during an extraordinary market crisis.
REO properties are toxic assets in the housing market. We need a similar program to address the illiquidity of REO properties in the Housing Market. The Treasury and the FDIC could work with a select group of Real Estate Investment Trusts who would buy large portfolios of these assets and then re-sell them in by neighborhood groups to builders and/or developers who could rehabilitate these properties and then sell them at prices higher than they could fetch in the current housing market crisis.