State of the REO (Real Estate Owned) Market

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Although foreclosures slowed pace slightly in May, it more than likely will be a short lived leveling of the market.    With interest rates trying to creep up and refinance options dwindling more and more, homeowners are "stuck" with payments they can't afford and no where to turn.   Add to this the increased pressure for lenders to get their balance sheets cleared of toxic assets (non-performing loans and foreclosures), and you have a perfect storm that is going to cause great turmoil ahead in the housing market.  

Despite every effort to keep rates low, they are still creeping up and eventually will go WAY up.    Some are predicting mortgage interest rates in the double digits coming out of this super imposed low rate era.  Very simply, as we continue to print money and create stimulus, we decrease the value of our dollar.   With this decreased value in the dollar, the cost of borrowing money will have to increase.  In fact, the cost of everything will have to increase.  It is called inflation (created in part by increasing the amount of currency in circulation).  This will close down the refi market, bring to a crawl the already slow paced existing homes purchase market and dry up what little builder (new homes) market is left. Keep in mind, however, people did buy houses when interest rates were 19%, just not as many.

The sky is not falling, but the economic laws do still apply here, so ignoring the facts in evidence won't change what has to happen.   What goes up will correct.   In a stable real estate market we go up 7% and correct 2% and we still gain 5% appreciation on our homes.  In the markets of 2001 to 2005 property appreciation was insanely high.   Some areas were seeing 37% property appreciation per year for 3 years in a row.    When you have this type of sharp rise in the market you have to be prepared for an equally big correction.   That correction is what we are seeing now.  

So, if you bought a house in 2005 for $400,000, it might only be worth $292,000 in your market.   This is the problem most people are seeing in their markets.   It is making it easier for people to just throw their hands in the air and walk away from the property.  That is what is being seen in record numbers, and yet another contributing factor to the rise in foreclosures.    This trend should be expected to continue to gain momentum through the better part of 2010 as home prices continue to fall, struggling to find a bottom to this out of control spiral.     

What is the bank's answer?   Modification of the loan terms to create affordable payments and keep people in their homes.   In theory it is a great idea and a great option for some consumers.  The only problem is that it is not working.   The lending industry is seeing a 50% re-default rate on these modifications and this rate is expected to soar to as much as 75% re-default.   The unfortunate reality is that there are more factors coming into play than just bad loan terms.   The U.S is about to hit a 10% unemployment rate. This is alarming and also one of the major contributors to the sharp increase in the default rate of mortgages and ultimately the sharp rise in the number of foreclosures.  

Within this crisis, the new boom markets arise. Many agents now specializing in foreclosures, short sales, and distressed sales are reporting income levels better than many years in "the boom".   There are many new markets that will arise out of this transforming economy.   To be truly GREAT at anything, you have to be able to look a bleak situation and be able to find the opportunity within to arise victorious.   Stay focused on opportunity, educate yourself with the facts, and formulate a strategy.  

Thanks again for reading