The Hidden Foreclosure Market

Back in May, I blogged about the significant number of homes in the Redfin database that were clearly bank-owned, yet had not been put back on the market by the lenders. Now, according to this post from the Sacramento Real Estate Statistics blog, based on research from Deutsche Bank, this practice could be widespread.foreclosure.jpg

[B]ank-owned homes frequently do not show up in resale inventory, or MLS listings. The extent to which bank-owned homes do not appear in MLS listings is difficult to quantify because it depends on each bank or servicer’s timeline and approach in handling foreclosed properties.

The research estimates that there could be as many as 88,843 foreclosed homes in Los Angeles County, although only 62,379 have actually been listed for resale on the MLS.  In San Diego, there could be more than 12,000 foreclosures that haven’t hit the MLS — a significant percentage more than the 18,000 listed now.

It’s easy to find hidden foreclosures on Redfin.  Go to any neighborhood or ZIP and do a search that includes recent sales for the last six months or so.  You can tell which homes are foreclosures by the oddball sales prices, like, say, $761,405 – it’s rarely a round number. 

Here are some random ones I found just now on Redfin:

8961 Tree Farm Lane, Riverside
Sold for $263,891 on 4/30/08

2018 Lemnos Drive, Costa Mesa
Sold for $805,454 on 6/11/08

1785 Deavers Drive, San Marcos
Sold for $432,808 on 5/21/08

So why are lenders holding on to these properties?  According to a report included in the May post, some aren’t quite prepared to swallow the huge losses, so they’re holding on, hoping for a market rebound.  In cases where mortgages are held by multiple companies, all parties must agree on the best course of action, which snarls progress. Lastly, lenders are so overwhelmed by the volume of distressed properties that they don’t have time to deal with them.

Once these foreclosures finally land in the MLS, it’s hard to imagine them not depressing prices even further.  In the meantime, who’s taking care of these vacant, languishing homes?  Lenders would be wise to hire some people to process these properties; not doing so is just delaying the inevitable.

Recent Redfin posts:
Mandate for Low-Income Units:  Harmful or Helpful?
Why My Sale Price Wasn’t Really My Sale Price
Southern California Water-Saving Tip: Block New Development

  • Andrew Waite

    This is not news. I August 2007 the SEC and FASB changed non-performing loan recognition rules to allow federally chartered banks to park the assets related to non-performing loans in third party entities.

    This allows banks to transfer what used to be a 100% loss off the books into a parking entity at an agreed value. The intent was to avoid the illogical accounting rule that cratered S&Ls in 1987 who had to recognize the non-performing loan as 100% loss, when there was real estate with real value as security.

    Inside the third party entity, often owned by the bank under a trust, the loans over these properties can be converted to a temporary rental agreement with the borrower in place as tenant, or park and await the inevitable market rebound, do a work-out, do a later refi when market improves or most critical, keep good properties off the market knowing that within 24 months these will be back in the market at at least loan value or more.

    The side story is that often the best properties are not available as REOs or foreclosed inventory. When they are they have already been picked over by bulk REO buyers and wholesalers.
    This is happening all over the country and allows a staged return to inventory, if ever.

    The foreclosure numbers, although personal tragedies for those involved, remain less than a rounding error. 94.6% of all mortgages are current. Less than 2% are delinquent to the point of NOD and foreclosure.

    For the last five months in the West and SE, inventories (by MLS thus 65% market sample) are contracting, pending sales rising and sale price per square foot coming off replacement value.) The leading edge of the market reached bottom Q’1 2008 are the precursors for recovery are strongly in place. More credit is becoming available so the mortgage spiggot is being turned back on.

    What a wonderful country. Plan, Work, Smile and torque off a liberal.

    Best: Andrew Waite