With recent revelations of the fraudclosure scandal, and a spike in interest toward all things REO, we decided to go back to basics and present some "appendices" over why this process of excess bank inventory clearance is so important and what its implications are, especially in a world in which foreclosing has suddenly become legally impossible.
First, courtesy of UBS, an outline of the Foreclosure process:
The Foreclosure Process
The foreclosure process may vary significantly across states and even across countries, but the following description is general enough that it should be applicable to most of the US.
Delinquency and foreclosure. After a homeowner with a mortgage loan has missed three monthly payments, he or she is considered to be “90 days delinquent,” and the servicer of the mortgage (the company to which the mortgage payments are made) can initiate foreclosure proceedings.
Auction. At some point, the borrower will be asked to vacate the home, and if necessary at some later point, the borrower will be compelled to vacate the home by local authorities. The home will then go up for auction.
REO. If the auction bids do not reach a high enough level to cover the outstanding balance of the loan, the lender can take ownership of the property. Once the lender owns the property (referred to as real-estate-owned or REO), it will typically remain vacant until the lender is able to sell it.
A quick back of the envelope analysis that shows how much incremental inventory foreclosure creates:
A flow chart of the foreclosure process:
The charts below show the geographic/spatial concentration of foreclosure filings, as well as concentration of GSE in selected states:
The states where foreclosure accounts for the bulk of transactions:
A snapshot of contagion effects of foreclosure on homes in the same naighborhood:
Those who wish to dig into the fascinating topic of contagion (in foreclosures, not in default European countries), can find more info below:
As those who have been following our RealtyTrac updates know, in the last quarter the discount between a regular home sale and that in foreclosure just hit an all time record. Here is how the pricing matrix looks like by state and nationally:
And possibly the scariest chart of all: the end buyer of all the REOs, the properties that end up having the lowest salvage value, for the most part end up being acquired by the nationalized GSEs. And since the GSEs are on the US shadow balance sheet, these are simply more "assets" that collateralize US treasurys, and therefore, the US currency.
Take all the data above, and layer on top the complete confusion courtesy of the self-imposed foreclosure moratorium, and the utter confusion in the market becomes apparent.