The robo-signing scandal may give community banks a needed competitive edge to dispose of REO properties while many larger banks are sidelined as faulty foreclosure documents are thoroughly examined by the courts, politicians and attorneys — a process that could take months, if not longer.
As much as 40% of all bank-owned properties in the U.S. are held by the nation's 50 largest banks.
These banks are less than 1% of all banks in the U.S., and the banks with the largest first mortgage portfolios are generally the only institutions with a velocity of foreclosures necessitating the perceived need for faulty practices.
Though many of the biggest institutions have admitted to improperly filing thousands of foreclosures, because of limited volume, most smaller banks avoided similar improper practices. In comparison, while banks like JPMorgan Chase & Co., Bank of America and GMAC have recently processed 8,000 to 10,000 foreclosures per month, in many cases, midsize banks foreclose less than 100 properties per year.
The current total number of REO properties equals roughly 550,000. Of these, about 190,000 are owned by Freddie and Fannie and other 360,000 are owned by banks.
Unfortunately, an additional 2.5 million properties are in the process of foreclosure with approximately 2.5 million home mortgages in default with payments 90 days or greater past due. In total, around 10 times the current supply of REO is in the pipeline to be foreclosed.
On a macro level, the inevitable delay in foreclosures will only postpone the need for all repossessed properties to be absorbed before a meaningful housing recovery.
With approximately 5 million soon-to-be foreclosed homes looming on the horizon, larger mortgage issuers such as JPMorgan Chase, Bank of America and GMAC, will now be forced to deal with the significant delays and costs associated with the review of current foreclosures.
Additionally, by slowing the foreclosure process, properties remaining off the market and "in the shadows" will experience continued deterioration because of deferred maintenance, vandalism and theft as well as other carry costs such as taxes and homeowner association fees.
Unlike other financial instruments, mortgages represent an underlying asset that is in a constant state of physical decline — which significantly impacts market value and appeal.
The current halt of foreclosures will undoubtedly reduce the supply of repossessed homes entering the marketplace.
The reduced supply suggests a short-term increase in home values. Foreclosed properties will likely experience the greatest benefit of increased home prices given their less-expensive price tags compared with nonforeclosure properties.
In most cases, the purchase price of a bank-owned property is significantly less than the construction cost of a new home of similar quality and size.
Though many community banks now have a better chance to clear out thousands of current REO properties at a higher velocity, the length of this window of opportunity is unknown.
The nation's small- to medium-size banks may experience a competitive advantage in the coming months. These banks must act quickly and efficiently. They will continue to face the challenges of efficiently selling repossessed properties. Some of the requirements associated with effectively disposing of REO properties include: accurate valuations, critical maintenance and preservation and responsive disposition practices.
These banks need to capitalize on this unanticipated competitive advantage while the big banks are forced to the shadows.