Five Star Default Servicing Conference - an insight on REOs from Realty Trac
The Five Star Default Servicing Conference and Expo had in-depth, university-style education courses. While there, I took certification courses:
· Marketing REO Properties,
· Property Preservation,
· industry portal REO.Trans
· industry portal REO.Net.
I wanted to share with you some things that I learned at this conference.
I arrived quite early for the REO Marketing Course that was to be presented by Rick Sharga, Senior Vice President of RealtyTrac Inc. Since we had some time before the actual class started, Rick and a few of us got talking about the REO market. By the way, REO means Real Estate Owned and it means Bank Owned or Foreclosed properties. As we chatted, he brought out a presentation he had on his laptop and frankly, it was one of the most interesting presentations I saw at the conference—and this, mind you, a “quasi-private” showing at that! Here are excerpts of his presentation:
Obviously there were many factors involved in getting us to what the Mortgage Bankers Association has referred to as the “highest level ever” of foreclosure activity.
One of the factors was the availability of various loan products that were used for purposes other than those for which they were created.
Fed Policy:
· Stimulus aimed at righting the market after the dot-com meltdown and 9/11
· “Free money” policy drove down rates and artificially drove up home prices
Wall Street Securitization:
· Voracious appetite for exotic loans
· Risks shifted from banks to grape farmers in Tuscany
Fundamental Changes in Behavior:
· Lenders go from “buy and hold” to “Buy to distribute:
· Borrowers look at real estate as a place to park their money, not a place to park their car
The average homebuyer had virtually NO REASON to be sold a negative amortization loan; and ARMs weren’t created to put people into homes they really couldn’t afford. The problem went beyond loan types; there were fundamental changes in the market itself: Homebuyers treated homes as an investment rather than a place to live and Lenders adopted a strategy of “lending to sell” vs. “lending to hold.”
Securitization and packaging of loan pools by Wall Street exacerbated already-shaky underwriting standards.
We may see one more giant spike in foreclosure activity, as tens of billions of dollars of subprime adjustable rate mortgages are due to reset through the second quarter of this year.
These types of loans have a delinquency rate of approximately 42%, and default at nearly a 15% rate.
The “optimistic” view on this is that many of the loans may have already gone into foreclosure, so we won’t see as much of a spike.
The lending community is also hopeful that lower Fed and LIBOR rates will allow some homeowners to aviod going into default. Q1 2008 showed a 112% increase in foreclosure activity over Q1 2007.
Foreclosure activity has increased on a year-over-year basis for 33 consecutive months, and is unlikely to slow down until 2009.
If activity continues at this rate, 2008 will end 50% higher than 2007 in terms of foreclosure rates.
Foreclosures: 2009 and Beyond
August was the highest month on record since the RealtyTrac report started in January 2005.
REO inventory will exceed 1 million homes by end of 2008 – up from 225,000 at the end of 2006
$200 billion in Alt-A and Option ARM loans due to begin resetting – and recasting – in 2009.
