Will REOs Hamper a Housing Recovery?

The nation’s largest banks and mortgage lenders currently own more than 872,000 homes — properties in which they repossessed from foreclosure, according to RealtyTrac. That is nearly twice the amount they repossessed in 2007, when the financial crisis began.

But the problem may get even worse: Banks are ready to repossess another 1 million homes in foreclosure, RealtyTrac reports.

The swelling number of lender-owned homes has economists concerned because higher inventories of distressed homes can depress overall home values. Economists say that it could take lenders three years to sell their foreclosed home inventory.

“It remains a heavy weight on the banking system,” says Mark Zandi, the chief economist of Moody’s Analytics.

Indeed, the high number of lender-owned homes stands to cost banks $40 billion in additional losses as they’re forced to sell these homes at sharp discounts over the next two years, according to Trepp, a real estate research firm.

Real estate professionals told The New York Times that lenders seem overwhelmed by the huge inventory of homes. They also say these lender-owned listings are often out of date and overpriced by as much as 10 percent, and that lenders take too long to accept an offer.

These homes also can sit in limbo for nearly two years. It can take 400 days just for lenders to foreclose on the home and then 176 days, on average, to sell it.

Source: “As Lenders Hold Homes in Foreclosure, Sales Are Hurt,” The New York Times (May 23, 2011)