Reo Market Watch – March 2010

by B D Fenton

SO FAR, SO GOOD – HOME PRICES ARE UP AGAIN

Real estate values are still holding in spite of a new wave of foreclosures. According to Clear Capital, for the second month in a row, year-over-year home prices are up 5%. Considering the annual slowdown in sales during the winter season, Clear Capital observed that even with an increase in REO saturation in the February, prices were able to increase slightly indicating that the typical surge in spring and summer buying may ease the burden on the marketplace from pending foreclosures. Keeping wholesale values up in 2010 will be determined largely by how much of the $4B in foreclosures predicted by Credit-Suisse and Goldman Sachs can be deflected from overwhelming the market and undermining values. 

The FDIC inventory is growing and more bank failures appear imminent. To keep up they have been auctioning seized REO and NPN assets in large chunks through structured partnerships for the past two years. As reported by Carrie Bay at DSNews.com, just last month they sold $3B to the Lennar Corporation and another $1B to Colony Capital. The Wall Street Journal recently announced that the FDIC has three more private placement deals in the works totaling another $4B – one for $1.8B that may sell this month. Each portfolio comes with an FDIC guarantee backed by the government strengthening their attractiveness to investors and will be offered initially through outfits like Barclay's Capital. 

Although those numbers are well beyond the ken of most investors, DSNews.com is also reporting that the FIDC is preparing to auction recently seized assets from 19 failed banks totaling $610M. This portfolio consists of primarily residential real estate acquisition, development and construction loans. Most were originated in 2007 and are located in CO, CA, UT, ID, NV, GA and WA making this a highly anticipated sale. Bids for this offering can be tendered through Mission Capital Advisors LLC.

SUB PRIME PORTFOLIO PRICES DECLINE 6% 

A recent Fitch report noted that the taint of Sub Prime portfolios has weakened their value slightly – sub prime prices are down 6% sparking the interest of buyers. The dip in pricing combined with the anticipation of a summer increase in home sales may make the sub prime portfolios more appealing – especially the Pacific States, Texas and the Midwest where the action has been centered the past few months. 

What does all this mean to the smaller to mid-size investor? Approximately 85% of all bulk asset acquisitions are accomplished in large institution to institution transactions. But those assets that make it to the ‘one off' secondary market have seen a recent sustained price stabilization. Even with the dip in sub prime pricing, portfolios across the board are selling higher than they did six months ago. And many analysts are predicting a continuation as the summer buying season opens offering a tantalizing prospect of further recovery if the lien holders can hold back the 2010 foreclosure tsunami predicted by Credit-Suisse.

THE GOOD NEWS 

The good news is the lenders are actively engaging delinquent homeowners in avoiding foreclosures. Using short sales and loan modifications they are becoming more and more pro-active in assisting the homeowners to stay in their home. Ocwen  is one of the best examples of the new attitude. According to Carrie Bay at DSNews.com, the Florida based servicer "is converting trial mods to permanent status at a rate that is 10 to twenty times higher than some of the biggest banks". And its HAMP modifications have a (ninety day) default rate of 5% - compared to the industry's average range of 19 to 34 per cent.  Realizing a slice of something is a whole lot better than a whole pie of nothing, Ocwen has made principal reductions in 15% of their loan mods. They have even appealed to the administration to lower the HAMP payment to income ratio to 31%. All of which adds up to the most effective program in the industry.

 The lenders finally seem to be catching on. As reported by Ms Bay, Ocwen president, Ronald M Faris told Washington that "Almost a year into HAMP, too many homeowners are having difficulty getting their loans modified. In our view, this is due mainly to a lack of sufficient capacity and expertise in the industry to handle the volume". Maybe if a few more of them were as pro-active as OCwen the outlook for 2010 might be more promising. 

Price stabilization is a key element to achieving recovery in the both the retail and wholesale real estate market. Keep your eye on March – if the foreclosure rate declines and the mod/short sale remedies increase again and we see a third month  in a row of price bumps of year-over-year home prices – we might be on to something.