REO Inventories Shrinking in California

""ForeclosureRadar"":http://www.foreclosureradar.com, a Web site company that tracks every California foreclosure and provides daily auction updates, has issued its monthly California Foreclosure Report for April 2009. In a reversal from the prior month, the company said, the Golden State's foreclosure notices dropped while foreclosure sales and distressed property purchases by investors rose.
According to ForeclosureRadar's market data for California, sales at auction last month jumped by 35 percent. The company added that a record number of these properties were purchased by third parties at an average 28 percent discount from estimated market value.
In total, 13,550 foreclosed California properties were taken to auction last month, representing $6 billion in loan value. ForeclosureRadar reported that the number of foreclosures sold to third parties increased in April to 1,634 - a 52.3 percent increase over March and 217.9 percent higher than April 2008. Though the increase was significant, the company said, the percentage of foreclosures sold to third parties remains just 12 percent of the total, with 88 percent going back to the lender.
Lenders took back 11,916 foreclosures for which no third party bid was received, representing $5.3 billion in total loan value. ForeclosureRadar said that of these loans, nearly 99 percent were first mortgages, with many of these foreclosures wiping out the secured interest of junior lenders. Potential losses by junior lenders exceeded $623 million across 6,911 wiped out junior loans.
The company also noted that nearly 90 percent of the foreclosed loans last month were originated between January 2005 and December 2007.
With the rise in REO sales, ForeclosureRadar reported that California's notices of default, the first step in the foreclosure process, dropped by 18.2 percent from the record level set in March 2009. Last month's filings were down 1.1 percent from April 2008.
Notices of trustee sale, which set the auction date and time, also dropped by 8.5 percent from the prior month, ForeclosureRadar said. The number of trustee sale notices in April was 0.8 percent lower than the same month last year, and 24.2 percent below the peak reached in July 2008.
Sean O’Toole, founder and CEO of ForeclosureRadar, said, ""As the inventory of bank owned, or REO, inventories drop across California, we’ve seen a dramatic increase in demand for information on the foreclosure auctions as an alternative source for buying property in the current market. Despite the discounts offered at the trustee sale auctions, we’d like to remind everyone that these discounts come with significant risks, especially for consumers and inexperienced investors.""
O'Toole went on to explain that all trustee sales are as-is, with little or no opportunity to inspect the property before purchase. Sales are also subject to existing liens and encumbrances, he said, so buyers must carefully research any outstanding debt that may be owed after the purchase. Since there is no title insurance, any mistake made when researching those liens and encumbrances is the buyers’ alone to bear. In addition, the successful bidder may also have to evict the prior owner or tenant, before taking possession of their new purchase.
In return for taking on these risks, third party buyers of California foreclosures enjoyed an average 28 percent discount from ForeclosureRadar's estimated market value of the properties. The company explained that with an estimated market value of $294,000, that discount represents a significant savings of nearly $82,000.
Despite the size of this discount, ForeclosureRadar said, actual margins are lower given the costs associated with evicting occupants, cleaning, repairing, maintaining, and reselling these properties. The company explained that private investors can often accomplish these tasks far more cost-effectively than large banks, making it a win-win for both parties.