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Commentary: REO Isn’t Dead

Is it possible that we have turned the corner on the nation's real estate crisis? Some economic indicators seem to be pointing in that direction. The National Association of Realtors ""recently reported"":http://www.themreport.com/articles/existing-home-sales-prices-jump-in-may-2013-06-20 existing-home sales rose 4.2 percent in May 2013 to an annual pace of 5.18 million; this is the largest increase in sales since November 2009-a very positive sign that suggests we are on the right track.

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Inasmuch as there are tangible measurements, which have evolved into positive forecast discussions, we are not out of the woods just yet. The foreclosure process remains in the spotlight.

Shortly after the 2010 robo-signing issue materialized and was reported on every news channel imaginable, REO sales throughout the country began a downward spiral. Meanwhile, the industry has seen a stronger surge of short sales as REO sales wind down.

Although the robo-signing issue seems to have been addressed, there are many states that still have a cumbersome foreclosure process. For example, in the state of New York, the amount of time it takes to complete a foreclosure is approximately 1,089 days; the national average is 414 days. Needless to say, REO inventory for some lenders is protracted as a result of these types of delays.

Despite the progress seen in many markets, there are some areas that remain in flux. For example, RealtyTrac ""reported that in 2012"":http://dsnews.comarticles/foreclosures-declined-in-2012-increases-expected-2013-2013-01-17, one in every 32 homes in Florida received either a notice of default, auction notice, or was repossessed. ""As of June 2013"":http://dsnews.comarticles/foreclosure-filings-reach-six-and-a-half-year-low-2013-07-10 Florida held the nation's highest foreclosure rate (one in every 355 homes with a filing during the month), followed by Illinois (one in every 525 homes), then Maryland (one in every 647 homes).

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RealtyTrac ""also reports"":http://dsnews.comarticles/foreclosures-short-sales-decline-in-q1-2013-05-30 there were 101,371 REO sales nationwide in the first quarter of 2013, a 23 percent drop from the first quarter of 2012. Foreclosure activity in 2012 dropped from 2011 figures in 25 states, with the decline in 19 due in part to the use of more streamlined non-judicial foreclosure processes. In short, this is aggregately a discernible decrease from the industry high of 187,622 REO sales in the second quarter of 2009.

On the flip side, median home prices in California have reached their highest level since April 2008. As REO sales contract, home prices benefit. CoreLogic estimates that REO properties sell at a 20 percent or greater discount. Geography is the primary catalyst for the discount rate. November 2012 data reflects REO sales nationwide averaged a 47 percent discount compared to non-REO transactions. Short sales were discounted at a 25 percent clip.

Despite limited inventory, some lenders and real estate professionals are starting to see a positive trend. Once they establish a probable sale price for a REO property, home values increase by the time offers are considered. Unfortunately, this is not a trend that's evident across-the-board. However, it is happening enough to consider that the pendulum has begun to swing the other way, and for lenders, the bleeding may soon be over.

What does all this mean? It means lenders now have viable options. Now it is tenable for lenders to consider short sales, loan modifications, and foreclosure as a means to recoup the money they lent out during the subprime boom. As for agents, traditional sales may be an avenue to revisit in tandem with REO for the foreseeable future.

It is evident that REO sales do not claim as large a role in the marketplace as in recent years. However, until employment improves nationwide, and depending on where you are geographically … REO sales will remain a viable market for real estate sales in the near future.

_Jim Alvarez has 25 years' experience in the fields of REO, title curative, legislative analytics, and lending. He is currently director of risk management for_ ""_Financial Asset Services, Inc._"":http://www.fasinc.com/

About Author: Jim Alvarez

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