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ProTeck Examines Relationship Between LTV Ratios and Foreclosure

While the housing market has seen some recent positive signs, many still wonder when a true recovery will occur. Distressed real estate continues to hold a market-wide recovery at bay, and predicting a timeline for bringing distressed real estate to manageable levels is difficult at best.


Last week, ""ProTeck"":http://www.proteckservices.com/ released the results of a ""preliminary study"":http://www.proteckservices.com/hvf-lessons-from-the-data/some-challenges-and-initial-findings-regarding-the-transition-from-negative-equity-to-the-reo-inventory/ of distressed real estate for three ZIP codes based in Connecticut, New Jersey, and New York. ProTeck observed 5,021 properties that became distressed between April 2005 and July 2012.

ProTeck defined ""distress"" as any property with a value equal to less than 95 percent of its outstanding loan balance.

The median amount of time properties spent in distress was three years.

However, more than 20 percent of properties remained distressed for more than five years.

The situation for many distressed properties ProTeck observed was exacerbated by declining home prices. The average home value, as estimated by an automated valuation model, was $270,000.


After becoming distressed, values fell more than 25 percent on average.

The probability of foreclosure peaks during either the second or third year of distress, according to ProTek.

LTV is also ""a key driver"" in the transition into foreclosure, with higher LTVs aligning with higher probabilities of foreclosure.

In their first year of negative equity, properties with an LTV of 125 percent have just under a 15 percent chance of going into foreclosure. Properties with an LTV of 200 percent have just over 40 percent chance of falling into foreclosure.

ProTeck also found that while probabilities varied between the three ZIP codes, the relationship between time spent in distress and probability of foreclosure remains relatively constant in all three observed locations.

When ProTek examined the relationship between the probability of foreclosure and the current LTV ratio over a two-year period, results suggested a much stronger relationship between the two variables in the Connecticut and New Jersey zip codes versus New York, where the relationship was not nearly as strong. The report explained variations in foreclosure laws could impact the relationship, as well as ""the years and the circumstances in which these various properties entered the inventory.""

The overall outcome of the 5,000-plus properties as of July 2012 was 4 percent ended in foreclosure, 5 percent exited as a short sale or regular sale, while 89 percent still remained in inventory as a property in negative equity.

ProTeck intends to continue to study the transition from negative equity to REO status in more depth and across more geographies.


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