Mix of distressed sales is changing
As published in Scotsman Guide’s Residential Edition, December 2012.
U.S. foreclosure activity dropped to a five-year low this past September, partly because lenders and servicers are disposing of distressed properties earlier in the foreclosure process and even before the foreclosure process begins.
This paradigm shift in the disposal of distressed loans is likely attributable to several factors: the recent national mortgage settlement, the short-sale guidelines from Fannie and Freddie that took effect Nov. 1, tougher state foreclosure laws, litigation challenging proper foreclosure procedure, municipal ordinances fining banks for foreclosed homes that are not properly maintained, bad press and political pressure.
All of these negative motivators, combined with the positive motivators of higher average sales prices and lower loss severity for properties sold via short sale compared to those sold post foreclosure (real estate owned or REO), add up to a compelling case to move distressed dispositions further upstream.
Sales data from the first five months of 2012 compared to the same time period in 2011 clearly show the shift nationwide. For this analysis, RealtyTrac looked at three different categories of distressed sales:
- REO sales: sale of a foreclosed, bank-owned property to a third-party buyer
- Pre-foreclosure sales: sale of a property in the foreclosure process but not yet foreclosed, either via short sale or at the public foreclosure auction to a third-party buyer
- Short sales before foreclosure: a short sale of a property that has not started the foreclosure process
In the first five months of 2011, REO sales nationwide accounted for 14 percent of all residential sales, the biggest share of any of the three categories, followed by short sales before foreclosure (13 percent) and pre-foreclosure sales (9 percent).
But in the first five months of this year, short sales before foreclosure accounted for the biggest share of the three categories, 14 percent, thanks to an 18 percent year-over-year increase in this type of distressed sale. REO sales came in second, with 11 percent of all sales, and pre-foreclosure sales came in third with 10 percent.
This shifting mix of distressed sales resulted in a net increase of 6 percent in all distressed sales from 2011 to 2012. The total distressed-sale share decreased slightly over the time period thanks to a 12 percent increase in nondistressed sales, but distressed sales still accounted for 35 percent of all residential sales in the first five months of 2012.
Although there is still a heavy share of distressed sales, more of those distressed sales have moved below the surface of foreclosure — the most visible manifestation of housing market distress to most people. Instead of seeing a property sit vacant for many months, often falling into disrepair and becoming a neighborhood eyesore, homeowners living around a distressed property simply see a for-sale sign go up when the home still is occupied and eventually see new buyers move in.
The end result is that distressed sales are having less of a negative impact on the housing market, both in appearance and in reality. Foreclosure activity is down to a multi-year low in many states as more distressed properties are disposed before foreclosure, and average home prices are inching up as the most highly distressed sales, REOs, shrink as a percentage of all sales.
Daren Blomquist is vice president at RealtyTrac. With RealtyTrac since 2001, he is the company’s primary media spokesperson and expert on foreclosure statistics and trends. Blomquist is managing editor of the Foreclosure News Report and creates foreclosure market and sales reports cited by thousands of media outlets. He interfaces with the Federal Reserve, U.S. Senate Joint Economic Committee and Banking Committee, U.S. Treasury Department, and numerous state housing and banking departments. Reach him at firstname.lastname@example.org.