Huge amount of REO homes still held by lenders; Foreclosure actions rise sharply in other US cities

Fitch Ratings, a global credit rating agency, now estimates that the huge “shadow inventory” of REO properties still held by lenders will take at least 40 months to process and sell.

With an estimated 7.5 million REO homes still to be listed, it will take some time for major banks to liquidate these properties. Of all the family home loans JPMorgan Chase has, for example, one in thirteen is in foreclosure today for a total value of $20 billion. Currently, it takes approximately 18 months to process and resell an REO home, starting from the date of the last mortgage payment.

These numbers guarantee that REO listings will continue to account for a large portion of all real estate sales for at least the next three to four years.

A further spike in foreclosures will also add considerably to the overall REO inventory. Ongoing foreclosure actions are starting to see big jumps in other areas of the United States. While most of the attention has been directed at Florida, California, Nevada and Arizona, the “big four” that have seen the largest increase in REO properties in recent years, other cities and states are suddenly seeing dramatic increases. .

In the third quarter of 2010, foreclosure actions (which include everything from default notices to actual bank repossessions) increased in 65 percent of the top 200 housing markets in the country. Seattle saw a 71 percent increase, Chicago a 35 percent increase, and other cities like Houston and Atlanta also saw double-digit increases. When it comes to actual bank foreclosures, Boise, Idaho saw a 71 percent increase and Philadelphia saw a 38 percent increase.

Unemployment seems to be driving these new numbers, and it’s also affecting the number of prime mortgage delinquencies in recent months, which also rose sharply. Managing director of Lender Processing Services’ applied analytics division, Kyle Lundstedt, said current mortgage delinquencies exceed 7 million.

Loan modifications aren’t helping struggling homeowners either. It was recently reported that of the approximately 16,000 mortgage modifications made on Freddie Mac loans in the second quarter of 2009, 42% had returned to delinquency 12 months after the restructuring. Which explains why Freddie Mac suffered a $2.5 billion loss in the third quarter and requested another $100 million from the US Treasury.

REO agents, brokers, and other professionals trained in this specialized field will continue to be desperately needed as this segment of the real estate market continues to dominate in the coming months.