Banks are delaying the sale of homes they have acquired through the foreclosure process both in the Tri-Cities and nationally as they try to minimize the impact that foreclosures have on their bottom line.
Certainly the pace of foreclosure has accelerated in the Tri-Cities. For example, the number of foreclosures banks have newly put up for sale during the April through July period in each of the past four years in St. Charles, Geneva and Batavia are as follows:
2009 — 48
2010 — 69
2011 — 105
2012 — 98
While the bank-owned listings during the past two years increased markedly, it doesn’t match the overall pace of foreclosure activity. For example, there are approximately 350 homes at some stage in the foreclosure process in the Tri-Cities but banks haven’t yet put those homes on the market. Why?
Four answers are probably all in play. First, many of the 350 currently in pre-foreclosure won’t actually end in default. They will be sold either through regular or “short-sale” processes or the homeowner will become current. Banks are realizing that the loss on a short sale is less than the loss on a foreclosure and they're disposing of more homes in this manner.
Second, banks' capital structure dictates how many homes they can book a foreclosure loss on and stay solvent. Banks can carry the foreclosed home on their balance sheet at the value at which it was originally appraised until they sell it. Once they sell, they must book any profit or loss. With home prices down approximately 30% since the market peak, banks have huge potential losses baked into the sale of the foreclosures they hold.
Third, banks may be playing a sophisticated game of managing the market. If the large holders of foreclosures start to dump their entire inventory onto the market, and other banks join in, prices become depressed as normal sales compete with foreclosures at “fire-sale” prices. Homeowners who were previously current with their loans will become underwater as prices decrease and they become more likely to default. This is a vicious downward spiral that banks want to avoid.
Fourth, banks may just be playing catch up and we’ll see more of these homes hit the market in the back half of the year.
As a Realtor watching a market struggle with the lack of inventory of homes for sale, increasing the rate of disposition of these homes by the banks would be helpful. This is a how do you take a Band-Aid off issue: rip it off and deal with all of the pain at once or slowly, languidly, and zombie-like?
Bottom line: We’re not out of the woods yet with foreclosures here or nationally. If you’re interested you can find a list of foreclosures that are for sale locally at www.scottnowling.com.