Tri-Cities Foreclosures: Why Aren’t the Banks Selling Them?

There are plenty of foreclosures that could be sold by banks in the Tri-Cities. Scott Nowling of Prudential Starck Realtors addresses why they aren't being sold.

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.

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James August 13, 2012 at 02:27 AM
Great Story, It will be interesting to see what happens. I read Jeff ward is 60 days delinquent!!!
Scott Nowling August 13, 2012 at 11:19 AM
James: It will be interesting. I can't tell if your comment is made as a joke or not. I can say I have sat at the kitchen table with people who have a desperation that makes me feel like I'm living in the Grapes of Wrath. It's neither fun nor funny.
Elizabeth R August 13, 2012 at 11:37 PM
I also believe Politics is playing a huge piece in this. The Obama Whitehouse has been in negitiations for a long time with the robo-signing issues and banks. A couple months ago thousands were allowed to be released (which our Sheriff sales show are at record levels right now) and I think with this being an election year and not wanting more bad economic numbers made public or news that he can't defend, part of the deal is no more will be released until after the November elections.
Never Better August 15, 2012 at 12:32 PM
Louis, sorry but that's just not how the free market works. No conspiracy theories are needed to understand why banks don't want to write down the debt. We saw what happened in Japan; that should be enough. Insightful analysis, Scott. If we look at the Japanese real estate bubble from way back in the late 1980s we'd find some banks involved in that bubble still have foreclosed properties on their books they haven't written off. They will hold them at the mortgaged rate of value as long as they possibly can rather than reflecting a complete loss of all of them on their books, which would affect their whole portfolio. The other issue is that if those other houses were foreclosed upon we'd also have the community issue of a large number of uninhabited houses - lawns to mow, issues with public safety. In most cases it's better for everyone to keep those houses inhabited if at all possible. Our country has been wiser in its economic policies so far than Japan was, responding more quickly than the Japanese government did and not stupidly plowing into "austerity for everyone!" in the midst of a banking crisis like some EU countries have done. Mortgage debt is a piece of this puzzle, and hopefully calmer heads will continue to prevail and not be tempted to either rip off the BandAid all at once OR let it all languish, Japanese-zombie style, while the wound underneath continues to fester.


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