Focus on REO's

This is going to be a slightly different take on my usual REO update. Most of the time, I tell you what happened over the past few months, and what the current inventory levels look like, and I make a stab at what's coming down the line at us.

This time that last part - what's coming - is more of the focus. I found a good data source that I think sheds some light on upcoming REO activity, and I'm going to share some data today that might surprise you. But first, let's get the usual suspects out of the way:

REO's account for about 20% of our active inventory and about 23% of our pending listings as of this afternoon. The share of pending listings has shrunk a bit in recent months, and we're down to REO's accounting for around 50% of sold units in the past three months. That's been running closer to 60% for a while, so that's a pretty significant change.

What hasn't changed a lot is the number of unlisted REO's and the foreclosure activity. You'll see from this chart that we've been relatively stable in foreclosure activity for a while now. We continue to run at about 60 unlisted REO properties in the queue at various points in the process, and we've seen a decline in recent months of unresolved Trustee's Sales.

Now for the part about what's coming. If you've been reading or watching the usual media sources out there, you've probably been hearing about two things in terms of foreclosures. First, that there is this enormous "shadow inventory" of properties that banks are holding onto for one reason or another. And if you've been reading this blog, you know that I'm not seeing that on a local level. Second, there is a lot of talk about a big wave of loan resets that is going to spur another surge in foreclosures.

Let's talk about that last one. It may be true on a national level that we are coming into a big round of mortgage resets. But real estate is primarily local, so let's talk about what's happening here in little old Lompoc. I've been looking for a good source for localized information here, and I've found a couple of data sources recently. I pulled the numbers for loan resets for the next few years, and I charted it. And I ask you - does this look like a tidal wave to you? What this looks like to me is that we'll see a pretty stable number of loan resets for the rest of the year, and then it should start to decline next year and for the next few years. I only pulled numbers through 2014 because they start to drop off so significantly.

I'll admit that there are a couple of limitations in these numbers. This data doesn't go back in time reliably, so I can't easily compare what we are seeing now with 2007 and 2008 numbers. And it also doesn't account for second mortgage balloon payments - people who bought a home with 100% financing, with a first loan of 80% and the remainder on some form of junior loan with a lump sum payment due after a handful of years. That could get interesting, but we don't often see of junior lien holders go all the way through the foreclosure process. The reason for that is, even if they take the property back, they take it subject to the first trust deed. And if the senior loan is more than the property value, it's kind of a financially pointless endeavour.

So what do I think we have coming? Well, we clearly aren't out of the foreclosure cycle yet, and we probably won't be for a while. But I don't think that based on the data I have that there is any reason to fear a big wave of loan resets causing more foreclosures locally. That's not to say that we couldn't still see some significant problems if the local employment picture takes a turn for the worse. In fact, I expect that the biggest driver of foreclosures in the next couple of years to be job loss and "strategic" defaults. I have some thoughts on that last one that I'll share in another post sometime soon.

I said the last time I updated REO's that I expected to see a shift in our market from REO's to short sales. I still expect that to happen, and it might in fact be starting. It makes a lot more sense for the banks to encourage and cooperate with short sales than to go the foreclosure route. Go back to the point I made on the junior lien holders, for example. Would it be better for them to foreclose just to get their pound of flesh (and spend a lot of money for no real return), or to cooperate with a short sale and get a few thousand dollars? Duh.

Bottom line here, foreclosures appear to be waning slowly in our market. And for a lot of reasons, that's good news for our market and our community.