Tuesday, May 27, 2008
REO goes jumbo
we enlisted the help of Denver-based Integrated Asset Services LLC, a 230-person company that handles asset disposition nationwide for many of the nation’s largest financial institutions. The folks at IAS dug into their national database of sold REO properties and pulled together for Housing Wire an exclusive look at REO sales by state where the sales price was recorded above the $417,000 limit (most REO properties are listed and sold at prices well below this level).
What the numbers show is clear evidence that the foreclosure mess — and, by extension, the build-up of REO — is clearly moving up the real estate food chain.
this dovetails neatly with expectations and early evidence that defaults are rapidly expanding from subprime into alt-a and prime mortgages, where underwriting standards were little better than in subprime during the height of the boom.
commentary of this kind is not only in wapo but on the cover of barron's this week.
numbers of actual jumbo REO sales are still small and concentrated (if expanding) geographically:
In April of 2007, for example, just 27 REO properties above the traditional conforming limit were sold nationwide; in April 2008, that number had mushroomed to an astonishing 173 properties. (We should note that these numbers refer to REOs actually sold during the month, and don’t include the countless many more properties still sitting — unsold — in inventory.)
And it’s not the just number of jumbo-priced properties that are swelling in REO, either; expansion is taking place geographically, as well. Last April, 11 states recorded at least one REO property sale above the conforming limit; in April of 2008, that count had reached twenty states. The lion’s share, not surprisingly, were in California — the Golden State, hit hard by the market downturn, saw 102 REOs sell for more than $417,000 during April, compared to just 13 such sales in April 2007.
but that is going to change.
“We’re just now seeing Alt-A and prime delinquencies begin their climb,” said one source, an MBS analyst who asked not to be named. “That means a whole lot of deluxe REO is on its way.”
paul jackson points out the important caveat for people (like myself) who have got out of the housing market during the boom to rent with the expectation of picking over the carcass of housing during the bust.
For lenders, a growing glut of high-end REO can particularly problematic, according to IAS CEO David McCarthy.
“The carry cost is so much greater,” he said. Carry cost typically refers to the amount of money needed to “carry” an asset on the lender’s books, and includes accrued taxes, property maintenance, and the like; traditional cost of carry can run roughly 2.5 percent of a property’s value.
The result, McCarthy said, is that many servicers and their investors are placing extra attention on the valuation of higher-end properties, in an effort to make sure that they can sell more quickly and keep loss severity as low as possible.
“I think many are taking a closer look at the prices they get, and are spending more time to estimate value” in those markets that have been hit the hardest, McCarthy suggested.
In part, the push to ensure accurate valuation is a reflection of the carrying cost and the desire to limit loss; it’s also a reflection of the fact that more consumers are now looking at REOs as a potential investment, given the higher price points involved.
with banks likely to overmanage this end of their REO portfolio, it will likely pay to wait for the flood to begin. at this point, as the post implies, there are too many quick-trigger investors and not enough deluxe REO. the attention being paid to the situation in barron's and wapo is testament to the lack of fear in this setup.
it's likely not until the first wave of deluxe REO speculators jump in and have their capital position destroyed by secondary waves of supply and further price collapses that honest-to-god panic will set in on the part of banks and investors alike.