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Housing Market Threatened By Glut of Foreclosed Homes

Over the last few years, the nation's largest banks and mortgage servicers have steadily acquired massive portfolios of real estate holdings, and now have a massive glut of foreclosed homes that threatens to prolong the housing slump and present further hurdles to a recovery in the overall economy.  All told, there are nearly 872,000 homes owned by banks and lenders as a result in the recent waves of foreclosures, nearly double the number there were at the onset of the crisis.  Additionally, there are another one million homes going through the foreclosure process at this time and lenders are on pace to seize several more million in the next few years.

Five years after the first signs of weakness in the housing market, economists are now concerned that the buildup in lender-owned properties is creating a vicious cycle, wherein foreclosures depress home values, which in turn leads to more foreclosures.  With the typically bountiful spring selling season well under way, property values have been in a steady decline for months.  Overall, economists suggest that it would take about three years for lenders to sell the properties in their portfolios.  As a result, prices could fall another 5 percent by the end of the year, before rising modestly in 2012.  Area that were particularly hard-hit by the recession could take even longer to recover.

Although sales have been picking up in recent weeks, banks and other lenders continue to be inundated with foreclosures.  According to data from RealtyTrac, lenders in Atlanta are seizing an average of eight homes for every one distressed property they sell.  In Minneapolis, the ratio is six-to-one, and in formerly top markets like Chicago and Miami, the ratio is two-to-one.  In comparison, before the housing crisis began a typical ratio of foreclosures to distressed properties sold was one-to-one.

The reasons for this massive backlog of distressed homes are several.  Many lenders are inadequately staffed to handle all the foreclosures coming in, and many went through self-imposed moratoriums on seizures amid probes into their foreclosure practices.  Real estate research firm Trepp estimates that the buildup could lead to an additional $40 billion in losses for the nation's lenders as they are forced to sell homes at steep discounts over the next few years.

Lenders have become more open to the short sale process in recent months, allowing borrowers to sell homes for less than what is owed in order to limit their growing inventories.  Major lenders say they are nor artificially holding back any foreclosed properties, as a longer sale process can lead to higher maintenance and other costs, but they are also not inclined to unload properties in a fire sale mode.

Perhaps the biggest reason for the growing backlog of lender-owned properties is that it takes longer to sell a foreclosed home.  It currently takes an average of 176 days to move a foreclosed property, on top of the 400 days it usually takes for a lender to seize the property.  Many lenders slowed their operations extensively last fall, after it was discovered that many had taken shortcuts during the early days of the recession in order to process seizures faster.