The Unvarnished Truth About Rising REO Volume

AUG 4, 2014 3:54pm ET

Signs are definitely pointing to a rise in REO activity across the country in specific markets, particularly in Massachusetts, New York, Florida, Ohio, Illinois, Tennessee and elsewhere. With respect to this development I offer the following comments by Amy Dix, a veteran REO specialist who is broker and co-owner of The House Store, a successful Knoxville, Tenn.-based real estate company. She reports to me that REO assignments in her office are on the rise.

"We have received one or two assignments each day over the past couple of weeks," said Dix. "Some are coming from asset management companies that we hadn’t received assignments from in quite a while."

While in Florida for an industry seminar recently I had the opportunity to visit with over 30 members of the National REO Brokers Association, who were among over 400 real estate professionals at the session. Most of the NRBA members also reported increased listing activity on REO.

The asset management division of the organization that held the seminar (which preferred not to be named in this article) has over 7,000 REO in their portfolio.

They expect that number to more than double through portfolio acquisitions and organic growth from their lending side. This is, perhaps, only anecdotal evidence of a worsening housing market and general economy, but it is clear to me that the downturn that I and other industry observers are predicting may be closer than anyone thought.

In an article written by Lucia Mutikani put out by Reuters on Aug. 1, "U.S. job growth cools, unemployment rate rises," the author points out that "…job growth slowed in July and the unemployment rate unexpectedly rose, pointing to slack in the labor market that could give the Federal Reserve room to keep interest rates low for a while." For those who are happy to see interest rates potentially remain quite low this news might appear positive.

However, for those of us who are eager to see signs that the economy in general and housing market in particular improve significantly, and truly recovering, not merely being reported as such, this is more bad news.

Additionally, the article indicated that the ranks of the long-term unemployed swelled and "…the length of time Americans are spending unemployed rose after reaching its lowest point in more than five years in June." This will not help the housing market nor the economy to improve much at all.

This comes on the heels of other news from Reuters on July 30 regarding economic growth in the second quarter of this year.

While on the surface of it the economic news from Reuters, as reported by Fox Business, "U.S. Economy Grows at 4% Pace in 2Q," also seemed positive, when one considers the fact that early reports like this one have been revised downward time and time again, the picture darkens. In the Fox piece they quote the Commerce Department as indicating on July 30 that, "Gross domestic product expanded at a 4% annual rate as activity picked up broadly after shrinking at a revised 2.1% pace in the first quarter."

There are far too many indicators being reported today to ignore the signs that the number of foreclosures and the associated REO are going to rise.

Many individuals and families who received loan modifications and other loan workouts are falling back into default, the backlog of foreclosures in judicial foreclosure states are beginning to make it to the system, adding more REO to the mix, Home Equity Lines of Credit are recasting, as are mortgages that were modified through the Treasury Department's HAMP program, which means higher mortgage payments while home prices are beginning to decline in many markets, FHA loans have become the "new" subprime loans, and the government is pushing lenders to make loans to low-income families.

The unvarnished truth is that REO are making another comeback. Actually, they never "really" went away.

Lynn Effinger is a veteran of more than three decades in the housing and mortgage servicing industries. He currently serves as executive vice president of ZVN Properties Inc.

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