Servicers Turn to REO Auctions

Fitch Ratings, estimating that the volume of real estate-owned that is managed by mortgage servicers increased by 441% between the end of 2005 and the end of 2007, says that an increasing number of lenders are turning to auctions to unload homes acquired through foreclosure.

But Fitch said lenders should carefully screen properties before routing them through auctions, warning that loss severity appears to be higher on homes sold this way.

According to a Fitch survey, 60% of its rated servicers of subprime mortgages had used auctions to liquidate REO holdings as of the end of last year. Those servicers said that between 1% and 44% of their REO inventories were liquidated in this fashion.

Fitch said its survey showed a "marked difference in loss severity" when auctions are used, however. REO properties sold through traditional marketing incur a loss severity of 40%, on average. However, the loss severity rises to 56% when auctions are used.

However, Fitch said that several servicers told the rating agency that auctions are being used in distressed areas, where loss severities would have been high through traditional sales as well. "Auctions may be the most appropriate REO disposition strategy under certain circumstances," the Fitch report said. "For certain properties such as those located in distressed geographical areas, that are vacant and exposed to higher instances of vandalism, in poor condition and/or facing huge repair expenses, or are located in areas already saturated with REO properties, traditional REO liquidation methods may significantly increase holding times and repairs, as well as require multiple price reductions."

Servicers generally reserve for auction those REO properties considered "most undesirable," Fitch said. Those include, in addition to properties that are in disrepair, REO that has been in a servicer's inventory for a long time. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/