Will Servicers Face Another Round of Foreclosures?

The great recession is over, the economy is improving and the stock market is performing better-but I'm nervous that we will soon confront a significant increase in REOs. The next several months will bring solid economic growth, "but after that, no one knows. But it's not likely to be pretty," said Christopher Thornberg, a panelist at REO Expo, a recent mortgage conference.

While housing prices have bounced back, the improved conditions have not helped distressed borrowers. Many continue to suffer from the lingering effects of the dismal economy, according to Beacon Economics, the research firm Thornberg founded. Assuming he is correct-and his data are persuasive-there could be an increase in REOs, starting in the fourth quarter or early 2011.

Too few homes have closed over the past several months. Since spring, the number of pending sales of existing homes has plunged; there simply was very little activity. The trend that started in April when pending sales had grown a hefty 40% since January. Since April, however, pending sales fell 25% below January's figure, noted Thornberg's research. That likely means that borrowers will be unable to sell their homes, certainly in the short term-and the lack of liquidity may leave them no option but to return their keys to the lender, pack up their belongings and move.

Too many borrowers continue to experience financial difficulties and are unable to make their mortgage payments. In the California communities of Riverside, Sacramento, Contra Costa, Los Angeles, San Diego and Santa Clara, for instance, the number of FHA loans that were seriously delinquent rose to 552,929 at the end of February. To compound an already difficult situation, 458,385 mortgages, or 74.7%, in the Las Vegas-Paradise area are "underwater. While this metropolitan area is the hardest hit in the U.S., more than 50% of the borrowers in Phoenix, Orlando and several other regions are in similar difficult circumstances, according to Beacon.

These borrowers, and others like them, are unlikely to make their mortgage payments. In the event they cannot negotiate a modification, short sale or deed-in-lieu of foreclosure may be their only relief options. Given the dire financial situation that afflicts these borrowers, they may suffer difficulties in the next few months-increasing the number of REOs on the market. But bad as these statistics are, a growing REO market means opportunity for real estate agents, especially if they make an investment in training. That's because a better-educated Realtor, one skilled in pricing properties, will be more likely to arrive at an accurate price; lenders will appreciate the skill, and in recognition, use that professional more often. Training is simply good business, at a time when the markets are fluid and the skills to be successful seem to change more often than in the past-it's indispensable.

Frank Marshall is VP of business development for Default Resource, Frederick, Md.