American Banker’s Kate Berry has a great lead today on how lenders’ unrealistic price expectations are hurting the REO sales market — and, by extension, the rest of the housing market. As REO inventories swell at most institutions, many sellers simply haven’t adjusted their pricing expectations downwards enough to account for where many markets have been heading (sounds familiar to the consumer resale market, doesn’t it?). The result is greater unsold REO on the market and an increasing number of would-be buyers for these properties falling out of the purchase pool.
… roughly two-thirds of lenders are still “chasing the market down” by cutting prices in small increments over several months, according to brokers. “The banks and investors will often price a property 5% over the highest appraisal or broker price opinion, when they should be pricing it 5% below that, because it’s a declining market,” said Tom Moon, a broker and the owner of Pacific Moon Real Estate in Huntington Beach. “Brokers really don’t care what the loan or appraisal on a property was six months ago, because all of these houses were overpriced to begin with, and the borrowers are upside-down.”
Subscribers can read the full article; a subscription is highly recommended. Berry astutely notes that guys like Moon — who I’ve spoken with numerous times in the past — have a vested interest here in seeing properties sell, since they can’t earn the meager commissions offered by institutional sellers unless the property actually sells. REO sales is a volume business. But there is a point here: institutional sellers will usually look at loss levels in terms of establishing prices for their REO assets, a strategy that isn’t allowing them to keep up with a market like Southern California, where prices and comps are falling dramatically and very quickly in many neighborhoods. The interesting thing to keep in mind here is that a good majority of REO shops are working on a third-party basis — that is, they’re outsourced to places like Fidelity, First American, Integrated Asset Services, and the list goes on and on… — so the selling guidelines are established by whatever third-party contract is in place, and asset managers must live within whatever boundaries have been established there. But whether in-house or outsourced, it is often investor’s guidelines or insurer’s standards that ultimately will rule the day in terms of an acceptable sale. The reason here is that a defaulted loan is pulled out of a securitized pool, and any recovery of funds comes in the form of the asset sale and/or insurance proceeds. So investors and insurers alike have a strong vested interest in seeing losses kept as low as possible. With that in mind, I don’t know that the problem here lies with the institutional sellers themselves, in spite of what we’re hearing from various REO agents in the field. Much of the problem likely lies with a hodge-podge set of investor/insurer guidelines that determine what can be done and what can’t. HW readers will recall posts I’ve made here in the past about the loan modification process and the difficulty servicers often face in terms of getting past PSA limitations on what can and cannot be done to mod troubled loans within a given securitized pool. Many servicers, as a result, are actively pursuing amendments to relevant PSAs that give them what they feel is sufficient power to act in the investor’s best interest. I don’t know if a similar effort exists on the REO side, but it seems as if it might be something for different servicing shops to think about.