Real Estate Focus

One of the things the real estate market could rely upon was the foreclosure process to mop up the problems at the margins.  In order for this segment of the market to work however requires that investors can, with reasonable risk, see an opportunity for a significant return through reselling the property or holding for income.  

The current disruptions the real estate markets are experiencing with slowing sales velocity and falling prices have created problems in the foreclosure area as well.

Expect the lenders to take back significant amounts of inventory as the foreclosure investors step back.  With uncertainty and instability in the markets, foreclosure investors will change their investment strategy.  Namely, investors will hold back and wait for the banks to take back property.  They will then go to the lending institutions to review and purchase inventory.  Up until recently there has been pressure for these investors to move earlier and earlier in the cycle in order to obtain deals-- Courthouse steps pushed back to filings and pre-foreclosure—pushed back into delinquencies.  This was done in an effort to fend off competition and capture the adequate discount to fair market value investors required in order to make money in this segment of the market.  Falling prices and a slower sales pace makes the discount to fair market value an unknown quantity.  Prudent investors will therefore step away from the process until this important number can be reestablished with some degree of confidence.

Further exacerbating this issue is the mortgage-lending problem.  Less accessible money (tighter underwriting and less than 100% financing) at higher cost makes the foreclosure investment process more expensive and therefore less attractive to the investors as well.

The important implication of all this is that Bank REO (Real Estate Owned) departments will be growing, creating a drag on earnings through additional write-downs to assets on the balance sheets and hits to income.