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RealtyTrac: Waiting For The Other REO Shoe to Drop in D.C. Region

April 9, 2012  |  by RealtyTrac

As we mentioned in our February post, RealtyTrac data is beginning to show signs of a new wave of foreclosure activity forming in the Washington, D.C., metro area, particularly in Maryland — where initial foreclosure notices have increased on a year-over-year basis for four consecutive months through February 2012.

The new wave is less obvious in Virginia, where we believe a quicker, non-judicial foreclosure process has resulted in a smaller backlog of delayed foreclosures. But still, we are seeing some signs of that new wave in Virginia, namely two consecutive months of increases in scheduled foreclosure auctions, the first public foreclosure notice filed in the state.

We expect many of the properties that started the foreclosure process in both Virginia and Maryland over the last few months to eventually end up as foreclosed homes (REOs) somewhere down the road. Figuring out the exact timing is a bit tricky, but there are some data points that will help inform that. Anticipating when this next wave of foreclosed homes will hit is important because it could cause another temporary downturn in home prices and create more competition for non-foreclosure listings.

The first data point is the average time to foreclose in each state. Completed foreclosures (REOs) in the fourth quarter of 2011 took an average of 634 days from the time the initial foreclosure notice was filed in Maryland, while the average was 132 days in Virginia. If we assume that foreclosures started in the last few months take just as long, it could be as far out as the end of 2013 before those new foreclosures become REOs in Maryland, while in Virginia we could see REOs resulting from this new uptick in scheduled foreclosure auctions hit as soon mid-2012.

It’s likely that we’ll see increases in REOs even before that, however, because lenders are finally foreclosing on some properties that started the foreclosure process several months or years ago — at least in some states. We’re not yet seeing evidence of this statewide in Maryland and Virginia, but we did see it in some other states in our February foreclosure activity report.

For example, in Massachusetts there was a 114 percent year-over-year increase in REO activity in February. The annual REO increase was 95 percent in North Carolina, 90 percent in Florida, 87 percent in South Carolina, and 76 percent in Georgia. We expect to see similar jumps in Maryland REO activity and Virginia REO activity over the next few months as lenders clear the current foreclosure pipeline to make way for the new properties that have just entered the foreclosure process.

Clearing the current foreclosure pipeline should allow these newly initiated foreclosures to move through the process more quickly, particularly in Maryland, and we are seeing some evidence of that already. The increases in initial foreclosure notices in Maryland started in November 2011, and in the same month we also started to see modest increase in scheduled foreclosure auctions, the second step in the foreclosure process in the state. Those increases remained modest, between 4 and 10 percent in December and January, but in February scheduled auctions shot up 66 percent on a year-over-year basis in Maryland.  

We interpret this February surge in scheduled foreclosure auctions as evidence that the pig is already moving through the python. Many of the Maryland properties that started the foreclosure process in November and the following months were scheduled for foreclosure auction in February — within a period of about 120 days. That is much faster than what we saw for properties scheduled for auction in the fourth quarter, which had started the foreclosure process an average of 240 days earlier. If that sped-up foreclosure process continues, we could see the REOs resulting from these new foreclosure filings hit within the next six months instead of sometime late next year.

One big wildcard in all this is how many of these potential REOs will be diverted into short sales. Over the last five years we’ve seen about 50 percent of foreclosure starts end up as REOs, but with increased emphasis on short sales, we could see that percentage come down, resulting in fewer REOs in the long-term but more short sales in the short term. More on that next month.

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Posted in Blog, Industry News, RealtyTrac

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4 Responses to “RealtyTrac: Waiting For The Other REO Shoe to Drop in D.C. Region”

  1. [...] Waiting For The Other REO Shoe to Drop in D.C. Region | REsource Tweet this page Share on StumbleUpon Share on Reddit Share on Digg Share on Delicious Share in Facebook Get listings with RSS Print Get listings with RSS [...]

  2. Philip says:

    There have been no Foreclosures in D.C. since 2010, how is it possible that no one is talking about this. The new foreclosure laws are flawed. An artificial bubble if forming, when the law is changed the foreclosures will come back quickly and tank the market. Conversely, home prices are artificially high because there is little inventory.

  3. MRIS_CMO says:

    Philip, you make excellent points and we mostly concur with your assessments. The whole "don't ask; don't tell" of the foreclosure process is indeed troublesome and MRIS is actively seeking (and making arrangements with) the data sources at the local level to get a handle on loans underwater/defaulted/short sale/foreclosure and REO stats. We also do have a supply problem in many price points and markets in MRIS-land. I'm not sure I can agree that prices are "artificially high" as the supply/demand curve is a viable function in real estate prices and that's a natural market condition. But once the "shadow" hits the inventory (and it will) then the supply will be more in balance with demand and prices *should* react accordingly, not tank, but align to the supply/demand curve.

  4. Philip, you are right about DC. After the city council there ordinance passed there back in late 2010, RealtyTrac data shows that new foreclosure starts went from averaging 185 a month to averaging 8 a month through September 2011. From October 2011 through January 2012 there were no new foreclosure starts. Then in February there were 3, and in March there were none once again. I actually sent a lengthy email to a reporter at the Washington Post about this situation back in late February, and they expressed some interest in possibly doing a story on it. I think it would be good for them to do so to draw attention to this unsustainable course of basically preventing foreclosures from ever happening.

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