Tranzon Auction Properties - Real Estate Auction Blog

The big change in the residential markets that we have noticed in recent months is the tightening up of underwriting standards by residential lenders.The “front page news headlines” of trouble in the sub-prime market and regulatory pressure seem to have sparked this tightening.

We have started seeing loan commitments cancelled, appraisals questioned and sent back to the appraiser for more research, and requests for more borrower documentation.

One of the reasons we have been so sanguine about the residential market and its ability to navigate a soft landing was the huge liquidity in the markets. We noted the initial response to difficulties among lenders in certain residential markets was to become even more aggressive in their lending practices.

If our recent observation about lender practices continues, or if lender practices tighten even further, the chance of a harder landing for the residential real estate market increases significantly.

Most troubling, if liquidity continues to retract, RE problems will start surfacing in certain markets that heretofore have been pretty healthy.

We have read with some amusement the pundits declaration that the worst of the residential downturn has passed. We discount this observation for two reasons. First, any generalization of the residential market cannot be accurate because of the many sub-market economic factors that impact each residential market. We also continue to see certain markets, like the NC and TX non-coastal cities perform quite well.

At the same time, we continue to see other markets that are going to require years to correct the excesses of the 2003-2005 bull market. One year of moderately down volume and prices is not going to correct imbalances created by the huge multi-year run in some of the zany markets.

In summary, we see the risk in this area increasing due to the lenders’ reaction to the sub-prime problems and regulatory pressures.

What is OREO?
OREO, also known as REO, stands for “Other Real Estate Owned”. Banks generally acquire OREO through the foreclosure process. OREO is not something a bank wants to have on it’s books. Once a bank owns real estate, generally speaking, it is a liability and it is something the bank aims to rid itself of.

The Stats
From March of 2005 to December of 2006 Massachusetts banks have seen a rapid increase in the amount of REO they’re holding. In fact, according to the data provided by the FDIC website , Massachusetts banks have acquired 34%, or, more than one-third, more real estate through foreclosure. The numbers available for the whole of the state are only as recent as the December quarterlies and you can bet that when March 2007 numbers become available we’ll see even more on the books.

Interestingly, while residential REO balances are growing dramatically, commercial REO balances in Massachusetts are trending down. This, I think is further evidence of the strange economic forces that are currently at work and the large amounts of private capital chasing returns.

What Does This Mean to Me?
Does this wave of REO mean a bonanza for investors? Not so far. There is a lot of money chasing returns out there right now and banks aren’t exactly giving it away. As REO portfolios grow you should expect to see more ‘deals’.