Banks Sitting On An Housing Inventory Time Bomb

Wednesday, 28 Jan 2009

Posted By: Diana Olick
[link to www.cnbc.com]

An interesting little factoid from RealtyTrac, the online foreclosure sale site that tracks all kinds of foreclosure data.

Apparently about 70 percent of foreclosures in its database have not yet been listed on the MLS. I'm wondering why? Why are the banks sitting on all these properties instead of listing them for sale?

Okay, a couple of posibilities:

* The inventory of foreclosed properties has just exploded so rapidly and in such high volumes that the banks can't process it all as fast as they would like to.
* In a lot of cases it's taking longer to process the foreclosures themselves and the homes are getting trashed. Before the bank puts the house up for sale it has to do all the repair work, and now more repair work is needed.

Now here's a possibility that is a bit more disturbing. Rick Sharga of RealtyTrac says he can't get anyone to confirm it but he can't get anyone to deny it either:

"The lenders are simply trying to defer the losses to a later date, because having to recognize the losses short term might pose severe risks to the banks in question."

What does that mean? Well, when the properties are taken back by the bank at auction, they are often taken back for the value of the mortgage on the property. The bank puts in the bid for the value of the current mortgage and essentially pays itself back what it lost on the loan, and of course gets the house for all its trouble. In good times, the bank could profit by selling that house for more than the value of the loan, but not these days. The trouble now is just the opposite. On so many of these foreclosed homes, the property is actually worth far less than the mortgage on it. So the bank is taking it back at the mortgage value and not writing it down.

"Untold numbers of these properties sitting on banks accounting ledgers where the imputed value is considerably higher than the market value," says Sharga. And unfortunately nobody knows what that market number is.