Mar. 26, 2009 - Private Investment Stimulates the REO Market

When the financial crisis first emerged, it manifested itself in the subprime area. Holders of subprime paper scrambled to get out of it, either because they realized that it was seriously impaired from a credit perspective, or because mark-to-market losses triggered calls for more collateral. A massive liquidation began and much of that paper found its way back onto the balance sheets of the major banks and dealers. Banks and dealers, in turn, found themselves overleveraged due to the additional risk assets on their balance sheets, and then became capital impaired as they unloaded those assets at ever reducing prices.

The foreclosure crisis, resulting from the residential mortgage debt burden, depressed home prices, and consumer spending, acting as a drag on the broader economy.  By November 2008 more than 3.5 million subprime and alt-A mortgages were in foreclosure, pending modifications or facing foreclosures overloading the banking system.

It does not take long to realize to fix the economy we first need to divest the nation of millions of REO's without a process to move the unexpected volume of product.  The biggest problem we found was the institutions no longer had the institutional knowledge to know what to do with a large volue of foreclosures and the 1992 banking act formed barriers in the process.

The new administration has in the past few months been busy finding ways for private investors to re-enter the housing market.   Capitalizing on historic low housing prices the private investors have begun to buy government-owned REO assets in larger portfolios at less than market value to expand the capacity to move non-performing assets back into the system.

Move Inc., conducted a survey in the first week of March of over 1,000 respondents and found  about one-fourth of people surveyed said they have plans of buying a house in the next several years, with nearly 13 percent planning to buy within the next couple of years.

Additionally, more than 18 percent have plans of buying a house this year to capitalize on the tax credit worth $8,000 offered to first time homebuyers under President Obama’s program to stop the increase of foreclosed homes. Also, more than 50 percent of respondents planning to buy a house within the next nine months are people buying a home for the first time.

Americans are also changing their views about home ownership and the housing market. More than 62 percent are planning to stay in their homes, as opposed to buying them and selling them later for investment purposes, all good news for the future of the housing market.

Private investment efficiently bringing REO housing to market is showing early signs of stimulating housing sales around the country.  Good news in this decidedly downtrodden economy.