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The Reasons Why We Do Not Have High REO Inventories

The Reasons Why We Do Not Have High REO Inventories

The business head lines today read, “US Labor Participation Rate at Lowest Level in 30 Years” or “US Labor Participation Rate at Lowest Rate Since Carter Administration” and yet, I am trying to figure out why my REO inventory this year has shrunk to pre 2007 bubble bursting levels. To make this point a little more pointed, let me share a little statistic from the Bureau of Labor Statistics. Our current unemployment rate is 7.3% and the last time we were at 7.3% was December of 2008. Now, think back to December of 2008, think of your REO inventory….are you at that level today? I would venture to say, likely not. Are you still confused as to what my point is? Well, let me say it this way. If you add in the participation rate with the unemployment numbers, you get a “real” unemployment number of 9.4% and the last time we were at 9.4% or higher was May of 2009 thru November 2010 so, think back to you REO inventory then….are you at those same levels today? Once again, I venture to say….likely not.

So, how is it that we have a “real” unemployment rate at or higher than the worse unemployment we have had accordingly to the Bureau of Labor Statistics in the past 4-5 years and yet, we don’t have a correlated REO inventory?

Well, I am no economist however, I have some speculative theories, let me share.

  1. Obama Administration Homeowner Assistance Programs: Obama has directed HUD and the US Department of Treasury to stop the foreclosure crisis by implementing several foreclosure avoidance programs through joint department efforts like the Making Home Affordable programs. Do you know how many entitlement programs there are? Likely you don’t so, let me share…..
    1. HAMP (Home Affordable Modification Program)
    2. PRA (Principal Reduction Alternative)
    3. 2MP (Second Lien Modification Program)
    4. HARP (Home Affordable Refinance Program)
    5. FHA2LP (Treasury / FHA Second Lien Program)
    6. UP (Home Affordable Unemployment Program)
    7. EHLP (Emergency Homeowner’s Loan Program)
    8. FHA Forbearance
    9. HECM (Home Equity Conversion Mortgage)

So, you had no idea…did you? Granted, my blog isn’t long enough to go into details on each of these programs with you however, for more information you can call the NSC at 1-877-622-8525. The Obama administration has used all of these foreclosure avoidance strategies in a very similar way the Community Reinvestment Act set up , built up and ultimately collapsed our economy in 2007 with the bursting of the real estate bubble. Oooops, “did I say that?” HELL yes, I did.

That’s right, the reason we don’t have REO inventory as REO Professionals is because our President has decimated our industry by artificially and manipulatively used foreclosures as a political tool for re-election of himself and his party. Sadly, most of the American public don’t understand what this does to home values……so, let me explain. It artificially inflates home prices by restricting legitimate inventory from hitting the market place. It sets up our country for a 10(+) year trickling of these vacant, distressed, properties to the market place. Ok..sure, it can be argued that by doing this we are stabilizing the housing market and sure, I will relent and say….it does however, only for the short term. In fact, it makes things a little worse because, we end up sitting on inventory and God forbid, another economic crisis hits or the current one drags on for longer than expected and we end up with more and more and more and more water behind an aging, over burdened, crippled, dilapidated damn that is ready to blow.

Think of the housing crisis as a man mad lake with one side plugged up by a huge damn. Think of the water in the lake as all of the houses that are distressed, under water, risk of foreclosure. Right now, our lake is so full, we have foreclosures literally spilling over the top. Our economy…the damn, is barely holding and with a growing “Shadow” inventory of REO homes, high unemployment, high “real” unemployment and these continuing foreclosure avoidance / rescue programs……we will have a seriously problem, eventually.

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Comment by Jesus (Jesse) Gonzalez on September 7, 2013 at 1:07pm

Hey Stephan, I am surprised you haven't heard of the Community Reinvestment Act as being the source of the bubble collapse before. In fact, that is all I have ever heard is to blame.

For those of you reading this that don't know what the Community Reinvestment Act is let me explain it in simple terms. It was a law, originally passed in 1977 (+ or – a year) that’s sole purpose was to “encourage” banks to help low income borrowers get access to credit. Sound familiar? Basically, Congress felt that banks were not doing their jobs and actually, went further to say that banks were discriminating against low income people and not giving the credit. Congress felt this was such an obvious discriminatory practice  the term redlining was used. It basically meant that a bank, would set up a city wide map up in the office and red-line or cut off loans to anyone who lived in a high risk neighborhood. Ultimately, the banks felt that if you lived in the hood, chances are they didn’t want you as a customer because they felt you were likely too much of a credit risk and hence, redlined your neighborhood. Basically, the CRA (Community Reinvestment Act) said that this practice of redlining was illegal due to its discriminatory nature against high minority neighborhoods. Go figure…right? Now, in order to enforce this law, what Congress did is make the banks FDIC insurance subject to review if the bank failed their CRA audit. That’s right, what Congress did with this law is allows the banks to be audited for CRA compliance. The banks compliance was judged on how many “high risk” loans and how many “minority” loans they gave out each 6 months or year. If the bank didn’t give out enough, based on community standards set forth by the government, then the bank would be penalized with a FDIC audit, fines, fees and ultimately, risk losing their FDIC insurance or worse, they could close the institution down completely.

Well, given these crazy requirements, what do you think the banks started doing? They started engaging in high risk behavior because the government told them to. Better yet, the government didn’t tell them to, the government forced them to through penalties. Now, over time, the banks were losing a lot of money so, they had to figure out how to make money on these high risk loans. Out of this over regulation, new government agencies were formed, FRB (Federal Reserve Bank), FDIC (Federal Deposit Insurance), OCC (Office of the Comptroller of Currency) and the OTS (Office of Thrift Supervision) and all of these offices had one goal, enforce the CRA. In fact, it got so ridiculous, the Federal Reserve even created their own Community Affairs Office for nothing more than CRA enforcement. This Community Affairs Office got so powerful, they would partner with Community Organizers (Where have I heard that term before) and actually allowed Community Organization Leadership to be part of the CRA audits and enforcement. What you end up having was the fox guarding the hen house.

Now, the ACT has gone through a variety of changes since 1977, all of which was designed to increase credit to high risk borrowers. All designed to get banks to make more and more high risk loans. Finally, all this high risk lending….all of this over regulation….all of this progressive liberal monetary policy for political gain caused something strange, almost even unrecognizable by many, a real estate bubble. Pump the market place with fast, cheap, cash where you have no restrictions on who can and should be able to borrower….better yet, tell banks that if they don’t, they will be penalized and was it any surprise that we had a bubble?

This cheap, fast cash is all good and fine till something happens….till the economy begins to tank and people who were at high risk start seeing their risk, realized. Then, instead of high risk borrowers, you have loss mitigation. Hence 2007.

My point is yes, the CRA is absolutely to blame and if you didn’t know that, if you didn’t see that, if you don’t believe that…..maybe you don’t really know….REALLY KNOW, what is actually happening. Sure, you can argue that wars, poor fiscal policy, recessions, trade deficits, energy prices, volatile commodities, greed, fraud are all to blame and yes, I will admit, those things have played a role but, each of those are nothing more than a spoke on the wheel, they are nothing more than contributing factors that were exaggerated and magnified due to the CRA of 1977 and it’s revisions.

 

Comment by Stephan K Black on September 7, 2013 at 12:29pm

That's the first time I've heard the community re-investment act being blamed for the housing collapse, seems like a stretch into fantasy land. All I can talk about really is what I notice in my market area. I see far fewer homes in distress. I know there still are some but nowhere near the amounts as before. I'm talking about neighborhood drive throughs and also research on the MLS.  Blaming the gov't for creating programs to stop/slow foreclosures also seems a bit strange. That's what the gov't is supposed to do!  I've sold hundreds of REO and I always found it really distasteful when asset management companies would be so eager to throw people out of their houses. So I'm not a believer in the totally free no gov't involvement market place. There is too much greed and ignorance out there for a totally free market to work and be fair. 

Comment by Maria Gulati on September 7, 2013 at 11:15am

I have to disagree, all the programs you were talking about are there,  but banks will not give any modification to the poor people. See the lawsuits piled up against BOFA, Wells Fargo etc. Check Attorney General Kamala Harris new law against dual tracking homeowners...

What is really happening, investor groups, large like Black Rock are buying hundreds of this homes direct from the banks at the foreclosure auction. Banks benefit a lot more from foreclosing than modifying the loans so they have done that in the past a lot, but they don't like the fact the homes go unsold at the auction and they become REO's  because they have to deal with the maintaining the property and than sell it and they don't even know when the sale will happen so while is on the market they have expenses. So what they did, they made deals with investors and they sell them at the auction only to them for preset prices. The auctions are big shams..... Black Rock is using THR as a front for buying, which in turn is renting this homes till the time is right to sell for a profit. Did you notice that rent is at all time low? Should not be high if all the homeowners who lost their homes are looking to rent?

Check the news on Black Rock how it bought about 70% of all Sacramento's inventory or something like that.

Comment by Durward Blanks on September 7, 2013 at 10:33am

Very well said Jesse.  You need to write this up for Huffington Post 

Comment by Dick Thackston CRB, ABRM, ABR on September 7, 2013 at 10:22am

Yup, a cluster of governmental "help" in monumental proportions.

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