Real Estate Owned (REO) Properties Spike Six-Fold At Florida Banks

By Jim Freer
Senior Contributor

MIAMI -- Foreclosed condos, townhouses and single-family houses owned by Florida banks soared 620 percent in 2007 to $144 million from $20 million in 2006, according to a new report from Condo Vultures® LLC.

Nationally, the banking industry experienced a 128 percent increase in bank-owned foreclosed condos and houses, totaling $6.6 billion in 2007 compared to $2.9 billion in 2006, according to a report based on Federal Deposit Insurance Corp. data through Dec. 31, 2007.

The latest statistics on bank-owned properties – also known as Real Estate Owned (REO) - represent near-record highs in both Florida and nationally. And, the numbers provide one of the clearest pictures yet of the exploding foreclosure problem.

This FDIC data represents only those properties that federally regulated lenders have taken title to through the foreclosure process.

The bulk of the nation’s residential REOs are owned by mortgage companies and other non-bank lenders that serviced the mortgages on those homes or by Special Investment Vehicles (SIVs) and other new Wall Street-created entities that purchased mortgages as part of securities.

The diverse ownership is what makes this crisis different from previous housing downturns.
Historically, commercial banks and savings & loans held much larger percentages of their mortgages in portfolios and thus got stuck with higher numbers of foreclosures.

“This time financial entities all over the world are getting hit, and who owns the REO depends on how the deals were set up,” said Michael Cannon, executive director of Integra Realty Resources’ Miami office.

What hasn’t changed since the last housing crisis is the psychology of the lenders that are in possession of REOs. In the last year, a growing number of banks and other companies have set up divisions exclusively to sell REOs.

Most are trying to sell condos and houses as close to market value as possible. Until the quantity grows to the point of desperation, the institutions in possession of REOs hope to avoid sales at deep discounts.

Fortunately for buyers, the days of banks selling REO at par are probably a thing of the past as more REOs are becoming available. The volume is expected to prompt more and more financial institutions ready to accept discounts, and thus avoid lengthy costs of maintaining properties.

The FDIC data shows the country’s banks had $51 billion in non-current residential mortgages at the end of 2007, with $1 billion at Florida-based banks. Non-current loans are 90 days or more delinquent or are no longer accruing interest.

Banks list REOs on their books at the market value of a property, based on a new appraisal or review of recent comparable sales.

The FDIC does not report on the number of REOs held by the banking industry or by individual banks.

Dividing the industry’s $6.6 billion in REOs by an average value of $150,000 translates to about 45,000 properties.

That might not sound huge, without considering the large number of mortgages that banks have sold in the secondary market – thus passing on the foreclosure risk to private investors.

Mortgage originators normally sold off most subprime loans and adjustable-rate mortgages with teaser rates, which are among the loan types with highest delinquency and foreclosure rates, according to the Mortgage Bankers Association.

The Mortgage Bankers Association’s latest survey of loan servicers indicates that about 2 million home loans were in the foreclosure process on Dec. 31, 2007. The survey did not show how many properties had been taken back by lenders.

Locally, a review of court filings show banks and other lenders took back 4,539 properties in the Greater Miami area during all of 2007, according to Condo Vultures® LLC.

The pace is picking up rapidly, with lenders taking back 858 Greater Miami properties during the first 45 days of 2008, according to Condo Vultures®.

Florida-based banks, large banks based from out-of-state and Wall Street-related investors are among owners of these troubled Greater Miami properties.

The FDIC does not provide breakdowns on banks’ REOs by states and counties.

The 317 Florida-based commercial banks and savings banks held $144 million in residential REOs at the end of 2007. This amount includes an undetermined number of properties in other states.

If the REO book value of $144 million is divided by Florida’s median home sale price of $208,600, it is reasonable to presume the state’s banks are in possession of nearly 700 REOs.
The number would change depending upon the mortgage amount.

One South Florida bank has $46.9 million in residential REOs, giving the institution the distinction of having the highest concentration of bank-owned properties of the 79 tri-county banks in the region.

This institution had 167 REOs at the end of last year, according to the FDIC data.

As a sign of how the problem is compounding, the South Florida bank with the highest concentration of REOs had 94 properties through the first nine months of 2007. In the last three months of the year, the bank took back an additional 96 properties, and sold 23.

For several years many South Florida banks issued loans with monthly option Adjustable Rate Mortgages, which allow borrowers to pick different payment amounts each month. The monthly option ARMs are controversial because it enables the borrower to defer interest on the loan which is added to the overall debt amount, creating what is called negative amortization.

The South Florida bank with the high concentration of REOs insists that its mortgages are not subprime. Still, since last year the institution has been among lenders whose non-current loans and REOs have grown significantly.

Last fall, the South Florida bank set up its asset conservation division to manage and sell REOs and to help borrowers with delinquent loans find ways to adjust payments and make loans current.

“We are not in the real estate ownership business,” a lender with the South Florida bank said.

The lender added that the institution’s goal is to quickly sell REOs “through real estate brokerages and agencies that we feel have the best knowledge of local markets.”

Many banks usually need about 30 days to prepare to market an REO. A bank must obtain an appraisal, find brokers and often make repairs.

Taxes, homeowners association fees and maintenance are among costs from the start. These costs are among reasons banks usually do not wait for the market to recover before selling
REOs.

Most local banks usually sell properties one at a time to buyers who are clients of real estate brokers.

“We have gotten calls from buyers interested in buying at bulk at discounts, but none have gone past the initial conversation,” the lender with the South Florida bank said.

The South Florida bank’s REO portfolio is comprised primarily of single-family homes, with few in what the institution calls “luxury high-rise condos.”

The latest number of REOs for the South Florida bank does not seem large for a bank its size, the analyst Cannon said. For that bank and others, the 2008 question will be how many other mortgages are forced into foreclosure he said.

In setting up a division to manage non-current loans and REOs, the South Florida bank is following the lead of many large multi-state banks. Cannon expects most local banks will continue to hire realtors to sell REOs, and will assign lenders and other officials to REO work without setting up special departments.

An FDIC spokesman said the agency encourages banks to sell REOs as quickly as feasible, because they are non-earning assets.

FDIC rules permit banks to hold REOs for up to 10 years. But carrying costs make that schedule unrealistic even in the sourest of markets -- where South Florida ranks among the top.

Jim Freer is senior contributor to Condo Vultures.com who writes a weekly column that appears every Thursday. Freer is a veteran financial journalist in South Florida and a consultant to the financial services industry. He can be reached at JimFreer@aol.com. Don't forget to sign up for our weekly Market Intelligence Report

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