New Foreclosures Spike in May

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Investors unhappy with current foreclosure inventory levels may have some temporary relief in the coming months as an unexpected spike in May foreclosure activity works its way through the system.  Overall activity broke the 200,000 barrier for the first time in three months and starts increased on an annual basis for the first time since 2010 according to the May report from RealtyTrac.

But the bulk of new distress sales probably won’t be REOs, but rather as pre-foreclosure short sales and auction sales, where banks get a better return.

Georgia outpaced Arizona, Florida, California and Nevada to post the nation’s highest state foreclosure rate in May, the first time since February 2006 that Georgia’s foreclosure rate has ranked highest among the states.  Judicial states combined posted a 26 percent year-over-year increase in overall foreclosure activity while non-judicial states combined posted a 20 percent year-over-year decrease in foreclosure activity.

“U.S. foreclosure activity has now decreased on a year-over-basis for 20 straight months including May, but the jump in May foreclosure starts shows that it’s going to be a bumpy ride down to the bottom of this foreclosure cycle,” said Brandon Moore, CEO of RealtyTrac. “Based on the rise in pre-foreclosure sales we’ve seen so far this year, a higher percentage of these new foreclosure starts will likely end up as short sales or auction sales to third parties rather than bank repossessions going forward. While pre-foreclosure sales have less of a negative impact on home values than bank-owned sales, they still represent a discounted sale where a distressed homeowner is losing his or her home.

“Disposing of distressed homes by pre-foreclosure sale can also benefit lenders and servicers because pre-foreclosure homes sell at a higher average price point than bank-owned homes,” Moore continued. “Our first quarter foreclosure sales report showed that the average price of a pre-foreclosure home was more than $27,000 higher than the average price of a bank-owned home — which quickly adds up given that there have been an average of 1.6 million nationwide foreclosure starts per year for the past five years.

“More banks are now recognizing that treating the problem of delinquent mortgages with short sales rather than bank repossessions can help them minimize their losses and also avoid taking on more REOs, which they then have to manage, maintain and market for sale.”

Photo: r. nial bradshaw

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About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.

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