Are the Foreclosure Floodgates About to Open?

At the end of last year, many banks and financial institutions including Fannie Mae adopted some sort of “foreclosure moratorium” and they did the same thing again this year at the request of the Obama administration. The moratorium halted foreclosure proceedings on many who were facing foreclosure or in the process of getting foreclosed on.

Fast forward to April 1, 2009…

The moratoriums have pretty much all been lifted and the banks are back at it - foreclosing and eventually putting those properties on the market. Based on how long foreclosure proceedings take in Virginia and how long banks take to process everything before listing the property, we should start seeing many of these recently foreclosed properties hitting the market sometime this summer to the end of the year.

I’ve also heard rumors and talk about Fannie Mae and other banks thinking about taking an “let’s get rid of it all as fast as we can” approach to their foreclosure inventory (anyone else hear/know anything about this?). If Fannie and other banks release their inventory onto the market all at once, I think we’ll be in trouble. Yes, they’re only rumors and I hope that they stay stay only rumors. But what if there is a flood of foreclosures hitting the market?

These moratoriums have artificially deflated real estate inventory across America. In the Northern Virginia/Washington, DC metro area, housing inventory is down to 2003/2004 boom-market levels. In fact, the housing supply numbers in Loudoun County are indicative of a seller’s market.  We’re seeing multiple offer situations on many almost every property on the market priced below market value (feel free to ask any buyer or agent in my area to confirm that).

It was inevitable that the foreclosure moratoriums would just delay the foreclosure proceedings and eventual bank-owned market inventory. The question is when and how all those bank-owned properties will hit the open market and how great of an impact that influx of inventory will have. If all of these foreclosure properties hit the market at relatively the same time, inventory will go up and we’ll see downward pressure on prices. That would not be good.

Do I think all these foreclosures will hit the market at the same time? Personally, I doubt it - especially if the government has anything to do with it.

Foreclosure Freeze “Icing” Loudoun Real Estate Market

President-Elect Obama said he wants to put a 90-day moratorium on foreclosures once he takes office, but Countrywide/BoA, Chase and Citi aren't waiting until January 20 to start "freezing" foreclosures. The effect of this is already being felt in Loudoun County as less new foreclosure/bank-owned properties are coming on the market.

For example…I just did a search for active bank-owned and short-sale town home listings in Ashburn Village and found that over 90 percent of them were short-sales. The ratio has recently been about 60/40 (foreclosures to short-sales)

One effect of this is that buyers will be further frustrated with the purchase of a home. Short-sales take 3, 4 sometimes 6 months for a response and only about 20 percent get approved so they work for only a select few buyers that have that kind of flexibility and patience. With the rising number of short-sales and diminishing number of foreclosure listings and traditional resales on the market, buyers are left with less "real" inventory to choose from than they have in years.

(Short-sales are not "real" listings in my book because the seller doesn't even know if the short-sale will be approved by the bank while listing the property)

What will happen when the "freeze" ends? We'll see more foreclosure properties hitting the market once again. As much as this may sound like a bad thing, it's actually a good thing. We have to get through the bank-owned property inventory one way or another before we can see the market rebound. Plus, it will give buyers more "real" inventory to choose from.