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Foreclosed Home Sales Rise in 3Q

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Data released by RealtyTrac revealed that total number of foreclosed properties sold in the third quarter of 2012 grew 21% sequentially but fell 3% from the prior-year quarter to 193,059 properties. Of the total foreclosed properties sold, 98,125 properties were at some stage of foreclosure (up 22% both from the prior quarter and the year-ago quarter), while 94,934 were bank-owned (increasing 19% sequentially but declining 20% year over year).

The sale of pre-foreclosed (in default or scheduled for auction) and bank-owned residential properties (REO) was 19% of the total residential sale, inching down from 20% in the prior quarter but in line with the year-ago quarter. Moreover, these residential properties were sold at an average price that was 32% below the average price of a home not in foreclosure.

In addition, properties that were in the early stage of foreclosure were sold within 359 days on an average, after passing through the foreclosure process. Properties owned by banks that were sold had been repossessed about 186 days before sale.

Further, non-foreclosure short sales of properties (accounting for 22% of all residential sales) jumped 15% from the previous quarter and 17% from the year-ago quarter. Short sale is a process where the sales price is below the estimated amount of all outstanding loans of a property.

Moreover, Georgia recorded the highest foreclosed property sales as it accounted for 38% of all residential home sales, followed by California (36%), Arizona (34%), Nevada (31%) and Florida (26%).

The surge in foreclosed property sales primarily resulted from resolution of a large number of pending foreclosure cases that were on hold as the mortgage servicers sorted out the foreclosure mess. Post the announcement of the $25 billion settlement deal between five mortgage servicers – JPMorgan Chase & Co. (JPM - Free Report) , Bank of America Corporation (BAC - Free Report) , Citigroup Inc. (C - Free Report) , Ally Financial Inc. and Wells Fargo & Company (WFC - Free Report) , 49 states’ attorneys general and the regulators, the number of properties entering foreclosure process is expected to remain elevated.

Further, the lenders are in support of short-sales, which is a quicker way of retrieving some amount from their mortgages than waiting for foreclosures (a more expensive and time-consuming process), as evident from the third quarter data. Also, the progress report (for the period from March 1 to September 30) released under the settlement deal shows that the maximum relief was provided via short sale.

However, the scheduled expiration of the Mortgage Forgiveness Debt Relief Act at the end of this year is expected to reverse this trend. The termination of the law would lead to significant increase in income tax for the property owners who agree for short sale, as the part of the unpaid loan not covered by short sale will be considered as taxable income.

Hence, this will lead to higher foreclosed properties in the market, as the homeowners will allow the property to foreclose, rather than taking short sale option. Thus, we believe overcoming the foreclosure crisis is expected to take some time.

Also, home prices across the nation will be pressurized as many properties are expected to come to the market due to increased foreclosure activities. Though the huge surge in foreclosures may dampen the housing prices in the near term, this will enable the housing market to revive over the longer term.

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