Where the REOs are

The Eastern Queens, Northern Staten Island and Central Brooklyn neighborhoods decimated by the housing downturn may be facing fresh waves of misery from homes that were in foreclosure and are now ending up owned by the bank.

The latest data from New York University’s Furman Center for Real Estate and Urban Policy prepared for The Real Deal show several troubling trends for REO homes, the shorthand for real estate owned by the bank — foreclosed properties that fail to sell at auction and are taken back by the mortgage lender. Typically vacant and poorly maintained, REO properties are notorious as blights on a neighborhood, dragging down property values for nearby homes and fraying the fabric of communities.

New York City’s REO stock has historically been hard to track, and, with a total inventory of 2,186 in December 2010, remains tiny compared to that of major foreclosure epicenters across the country. The latest data from the Furman Center, however, show that despite the recent stabilization in the Manhattan market, REOs are a growing problem in some corners of New York City.

In fact, the pain is falling disproportionately on a handful of neighborhoods already walloped by foreclosures. [See adjacent map for a breakdown of REO properties in the five boroughs for 2010, and go to www.TheRealDeal.com/REOmap for an interactive feature on REOs in New York City by zip code since 2005.]

Before the real estate bubble burst, a troubled borrower could readily resell a home to pay off an unmanageable mortgage, or try to refinance the loan. Once the real estate market tanked, those options evaporated, as homes were suddenly worth far less than the value of the mortgages. As a consequence, new REO inventory spiked to 1,832 in 2008. The total of 2,186 in December 2010, the most recent number available, remained essentially flat compared to December 2009, according to MoodysEconomy.com. Overall, Furman Center data show that existing REO inventory more than tripled from 2005 to 2010.

While there’s been a temporary lull in local foreclosures since last fall, the data still show troubling trends at every phase of the foreclosure process.

More foreclosed properties are going to auction, with 20 percent hitting the auction block in 2007 once the recession began, up from just 10 percent in 2005, when the economy appeared healthier and homeowners found it easier to sell or work out modification deals with their lenders. As a result, a greater percentage of these homes are becoming REO properties. (Since getting a property to auction is taking far longer today, data beyond 2007 are not yet available.)?

In fact, the painful struggle of foreclosing on a home is lengthening to an average of over two years, based on data from properties that sold at auction or became REOs in 2010, from an average of 425 days in 2007, when the downturn began. This is the longest time frame in recent memory, which in turn means these already troubled properties are likely to be in even greater disrepair once they finally go back to the lender. And, after going to auction, far fewer properties are selling in arm’s-length transactions within a year. That’s further postponing the return to stable ownership in hard-hit areas such as Jamaica, St. Albans and South Ozone Park in Queens, as well as Bedford-Stuyvesant and Crown Heights in Brooklyn. These areas have endured the highest numbers of foreclosures in the city, and Furman data show they are also where more foreclosed properties are ending up as REOs.

While vast stretches of New York City, including most of Manhattan and wealthy enclaves in Brooklyn and Queens such as Brooklyn Heights and Forest Hills, have no REOs at all, the bank-owned homes are highly concentrated in already ailing neighborhoods. For example, in the 11433 zip code, which includes Jamaica and St. Albans, REOs spiked to 94 in 2009 from just 7 in 2005. While that number was down in 2010, experts say it was only because the foreclosure process is being drawn out longer. Likewise, South Ozone Park in the 11420 zip code logged 66 REO properties in 2008 and another 48 in 2009. In Brooklyn, 11233 and four other zip codes that include Bedford-Stuyvesant and Crown Heights are among those with the most REOs in the borough, for a total of 54 in 2009, up from just 20 in 2005.??

All this adds up to a growing backlog of vacant homes, and a more painful day of reckoning for both the lender and the neighborhood once the properties reach REO status.

Attorney Franklin Romeo with Queens Legal Services sees firsthand the damage foreclosures and REOs are wreaking in Jamaica, South Richmond Hill, South Ozone Park and St. Albans. Homeowners in these communities come to Queens Legal Services to help stave off the loss of their homes. Romeo said the vast majority of his clients are working- or middle-class residents who bought homes to build financial stability. Instead, they were sold loans that became unaffordable when the rates adjusted upward.

“These are neighborhoods that for years and years were a gateway to the middle class,” said Romeo. “People are forced to leave and pull their kids out of school, and the impact of foreclosure is devastating.”

One of the few things consumer advocates and lenders agree on when it comes to foreclosures is that when they are unavoidable, they are best done quickly. But unfortunately, the opposite is happening now. New York already has the longest foreclosure process in the nation, and the time frame is jumping dramatically in New York City. Last year, one-quarter of the foreclosure auctions in the city had lis pendens (the formal notice that starts the foreclosure process) that were more than two and a half years old.

That doesn’t bode well for the future value of the home or for the nearby community.

“A house is not going to be in very good shape by the time it gets to REO after two and a half years. … Either it’s not occupied, or it’s occupied by someone who is in dire financial straits who knows he is losing the house, [and as a result] the maintenance on the house is not going to be what it should be,” said Vicki Been, faculty director of the Furman Center. “Lenders probably take even more of a hit once they eventually sell the property, and for the neighborhoods, stability is undercut — it’s not a pretty picture.”

And while foreclosures and REOs have slowed dramatically since last fall, experts say the drop is not because of positive fundamentals such as improvements to the housing market or economy. Rather, they warn that it’s only a temporary lull created by changes in New York State law and increased scrutiny of foreclosures since last fall’s robo-signing scandal.

“The pipeline is still very full, and it’s going to get moving again, and everything that would have come out of the pipeline is still going to come out,” said Matthew Haines, the founder of Propertyshark.com.