REOs hit record high, but dropoff expected amid foreclosure freezes

Robo-signing scandal sparks worries about shadow inventory

A record 102,134 U.S. homes were repossessed by banks last month, according to new data from RealtyTrac, in a sign that lenders were finally beginning to make a dent in the nation’s backlog of residential foreclosure properties when allegations of widespread faulty documentation threw thousands of those repossessions into question.

The reports, which surfaced late last month, have prompted some of the nation’s largest banks to freeze foreclosure proceedings pending federal and state investigations into the scandal, suggesting that what might otherwise have been a promising trend in the foreclosure cycle may turn out to be short-lived.

Overall, foreclosure filings were reported on 930,437 homes in the third quarter, up 4 percent from a quarter earlier. Of those, 347,420 filings occurred last month, a 3 percent increase from August, RealtyTrac said.

Scheduled foreclosure auctions and bank repossessions, or REOs, accounted for the third-quarter uptick, up by 5 percent and 7 percent since the second quarter, respectively, while initial default notices posted a slight decline.

It is unclear, though, whether that escalation in the later stages of foreclosure was achieved entirely through legitimate means, as employees of a number of servicers have since come forward with claims of having forged signatures or “robo-signed” thousands of foreclosure affidavits without specific knowledge of the cases in question in an effort to speed up the process.

Bank of America
, JPMorgan Chase and GMAC are among the lenders that have announced moratoriums on foreclosure sales in the wake of the disclosures, and yesterday, the attorneys general of all 50 states said they would launch a joint probe into the allegedly fraudulent practices of these so-called “robo-signers” and the validity of the documents loan servicers have used in foreclosure proceedings.

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“The trend over the past few months has been that REOs have been pushing upward and hitting record highs, but this whole robo-signing, foreclosure documentation issue is probably going to put a stop to that trend, at least temporarily,” said Daren Blomquist, a spokesperson for RealtyTrac. “Primarily, we think that the drop will be in REOs in October.”

A potential lull in foreclosure filings in the coming months could cast another cloud of uncertainty over the housing market, Blomquist cautioned. “You could see lower demand from buyers, another hit to home prices because of that demand and a bigger backlog of shadow inventory being created as these foreclosure sales are delayed.”

And those effects would be particularly jarring in the 24 states, including New York and Florida, that have judicial foreclosure processes, Blomquist said. Those judicial states accounted for 40 percent of all nationwide foreclosure activity and 36 percent of REOs last quarter, according to the RealtyTrac data.

Still, New York City itself remains somewhat of an anomaly when it comes to distressed residential properties, and is likely to continue that way, despite a potential foreclosure moratorium, Blomquist said.

Bucking the national trend, both scheduled foreclosure auctions and REOs in New York City saw a decrease in the third quarter from the second, while lis pendens were flat. Some quarter-to-quarter and month-to-month fluctuations appeared in the individual boroughs, but overall, foreclosure activity fell by nearly 25 percent quarter-over-quarter citywide.

Blomquist added that the foreclosure process is already so slow in New York state that “another delay is probably not going to cause a huge difference in the numbers” for New York City.