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Should Banks Hold Onto Foreclosed Properties?

There has been some controversy and speculation that banks are holding onto foreclosed properties — rather than releasing them back into the marketplace, and are foreclosing on borrowers who have, or could have, qualified for a loan modification.

We’re still receiving comments on the story that we wrote on this exact subject back in early September. Our article titled “Making Home Affordable’s Impact on Foreclosure Sales” is concerning an interview CNBC had with a Bank of America (BofA) representative over whether or not they were purposely holding onto their foreclosed properties. Many of the comments following the story suggest that BofA came up short in their efforts to help their borrowers stay in their homes.

From 09/02/09:

What do banks do once they foreclose on a property? There has been a lot of controversy recently whether banks are holding onto foreclosed properties in order to keep home prices from dropping even lower. Diana Olick of CNBC wrote an interesting post on her blog “Realty Check” on Monday, in which she reached out to a representative from Bank of America (BofA) to get some answers.

The answers turn out to be quite interesting indeed because BofA highlights some of the exact same reasons we have detailed in past posts why the Making Home Affordable program will likely never generate the type of results the president has hoped for.

Is BofA not releasing foreclosed properties to the market on purpose? BofA says no. The bank says that foreclosure sales have been down recently because as soon as the details surrounding Making Home Affordable (MHA) were released, the bank was committed to give troubled borrowers every opportunity to stay in their homes.

However, BofA says, now that MHA is in full swing, the program’s faults or limitations will likely cause foreclosure sales to once again rise

Click on the “09/02/09″ link above to read the rest of the interview.

According to a recent report by the PMI Group — a mortgage insurance firm — home prices will fall by another 12% this year, so the inventory of foreclosed properties on the market matters very much:

If, for example, the owners and/or servicers of the large number of vacant and foreclosed homes not yet for sale decide to dump their properties onto the market, then we could see home prices reach their long-term trend levels quickly. More likely, however, is that these owners/servicers will continue to put these properties on the market at a more measured pace in order to avoid additional sharp drops in home prices. In this case, home prices would be relatively flat for the next several years, as the trend level caught up with the actual level of prices. In an environment of rising home sales and falling unsold inventories, as we have today, this is a more likely scenario than one in which home prices fall significantly further from here.

With so much being made over falling home prices during the last year, it seems as though lenders should heed PMI’s advice and be very cautious with how they approach their foreclosure sales.