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October 19th, 2009

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.

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4 Responses to “Should Banks Hold Onto Foreclosed Properties?”

  1. Mitch Says: October 25th, 2009 at 12:55 am

    I can’t figure out what reason banks would have for holding onto these properties. Well, actually I can, but it’s the stupidest type of speculation.

    They’re hoping that the real estate market will go back up sooner than later, and that will make the homes more valuable, which means they’ll be able to recoup their money faster. If they put those homes on the market now, people will get great bargains, but the banks won’t be able to recoup their money as fast as they lost it since those bad floating real estate loans just aren’t coming back.

    I hate those weasels; yeah, I know, I’m not supposed to hate.

  2. Tim Manni Says: October 26th, 2009 at 10:31 am


    We should be lucky in a sense that some are holding onto these properties. At first I couldn’t understand why, but then after a couple of discussions with co-workers it came to me that unloading foreclosed properties will only serve to drop home values even more. Foreclosed properties bring down the value of the home around them. Sure, some bargains may not be available, but it’s also helping existing homeowners by keeping their values from falling even lower.

    However, banks do want to recoup their funds asap buy reselling these properties. However, if a qualified buyer can’t be found, or an offer is far below the home’s value, even in its foreclosed state, a bank may not bite.

    Just some thoughts for consideration. Thanks for all the comments this weekend, they’re much appreciated.

    Always a pleasure,

  3. Zapp Says: February 24th, 2010 at 2:24 pm

    Current homeowners are lucky, you mean. Those of us who sat on the sidelines staring at a ridiculous housing market and are now waiting for the necessary correction are not so lucky.

    The banks will only start letting these go as they are required to by rising rates. Right now, why sell to recoup at a loss when you can borrow for free?

  4. Tim Manni Says: February 25th, 2010 at 11:06 am


    We always encouraged potential borrowers to get off the sidelines (if their financial situation allowed for it) and take advantage of what the housing market has to offer. Yet, it’s certainly not too late — rates are at historic lows, there’s a tax credit for ALL homebuyers, and real estate prices are cheap.

    You can’t blame banks for wanting to get the most out of their investments…I would assume you would want to do the same for your own.

    Thanks for commenting,

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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