Radar Logic: Potential REO Deluge Will Add To Market Imbalance

With the home buying season coming to a close and foreclosure filings ramping up, all signs point to trouble ahead for the housing market, according to Radar Logic.

This week, the firm released its July RPX Monthly Housing Market Report, which shows housing values in 25 U.S. metropolitan areas have fallen since hitting what Radar Logic describes as the likely peak in June. The price composite reached $188.11 per square foot on June 24 and has declined ever since. That price peak was just 2.2% higher than 2010's trough of $183.99 per square foot.

According to the report, the supply-demand imbalance remains the principal obstacle to a market recovery. Citing the latest RealtyTrac data, which indicated foreclosing filings are on the rise, the Radar Logic report notes that real estate owned (REO) inventories are set to rise.Â

In Congressional testimony this week, Amherst Securities Group Senior Managing Director Laurie Goodman estimated that 10.4 million additional borrowers are likely to default on their mortgages.

‘Given the vast number of current and potential delinquencies, a sustained increase in foreclosures would unleash a tidal wave of properties into bank inventories, and ultimately into the nation's housing markets,’ says Quinn Eddins, research director at Radar Logic. ‘The resulting growth in the inventory of distressed homes for sale would exacerbate the current imbalance of supply and demand and put further negative pressure on home values."

Radar Logic additionally notes that the Federal Housing Finance Agency's recent request for information on REO strategies suggests federal agencies recognize the potential threat of more REOs contributing to the supply-demand imbalance.

The company is opposed to bulk-disposition proposals, saying they would exacerbate losses for Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA). Radar Logic's recommendation is a two-pronged approach. The first half is a preventive measure that calls for the restructuring of seriously delinquent mortgages into a bundle of debt and equity securities that can be sold to investors or held by the government as investments.

The back end of Radar Logic's proposal calls for the government-sponsored enterprises and the FHA to rent out their REO properties through partnerships with private-sector property managers. Under this proposal, the GSEs and FHA would retain ownership of the properties.

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