Thursday, 14 August 2008

California Foreclosures

Prompted by an article in the WSJ on foreclosures, I did a little research. The basic issue is to what extent banks are delaying selling foreclosed inventory, or delaying the foreclosure process, either because they do not want to realise the loss, they do not want to increase their volume of REO (real estate owned) or they do not physically have the capacity to process all the foreclosures they have. So, how long can a bank delay an auction once the property has been foreclosed? In CA at least, the answer is a year. The relevant portions of the CA state code are here, if you have tolerance for US law, and the key paragraph reads:
There may be a postponement or postponements of the sale proceedings, including a postponement upon instruction by the beneficiary to the trustee that the sale proceedings be postponed, at any time prior to the completion of the sale for any period of time not to exceed a total of 365 days from the date set forth in the notice of sale. The trustee shall postpone the sale in accordance with any of the following:
  1. Upon the order of any court of competent jurisdiction.
  2. If stayed by operation of law.
  3. By mutual agreement, whether oral or in writing, of any
    trustor and any beneficiary or any mortgagor and any mortgagee.
  4. At the discretion of the trustee.
So we are in a situation where property is dripping out of the bottom of the bucket through foreclosure sales, property is entering the bucket through delinquencies turning into foreclosures, and property cannot stay in the bucket for more than a year, ordinarily. This is clearly going to lengthen the duration of the real estate downturn, at least until the bucket starts to empty. Clearly it is in banks' economic interest to get this done, but I wonder whether they have the capacity to sell at a much faster rate than they are doing now, or whether the market in parts of California, Nevada, Florida and Illinois will support that volume of sales.

Update. Foreclosure volumes are rising fast in CA: 1,300 a day are now being executed according to the LA Times, or more than three times the rate of a year ago. I'd really like to see a detailed industry wide analysis of the levels and trends in delinquencies of various ages, foreclosures, and REO to get a sense of how full the bucket is. My sense is that the banks are effectively long rather more property than they would have us believe but pinning this down is difficult.

Another update. Further background is here (an LA Times update) and here (a discussion by Sacramento Real Estate Statistics of a Deutsche research report on Shadow Inventory).

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