Whats Really Happening to the REO Stock?

An analysis of three cities: New York, Atlanta, and Miami

Ingrid Gould Ellen Josiah Madar Mary Weselcouch Furman Center for Real Estate and Urban Policy and Wagner School New York University May 25, 2012

Executive Summary The recent foreclosure crisis has caused a surge in the number of properties owned by banks and other mortgage lenders in cities across the country (often called REO properties). Fears that these properties may be depressing regional housing markets and destabilizing neighborhoods have motivated several policy interventions, including the federal governments Neighborhood Stabilization Program. To improve our understanding of the REO Problem we analyze REO trends in three housing markets with very different market conditions: Fulton County, Georgia (the core county of the Atlanta metropolitan area), Miami-Dade County, and New York City. Using local deeds data we identify properties entering the REO stocks of lenders, Fannie Mae and Freddie Mac (the GSEs), and the U.S. Department of Housing and Urban Development (HUD) over a ten year period from 2002 to 2011, and track all subsequent sales. Key findings of our analysis include: The size of REO inventory varies markedly across our three study areas, but stocks have declined recently in all three markets. As of the end of 2011, Miami-Dade County had the largest REO stock at about 7,400 properties (down by 42 percent from its November 2010 peak); Fulton Countys REO stock was 4,900 properties (down by 29 percent from July 2008 peak); and New York Citys REO stock was only 1,100 properties (down by half since its March 2009 peak). REO properties are more heavily concentrated in neighborhoods with higher shares of minority residents. Sales out of REO make up a significant share of all home sales in Fulton and Miami-Dade Counties, but only a very small share in New York City. The federal government (through FHA/VA or the GSEs) held more than 1,700 REO properties in each of Fulton and Miami-Dade counties as of the end of 2011, but only 250 properties in New York City. REO properties held by FHA/VA (via HUD) typically remain in REO much longer than those owned by the GSEs or private lenders. Investors accounted for a majority of REO purchases in New York City in recent years and at least a third of all purchases in Fulton and Miami-Date Counties. A vast majority of these purchases were by investors buying only a small number of properties. Less than five percent of properties purchased out of REO in each market are flipped by investors within three months. However, those properties that are flipped are generally resold for much higher prices.

Our analysis highlights the variation in REO accumulation patterns between U.S. cities and the possible difficulties in crafting a national policy response. Although recent reductions in stock give some reason for optimism, they are due mainly to slowdown in new REO entry, not increased rates of liquidation. In this context, acceleration of the foreclosure pipeline could cause REO stocks to again grow rapidly.

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

As the foreclosure crisis continues, many communities face a glut of properties that have completed the foreclosure process and are now owned by banks or other mortgage lenders. Large concentrations of these properties, referred to as real estate owned or REO, are thought to impose severe spillover effects on the price of homes and the quality of life in surrounding neighborhoods. In addition, through Fannie Mae, Freddie Mac and the Department of Housing and Urban Development (HUD), the federal government owns or controls several hundred thousand REO properties. As a result, the federal government has a significant role in shaping how REO properties are managed, and taxpayers have a direct financial stake in the strategies these entities use to sell their REO properties. In response to the threats that REO stocks are believed to pose, governments at all levels have launched or proposed policies targeting these properties. The federal government has already spent or allocated almost $7 billion on the Neighborhood Stabilization Program, which provides money to local governments and non-profits to address REO properties. Local governments have also created land banks, established vacant property registries, beefed up code enforcement, and even hauled bank officials into court in an effort to promote better management of these properties. Most recently, the federal government has launched a pilot program to convert portions of its own REO stock into rental housing. Despite the policy attention REO properties have received, our understanding of the size and nature of current REO stocks, as well as what becomes of properties after being sold, is extremely limited or anecdotal. There is no national source of public data that monitors or describes REO properties, so policymakers are left with limited information about the characteristics, and even the size, of this lender-controlled stock. While some useful research surely exists, most of it focuses only on a narrow aspect of the issue or only on a single city, most of it provides a snapshot of a single point in time, failing to consider the longer-term trajectory of REO properties after they sell, and finally, much of it was conducted at earlier stages of the foreclosure crisis and is thus of limited use in addressing current challenges. Our paper shines some new empirical light on the REO problem by studying the volume and characteristics of properties entering bank ownership, the length of time they stay in bank ownership, and what happens to those properties after they are sold to private owners. We add to the existing literature by analyzing these patterns through 2011 in three cities with very different market conditions: Atlanta, Miami and New York City. We undertake our analysis using a combination of longitudinal administrative data sets on foreclosure filings, auction sales, and property transactions. For each city, we calculate REO inflow, outflow and inventory size. We also determine who owns the REO properties (HUD, GSEs, private lenders) and examine how concentrated they are in particular neighborhoods. We track which properties are selling out of REO, and how the rate of sale varies across neighborhoods and over time. We also examine the buyers and estimate the share of properties bought by individuals and small and large investors. Finally, we follow properties after they leave REO stocks to determine how quickly investors are reselling properties, and at what level of mark-up, with an eye towards exploring implications for neighborhoods. The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

Our paper proceeds as follows. First we provide basic background on the legal process that results in lender-owned properties, describe the problems associated with REO properties and summarize the range of policy responses implemented and proposed to date. Next we review other recent research that focuses on the accumulation of REO properties and what becomes of REO properties when sold. We then present our own empirical analysis of REO properties in Fulton County, Georgia, New York City, and Miami-Dade County, Florida. We conclude by analyzing the implications of our analysis for crafting policies to address the REO problem. Background on the Foreclosure Process and REOs Figure 1 charts the main stages of the REO lifecycle, which begins with foreclosure. Although the specific legal process and timeline differ across states, most foreclosures generally follow a similar course. Mortgage-holders (i.e., lenders, securitization trustees, or servicers acting on their behalf) issue a foreclosure notice to borrowers after they have missed a specified number of mortgage payments. If a homeowner in foreclosure is unable to sell her property or halt a foreclosure proceeding through paying arrears or negotiating a loan modification or other agreement, the foreclosure will result in a public auction of the home. In states with a judicial foreclosure process, which is conducted through the courts, the time between the initial foreclosure filing and the auction can last for several months or even years. In states with a non-judicial process, which occurs outside of the court system, the time from foreclosure notice to auction is generally much shorter.
Figure 1: Main Stages of REO Lifecycle

At the foreclosure auction, third parties can make bids on the property, but they do not have an opportunity beforehand to enter the property to inspect its condition. The party that makes the highest bid wins the auction and takes title to the property, provided that the bid exceeds the mortgage-holders reserve price (typically equal to the unpaid balance on the mortgage plus accrued interest and fees). However, if no third party places a bid higher than the reserve price, the mortgage-holder itself wins the auction and the property becomes (or enters) REO. For mortgages held in bank portfolios, the bank itself acquires title to REO properties. The situation is more complicated for most mortgages, however. Most subprime loans and many prime loans were privately securitized, so the mortgage-holder is typically a large bank acting as a trustee on behalf of a securitization pool. In these cases, the bank holds legal title to REO The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

properties in name only, but beneficial ownership of the properties is held by the investors who own the mortgage-backed securities. Management of the REOs is likely conducted by the servicer under the contractual requirements set up when the securitization pool was established. Most prime mortgages, in contrast, are securitized but also guaranteed by Fannie Mae or Freddie Mac (known as government sponsored enterprises or GSEs). For these mortgages, it is the GSE that is both the legal and beneficial owner of any REO properties. Similarly, for mortgages that were insured by the Federal Housing Administration or Veterans Administration, it is the U.S. Department of Housing and Urban Development (HUD) that takes title to any properties that complete the foreclosure process without a winning, third party bid. Although foreclosure auctions are the path into bank ownership for most REO properties, a relatively small number of homes enter REO stocks through so-called deed-in-lieu transactions. In these cases, a homeowner willingly conveys the property to the lender prior to the foreclosure auction. The lender is able to acquire title to the property more quickly and in exchange, the distressed borrower may receive a modest cash payment or have the debt extinguished. Once a lender, GSE or government agency takes title to an REO property, it will typically assess the propertys condition and current value, contract with a field services company for property management, and work with local brokers to sell the property through conventional channels. If the property is still occupied by the former homeowner, the REO owner can initiate eviction proceedings soon after taking title. However, if the property is occupied by legal renters, under federal law, the REO owner must honor the remaining term of the lease or, if longer, allow the tenant to remain for at least 90 days after the lender takes title. 1 Often, however, foreclosed properties are already vacant by the time they are auctioned (Whitaker, 2011). Most buyers of REO properties can be divided into one of two main groups: households who purchase the property as their primary residence and investors who purchase properties to rent out to others or for near-term resale. Additionally, a small number of REO properties are acquired by non-profits or local governments. As described below, much of the concern about REO properties stems from the characteristics of the buyers purchasing properties out of REO and their management of those properties. Addressing the REO Problem Local and federal policymakers have focused on REO properties for two primary reasons: concern about the stability of neighborhoods hit particularly hard by the foreclosure crisis, and concern that the glut of REO properties is depressing the overall housing market. REO properties are tied to neighborhood stability in multiple ways. Several recent studies have found that foreclosures (measured, depending on the study, by foreclosure filings, auction
1

Title VII of the Helping Families Save Their Homes Act of 2009. Public Law 111-22, effective May 20, 2009 (www.gpo.gov/fdsys/pkg/PLAW-111publ22/pdf/PLAW-111publ22.pdf).

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

sales, or REO status of properties) have significant negative effects on the sales prices of nearby homes (e.g., Schuetz, Been and Ellen, 2008, Harding, Rosenblatt, and Yao, 2009, Campbell, Giglio and Pathak, 2011, Gerardi et al., 2012). A likely mechanism for these effects is the poor physical condition of many properties that spend time in the foreclosure process (Gerardi et al., 2012). These homes often suffer from deferred maintenance during the homeowners financial distress before and during the foreclosure process, and significant condition problems are unlikely to be remedied while a home is in lender ownership. Poor REO management itself may result in outward signs of distress, such as an un-mowed loan, accumulated trash, or peeling paint (National Fair Housing Alliance, 2012). Moreover, because REO properties are often vacant, they are vulnerable to vandalism and theft, which can result in particularly severe and visible physical distress that can reduce the value of neighboring properties (Mikelbank, 2008, Whitaker and Fitzpatrick 2011). Distressed and vacant properties resulting from foreclosures are also believed to attract crime, by signaling social disorder, reducing eyes on the street, and providing venues for illicit activity (Ellen, Lacoe and Sharygin, 2011). For these reasons, vacant and distressed REO properties also impose significant costs on local governments, which must address the elevated risk of fire, injury, and crime they cause (Apgar and Duda, 2005). Another possible mechanism through which REO properties may affect nearby home prices is the use of REO sales as comparables for appraisal purposes. Several studies suggest that REO properties sell at a discount (see Frame, 2010 and Lee, 2010 for reviews of this literature). Guidance from industry groups instructs appraisers not to disregard distressed sales, including sales out of REO, but rather to investigate the circumstances of such sales and to take them into account accordingly (Appraisal Institute, 2012). However, it is not clear how and to what extent appraisers adjust the sales prices of REO properties when valuing nearby homes, and in high-foreclosure neighborhoods, sales out of REO may provide most of the guidance for valuations. Finally, many also fear that the sale of REO properties to unscrupulous investors hastens neighborhood decline (see, e.g., Katz, 2009). Treuhaft, Rose and Black (2011) and Ergungor and Fitzpatrick (2011) describe several investor business models that might harm neighborhoods, such as acquiring low value REO properties for quick, sometimes fraudulent flips, or using purchased REO properties as low-quality rental housing with little or no ongoing property maintenance. Of course not all investors are unscrupulous or pose a risk to the neighborhood. Greenberg, Essene and Lee (2009) show that investors who purchased two- to four-unit buildings in Southern New England between 2005 and 2009, generally put in more equity, had higher credit scores, and experienced lower foreclosure rates than owner occupants who purchased these same types of buildings. Nonetheless, REO sales are often the decisive point of transition from once-stable owner occupancy to the next form of ownership. The second primary reason policymakers focus on REO properties is a concern that the accumulation of REO properties is depressing the housing markets in many regions of the country simply by swamping them with supply (see, e.g., Mallach, 2010, Federal Reserve Board, 2012). The Federal Reserve Board recently estimated that one fourth of vacant homes for sale nationally as of the second quarter of 2011 were homes then in REO (Federal Reserve Board, The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

2012) and sales out of REO make up an even larger share of all sales in many markets. Homeowners trying to sell their properties, then, must compete not only with other individual owners selling properties, but with the lenders, securitization trusts, and federal government entities that are trying to sell REO properties. For this reason, the size of the REO stock, and the timing of its liquidation are viewed as a potential threat to the recovery of the national housing market and the broader economy. Policymakers have adopted or proposed a variety of strategies to address the potential threats REO properties pose to neighborhoods and the overall housing market. Foreclosure prevention efforts, including counseling, the federal Home Affordable Modification Program, and the Home Affordable Refinance Program, aim not only to help families stay in their homes, but also to reduce the number of foreclosed properties entering the housing market and to prevent the external effects on neighborhoods described above. Several other programs, however, focus on the properties that have already gone through foreclosure and are currently in REO. The most prominent is the federal governments Neighborhood Stabilization Program (NSP) and the many local efforts it has funded. To date, three rounds of NSP funding have allocated nearly $7 billion to local programs targeting census tracts that meet specific criteria based on foreclosure rates, vacancy, housing price changes and other measures of distress. Local government and non-profits have used this funding for a variety of purposes, including the acquisition of REO and other vacant properties for rehab and resale to owner-occupants; the acquisition of REO and other vacant properties for the creation or preservation of affordable rental housing; the acquisition and demolition of REO and other vacant properties to remove blight; and subsidizing financing or down payment assistance to homebuyers who purchase REO or other vacant properties. Through these targeted efforts to remove blight and steer REO properties to owner occupancy or responsible rental management, the NSP program aims to mitigate the negative spillovers that REO properties may generate in the neighborhoods most in danger of rapid decline. Building off of NSP, in September, 2011, President Obama proposed Project Rebuild which would allocate another $15 billion to neighborhood stabilization efforts (Department of Housing and Urban Development, 2012), but as of this writing its fate in Congress is uncertain. Local governments have responded in a number of other ways as well. Some jurisdictions, including the counties containing Flint and Cleveland, have created a new generation of land banks to allow for more direct and longer-term public intervention in their local housing markets (Fitzpatrick, 2010). These quasi-governmental corporations are empowered by state law to take title to tax-foreclosed properties, and also to purchase and receive donations of distressed REO properties, either individually or in bulk. The land banks assess the condition and market potential of properties and elect whether to demolish or resell them (with or without extensive rehabilitation). As a result, at least some properties that might otherwise be severe nuisances in the hands of REO owners or speculators are instead channeled to responsible owners or removed from the market altogether. Local governments have also tried to mitigate the effects of distressed buildings, including REO properties, by stepping up code enforcement (Schilling,

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

2009). Many such jurisdictions also require owners to register vacant properties with the local government, which allows cities to deploy enforcement resources more efficiently. 2 Finally, the federal government has responded by enacting or proposing policies focused on the extensive REO holdings of HUD, Fannie Mae and Freddie Mac. Through these entities, the federal government controls about half the national REO inventory (Federal Reserve Board, 2012), so its REO management and disposition practices are an obvious opportunity for mitigating the problems associated with REOs. To date, the Federal Housing Administration (FHA), which is responsible for the bulk of HUDs REO stock, and the GSEs have rolled out several policy initiatives. Both FHA and the GSEs have negotiated small-scale arrangements with local land banks or non-profits to transfer distressed, low-value REO properties at nominal cost, or even sometimes for free, with additional funding to pay for demolition (see, e.g., Keating, 2011). The GSEs and FHA also offer preferential first look access to REO listings to public entities, prospective owner-occupants, and others, in order to reduce the flow of REO sales to investors. More recently, the federal government has explored the possibility of converting some of its REO holdings into rental property (Federal Reserve Board, 2012) through bulk sales to private investors or public-private joint ventures. In February 2012, the FHFA announced a pilot program through which REO properties owned by Fannie Mae would be sold in bulk to investors in selected, hard-hit areas. The goal is to support the for-sale market by reducing the stock of available properties, while simultaneously meeting the growing demand for rental housing in certain regions. Although private investors already convert some REO properties to rental housing, policymakers hope the bulk sales of federally-owned REOs will allow for economies of scale that make responsible, well-capitalized rental management feasible at a large scale, without significant financial sacrifices by FHA and the GSEs. Importantly, however, FHA and the GSEs must balance neighborhood and housing market stabilization goals against sometimes competing fiscal priorities. The GSEs have already received massive infusions of public money and the Federal Housing Finance Agencys stewardship is intended, above all else, to minimize further losses. Similarly, FHA lending is self-sustaining, so FHA must manage its REO stock primarily to recoup loan losses. These fiscal realities highlight the fact that taxpayers have a large, direct stake in federal REO management in addition to any spillover effects on property values. Given the large number of mortgages that are currently delinquent or already in foreclosure, the flow of properties into REO is almost certain to continue for at least the next few years. A recent Federal Reserve Board white paper estimated that as of the end of 2011, the number of properties in the foreclosure process was more than four times greater than the number of REO properties (Federal Reserve Board, 2012). Many public officials will continue to advocate for additional policy response, such as the proposed Project Rebuild or an expanded
2

For a list of jurisdictions with vacant property registries, see http://www.safeguardproperties.com/Services/Vacant_Property_Registration.aspx

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

REO-to-rental program. Assessing whether additional policy responses are necessary and, if so, what form they should take depends, in part, on a firm understanding of current and projected REO trends. Specifically, if REO stocks are actually declining in many regions, despite the struggling real estate market, the need for additional intervention in these areas may be less urgent. However, if the decline is due wholly to a reduction in the flow into REO, which could reflect nothing more than a temporary slow-down of foreclosure processing due to the robosigning investigations, we may be more hesitant to take much comfort. Similarly much of the concern about investor purchases of REO properties has been based on anecdotal or highly local observation. In order to hone existing policy designed to insure that REO properties dont end up in the wrong hands or to craft new interventions, policymakers must better understand who is buying REO properties in the current market and what they are doing with them.

Prior Research on REO Stocks and Disposition A small number of prior studies and reports provide a foundation for guiding policies to address REO properties. Immergluck (2008) and (2010) provide an early comprehensive look at REO inventories around the country, using data from a proprietary mortgage servicer database to estimate the number of REO properties in 2006 and 2008 in all 358 U.S. metropolitan areas (MSAs). The paper analyzes the data in several ways to help unpack the growth of the nationwide REO inventory and to highlight differences among housing markets. For example, ranking the top 50 MSAs by REO density (the number of REOs per 10,000 properties), he finds that the Merced, California area had the highest level as of August 2008, at 493.7. In terms of our sample cities, the Atlanta area ranked 25th at 169.7, and the Miami area ranked 29th at 157.7. The New York City area was not in the top 50. Immergluck (2008) also looks at the change in size of REO inventories between August 2006 and August 2008 at the MSA level. He reports that nearly every MSA had an increase in REO density during this period, including Miami and Atlanta, though the MSAs with the largest increases were in California, Arizona or Nevada. The change for New York is not discernable in the figure showing his results, however, likely because it is in the large cluster of MSAs with only small (or no) change in REO density. Digging deeper in certain MSAs, including Miami and Atlanta, Immergluck disaggregates the trend in REO inventory size between those resulting from foreclosed prime or near-prime loans, on the one hand, versus subprime loans, on the other. This split roughly corresponds to REO ownership by the GSEs versus securitization trusts. He shows that in Miami the stock of subprime REO properties increased steadily from August 2006 to August 2008 by a total of about 18 per 10,000 mortgageable properties, while the stock of prime/near prime REO properties increased steadily by about 30. In Atlanta, subprime REO density increased by about 15 by the middle of 2008 but began declining slowly for the last few months in the period. The density of prime/near prime REO properties, meanwhile increased over the entire period by a total of about 40 per 10,000 mortgageable properties. A 2010 Furman Center analysis fills in some of the gaps with regards to REO properties in New York City in the early years of the foreclosure crisis. It finds that the REO stock in New The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

York grew rapidly between the beginning of 2007 and the end of 2008, from 290 properties to 1,830. The stock then plateaued for the following six months. As for variation in REO inventory size across neighborhoods within metropolitan areas, Smith and Duda (2009) track single-family properties that entered REO between January 2005 and June 2008 in Chicago. They find that a disproportionate share of the properties from this group that remained unsold at the end of 2008 were located in predominantly black neighborhoods. Similarly, a Furman Center study shows that the properties that entered REO in New York City in 2008 were overwhelmingly located in the same majority minority neighborhoods where the citys foreclosures were concentrated (Furman Center 2010). In an effort to better understand the growth of REO stocks, researchers have also looked specifically at the flow into and out of REO, and the amount of time properties spend in REO. The flow into REO depends largely on foreclosure start rates, which are widely reported by a number of sources, but they also depend on the pace of the foreclosure process and the share of foreclosures filings and auctions that end up in REO. The most recent publicly reported data comes from a report issued by CoreLogic in October, 2011. It reports that the share of all foreclosure auctions resulting in an REO was 66 percent in 2006, but rose to between 75 and 80 percent in 2008, 2009 and the first half of 2010 (CoreLogic, 2011). The 2010 report from the Furman Center shows that even though foreclosure filings in New York rose rapidly in 2006 and 2007, fewer than 15 percent of these properties ended up in REO, probably due to both New York States extraordinarily long foreclosure process and the relatively strong market in the city. As for time spent in REO, CoreLogic (2011) provides recent national data. It reports that the share of REO properties that sold within only three months of entering lender ownership grew from less than a quarter in 2006, to almost half in the middle of 2009, but then dropped back to 36 percent as of the second quarter of 2010. Looking only at Chicago and in earlier years, Smith and Duda (2009) find the median REO duration grew from 172 days in 2005 to more than 250 days in 2007. Furman Center (2010) finds that in New York, properties also spent an increasingly long time in REO as the foreclosure crisis played out: the share of properties that entered REO in 2007 that were resold within one year was less than 40 percent, compared to more than 50 percent the previous year. In contrast, Immergluck (2012) finds that the median duration spent in REO in Fulton County, Georgia dropped steadily between 2005 and 2008, from 925 days to only 175 days, which he attributes in part to the surge in low value properties in REO, which lenders sold relatively quickly. CoreLogic (2011) also provides data about the number of properties exiting REO in recent years and total sales. From September, 2010 through August, 2011, the share of all sales nationally made up of REOs ranged from 16 percent (in the last month of this period) to 26 percent (in February, 2011). The report also provides the same data as of August 2011 for each state, and for 25 large housing markets. In the individual MSA markets, the REO share of all sales varied widely, from only about two percent in the Nassau-Suffolk, New York area to 40 percent in the Riverside-San Bernardino-Ontario, California area. In the Atlanta area it was 22 percent, and no data were provided for the Miami area. The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

Past research tells us less about who is selling REO properties, who is buying them, and what buyers are doing with the properties they purchase. But there are some exceptions. Coulton, Schramm and Hirsh (2008) focus on the many properties sold out of REO in Cuyahoga County, Ohio at an extremely low price (less than $10,000) in 2007 and 2008. They find that the top ten most frequent sellers of such properties, which each made between 56 and 486 such sales, were all large national banks (though in many cases they were likely acting in their capacity as trustee of a securitization trust) and accounted for 62 percent of all sales in the studys low-priced sample of REO sales. The authors find that buyers were far less concentrated than the sellers. They report that the ten most prolific investors buying these properties purchased between 21 and 145 properties each, and together accounted for only 18 percent of all such REO purchases in the sample. Using deeds data from Fulton County, Georgia that cover the period between January 2005 and April 2009, Immergluck (2012) finds that REO sales are highly concentrated, with the five largest REO sellers accounting for more than 40 percent of all REO sales in each year from 2005 to 2008, and more than 50 percent through the first four months of 2009. The GSEs (Fannie Mae and Freddie Mac) alone accounted for more than ten percent of all REO sales in every year he examined, except for 2007, and more than 20 percent of all sales through the first four months of 2008. He too finds that the buyers purchasing REO properties in these years were much less concentrated than the sellers, but investors (identified through several techniques) together accounted for about 40 percent or more of all purchases out of REO each year. Of the subset of REO properties that sold for less than $30,000 (which grew rapidly in number in 2008), the paper estimates that investors accounted for 68 percent in 2008. Nationally, Treuhaft, Rose and Black (2011) cite a January 2011 Campbell/Inside Mortgage Finance survey data showing that investors accounted for more than 60 percent of all purchases of damaged REOs compared to less than 20 percent of move-in ready REOs and only about ten percent of non-distressed (i.e., not REO or short sales) home purchases. There is some evidence that many properties that sell out of REO are resold soon after. Core Logic (2011) finds that nationally, of those properties that sold out of REO (having entered in 2006), 85 percent were again resold within the following five years at least once. Five percent were actually resold three times in these five years. That said, only two percent of the properties sold out of REO from the 2006 cohort ended up back in REO within five years. The 2010 Furman Center study also looks at REO flipping, though only through 2009. It finds that in New York City, the share of formerly REO properties resold within a year was only about 20 percent for REO properties purchased in 2008, down from almost 50 percent for those purchased in 2005. As for proceeds from reselling properties, Coulton, Schramm, and Hirsh (2008) find that investors buying REO properties in 2007 and 2008 in Cuyahoga County, Ohio appear to have made considerable profits. Those who resold within 90 days made, on average, $2,500 in gains, while those selling between 90 and 180 days after purchase averaged about $4,200 in gains. Properties sold more than 180 days after being purchased showed much smaller (but still positive) average gains. In New York City, the Furman Center study reports that REO purchasers The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

who quickly resold properties were able to command average mark-ups of more than 50 percent in every year from 1996 to 2008 except one. Finally, another set of empirical studies focuses more narrowly on the sales price for properties sold out of REO in an effort to determine whether or not lenders generally sell properties for less than their estimated market value, a difference known as the foreclosure discount. Both Frame (2010) and Lee (2010) offer a review of this literature, which in some cases focuses on national, but in most cases local samples of sales. Most of this literature finds evidence supporting the existence of a significant foreclosure discount, though estimates of the size of the discount vary. In their analysis of distressed sales in Massachusetts, Campbell, Giglio and Pathak, (2011) estimate a discount of more than 40 percent for properties sold between one and three years after entering REO, among the steepest discounts estimated by the studies. The researchers suggest several possible mechanisms to explain a foreclosure discount, including sellers desire to complete transactions quickly and systematic quality differences between REO properties and other properties. Our analysis augments this existing literature in several ways that should be valuable to ongoing policy discussions. First, by covering New York City and Miami, we provide the first comprehensive analyses of the REO markets in these two cities. This should help policymakers in these specific cities or in other cities with similar housing markets better understand local conditions. Second, by employing uniform methods in our analysis of each city to the extent possible, our results allow for apples to apples comparisons among three major markets (New York City, Miami-Dade County and Fulton County). This allows policymakers a better understanding of regional variations when designing federal policies. Third, we also explore variation across neighborhoods within markets, to see if certain submarkets are being left behind. Understanding such variation should help in targeting any subsidies. Fourth, for each city we answer additional questions directly applicable to policy, which have been absent from the earlier studies. For example, similar to CoreLogic (2012), we analyze for each city whether properties sold out of REO end back up in REO. But unlike the CoreLogic report, we provide a more detailed, neighborhood-level analysis that examines price mark-ups and compares trends for properties purchased by investors rather than owner-occupants. We also separately examine price mark-ups on REO properties bought out of government-controlled inventories. Finally, because our analysis incorporates 2011 data, our results more accurately reflect current market conditions in these cities than any prior reporting. Market Context

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

Our empirical analysis focuses on New York City, Fulton County, Georgia (the core county of the Atlanta area), and Miami-Dade County, Florida (the core county of the Miami metropolitan area). For context, Figure 2 shows the FHFA house price index for the Atlanta, New York and Miami metropolitan areas since 2000, and Table A compares the three areas across key demographic, housing and market indicators. Large variations between the three areas are readily apparent. Miami-Dade County shows the characteristic Sand State pattern of very strong price appreciation and high levels of home construction in the mid-2000s, followed by a very steep drop in prices. New York City also experienced rapid price appreciation, but much less housing construction relative to its existing housing stock. Since 2007, New York has suffered a significant drop in housing values, though much less severe than in the other two cities. Fulton County experienced very high levels of home construction in the 2000s, but a much

smaller increase in home values than the other two areas (partly because developers found it so much easier to expand supply in the area). Since the peak of the housing market in 2007, however, it has nonetheless experienced a large drop in prices, which are currently below, on average, year 2000 levels. Other notable differences between the three areas are the homeownership rate which is far lower in New York City than in either Miami-Dade or Fulton County, and the median home price, which is far higher in New York.

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

Another relevant difference among the three markets is the type of legal process each uses for foreclosures. New York State uses a judicial process, which, since 2008, the state has augmented with a mandatory settlement conference to promote modifications and other nonforeclosure alternatives. As a result of this change, court congestion, and other factors, the time period between the initial foreclosure filing and a foreclosure auction has been close to 1,000 days in recent years, the longest in the country (Furman Center, 2010, RealtyTrac, 2011). Florida also relies on a judicial process, and there too the timeline between foreclosure filing and auction is quite long, typically taking about 700 days (RealtyTrac, 2011). Georgia, in contrast, uses a non-judicial process that allows lenders to foreclose much more quickly. As of 2008, the process typically took less than two months (Cutts and Merrell, 2008). Data and Methods To conduct our analysis, we obtained local records of every deed filed in the city or county registers office for each of our study areas. The New York City Department of Finance provided these data for New York City, the Fulton County Assessors Office for Fulton County and the Miami-Dade County Clerks Office for Miami-Dade County. For each study area, we have a record of every property transfer including the property location, the date, the price, and the names of the parties involved. Our study tracks 1-4 family residential properties that entered REO between 2002 and 2011. To identify properties that enter REO, we first identify all transfers that occur as a result of The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

a foreclosure auction. In New York City we rely primarily on a specific foreclosure auction flag included in the data provided by the New York City Department of Finance. Because the flag is not applied consistently to every auction sale, we supplement our list of auction transfers by adding all other property transfers for which the grantor (seller) includes the term referee. (As part of New Yorks judicial foreclosure process, all auction sales are administered by a court-appointed referee.) The Fulton County data contain two flags that identify foreclosurerelated transactions, which, unlike in New York City, appear to be applied to sales out of REO or even resales after REO, not just the transfers out of auction. Because foreclosure auctions in Fulton County always take place on the first Tuesday of the month, we only count as auction sales those sales that are both flagged as foreclosure-related and take place on such a date. In Miami-Dade County, the Clerk of the County Court is listed as the grantor for all transfers resulting from a foreclosure auction, which we use to identify such transfers. To identify which auctioned properties enter REO versus pass to third party bidders, we search the grantee names of auction-related transfers for any words that indicate the name of a bank, lender, servicer, or government entity. Additionally, we classify as an entry into REO any other property transfer from a non-lender entity to a lender or government agency so that we also include properties transferred to REO through deed in lieu transactions or that were missing an auction flag due to administrative errors in our data. In a small number of cases, we observe multiple deeds purporting to transfer the same property into REO filed within a very short time frame which, given the foreclosure timeline, we believe to be administrative errors or correction deeds filed to amend earlier deeds. Accordingly for any series of multiple transfers into REO within a defined time frame (within one year in Atlanta or Miami or three years in New York City), we only count the first such transaction as an entry into REO. 3 To classify REO properties as owned by HUD (on behalf of the FHA and VA) the GSEs, or other government entities 4, we look for any transaction after the transfer into REO, but before the first arms length sale out of REO, where the grantee listed is the name of a government agency (HUD, VA, FHA, or some local agencies) or the head of a government agency (e.g. Shaun Donovan as the Secretary of HUD). For each property that winds up in REO, we attach any subsequent transfers of the property to track its exit out of REO and any later resales. We consider a property to have exited the REO stock only upon the first transfer to a buyer who is a likely investor or individual (see below for definitions) and not a lender or government agency. We treat a transfer as a subsequent transfer only if it is at least one day after the first transfer out of REO to avoiding counting transfers among affiliates. When calculating prices paid for REO properties and when comparing the sales price of a propertys first resale to its sales price out of REO, we only include transfers with sales prices greater than $100.
In New York City, this step drops 548 entries into REO. In Fulton County, it drops 2,302 entries into REO and in Miami-Dade County 10,825. In Miami-Dade, many of these are probably correction deeds, which, unlike those in Fulton County and New York City, cannot be directly identified with the data. 4 We also identified a small number of properties transferred to the Federal Deposit Insurance Corporation (FDIC), Georgia Housing and Finance Authority, Miami Dade County, and the City of Miami.
3

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

Following Immergluck (2011), we classify any party acquiring a property out of REO as a likely investor if, based on a key word search of the grantee name, it appears to be a corporate entity (e.g., the grantee name includes inc,: corp, llc, etc.) or if that same grantee name is matched to two or more other REO acquisitions or four or more property acquisitions of any type in our study period. Additionally, we classify as an investor any purchaser who resells an REO property within 12 months of its purchase. We classify all other buyers as individuals. Results We report the results of our analysis in two main sections. The first describes the size of the REO stock, the trend in inflow and sales out of REO, and the spatial distribution of REO properties in our sample locations. The second section focuses on our analysis of the characteristics and behavior of REO purchasers and what happens to properties after leaving REO stocks. The REO Stock Figures 3a, 3b, and 3c show the number of properties in REO stocks as of the end of each month from January 2006 through the end of 2011 in Fulton County, New York City, and Miami-Dade County. The pattern and scale of REO accumulation has been quite different in the three areas, but in each the REO stock at the end of 2011 had shrunk significantly from peak sizes. In Fulton County, the REO stock grew rapidly between 2006 and 2008, peaking at about 7,000 properties at the end of July 2008 (which roughly corresponds to the end of the study period in Immergluck (2008)). Using Immerglucks REO density measure, this was equal to about 353 REOs per 10,000 mortgageable properties. 5 Since then, however, the REO stock in Fulton County dropped for several months, had a secondary peak in early 2011, and then once again began to decline. At the end of 2011, the REO inventory had fallen to fewer than 5,000 properties. In New York, the REO stock has been much smaller throughout our study period than in Fulton and Miami-Dade County, both in absolute and relative terms. In New York City, the REO inventory peaked in March 2009 at about 2,300 properties, representing an REO density of only 25 per 10,000 mortgageable properties. By the end of 2011, the REO stock in the city had dropped to about 1,100. Of our three study areas, Miami-Dade County had by far the highest number of REO properties in absolute numbers since the onset of the foreclosure crisis, with a peak of nearly 12,800 in November 2010. This was equal to a foreclosure density of about 200 per 10,000 mortgageable properties, substantially lower than the peak in Fulton County. In Miami-Date County, too, the REO stock has contracted, and stood at less than 7,500 at the end of 2011. Figures 4a, 4b, and 4c show the flow of properties into and out of REO each month during this same period for the three locations. In all three markets, the reduction in REO inventory after the initial peak was due to a steep increase in the number of REO properties
5

A mortgageable property is a 1-4 family home or condominium unit.

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

being sold by the mortgage holders out of REO. More recently, however, the decline in REO

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

stocks has been driven by a large drop in the rate of entry into REO, not high rates of liquidation. In fact, the rate of exit from REO in Fulton and Miami-Dade Counties actually dropped, both in absolute numbers and as a percentage of the outstanding stock between 2009 and 2011. In Fulton County, the number of REOs sold each month in 2009 was equal, on average, to 12 percent of the stock at the end of the previous month. In 2010 this average rate of outflow dropped to nine percent, and in 2011 it dropped again to eight percent. Similarly, in Miami-Dade County, the average monthly outflow rate dropped from eight percent in 2009, to only six percent in 2011. The slow-down in entry into REO is particularly striking in New York City. In September 2010, 111 properties entered REO. But in the final 14 months of our study period, from November 2010 through the end of 2011, only 15 properties entered REO per month on average. While the share of foreclosure auctions resulting in REO (versus a sale to a third party bidder) was also slightly lower in 2011 than in earlier years, the decline in the total number of properties reaching auction has largely driven the overall decline. One likely cause is the slowdown in foreclosure processing in the aftermath of the robo-signing scandal which unfolded at the end of 2010 and, given New York States extremely long foreclosure timeline, might still be affecting the trend now. Sales out of REO in the three locations make up very different shares of their respective real estate markets. Figure 5 shows that in Fulton County the REO share of the market was more than five percent even in 2004, before the onset of the foreclosure crisis. From 2008 to 2011, as REO inventories surged and other sales activities slowed amidst the real estate crash, sales out of REO accounted for more than a third of all sales activity. In Miami-Dade County, sales out of REO made up a negligible share of the real estate market until 2008, but in each of the last three full years, they made up more than 20 percent of the total market. In New York, by contrast, sales of REO properties have never accounted for more than 10 percent of the total market in any year, and in 2011 they made up only about five percent.

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

Another difference between the three areas was the type of institutions taking in new REOs in the years we analyzed. Table B shows the share of properties entering REO each year whose title passed to HUD 6 (which we refer to as FHA/VA), the GSEs, state and local government agencies, and all other owners (private banks and securitization trustees, both of which we call private REO owners). In New York, before 2007, when REO flow was relatively low, FHA/VA were responsible for a large share of all new REO properties. From 2002 to 2004, HUD accounted for almost half of all new REO properties in New York. Since 2007, however, the number of foreclosed properties passing to private REO owners has ballooned, and has accounted for more than 80 percent of all new REO properties. In MiamiDade County, only a very small share of new REOs in recent years were FHA/VA-owned and, like New York, the number of REO properties being acquired by private lenders and trusts has greatly exceeded the number acquired by the GSEs. (Because there have been so many REOs in Miami-Dade County, however, the 19 percent share for the GSEs in 2011 still translates to more than 1,000 new Fannie Mae and Freddie Mac-owned REOs last year.) In Fulton County, the GSEs have made up a much larger share of new entries into REO in recent years. Since 2010, the share of new REOs that were passed to the GSEs in Fulton County has grown to almost half, and the share going to banks and trustees has dropped to less than half. The GSEs took ownership of over 2,000 new REO properties in the county in 2011.

Figures 6a, 6b, and 6c show the median number of days spent in REO for properties entering the REO inventories of the three owner types in a given year. In all three cities, the REO duration for properties owned by the GSEs and private owners tracked one another very closely. But REO duration for FHA/VA-owned properties has been significantly higher in all three locations. In some years, this gap was quite large, particularly in New York and Miami-Dade County. In Miami-Dade County, for example, FHA/VA took nearly 500 days more on average than the GSEs to sell properties that entered REO in 2005. While some of this variation may be explained by differences in the nature and characteristics of the inventories, the significantly longer sale time for FHA/VA-owned properties merits further exploration.

For Fulton County, we also include in the FHA/VA category 34 properties that were conveyed to the FDIC.

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

As a result of these different trends, as of the end of 2011, the age and ownership of the REO stock in our three study period varied widely. The average REO property in New York City had spent much more time in lender ownership than that that in Fulton or Miami-Dade County. Table C shows that as of the end of 2011, only one quarter of the REO stock in Miami-Dade and Fulton Counties, was more than two years old (i.e., had entered REO before 2010). In New York, by contrast, nearly half of the REO stock at the end of 2011 consisted of properties that had been in REO for more than two years. Table C also shows the variation in REO ownership as of the end of 2011. In Fulton County, between FHA/VA and the GSEs, 40 percent of the REO stock was controlled by the federal government, compared to only 25 percent in New York City and 21 percent in Miami-Dade County. In absolute numbers, as of the end of 2011, there were about 250 federal government-owned REO properties in New York City, but more than 1,800 in Fulton County and about 1,700 in Miami-Dade County. Clearly any changes to policies governing the management of the federally-owned REO stock are much more likely to affect the Atlanta and Miami housing market than the New York market.

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

The distribution of REO properties across neighborhoods within these three markets also varies tremendously. As Table D shows, more than 90 percent of all tracts in both Fulton and Miami-Dade Counties had at least one property currently in REO as of the end of 2011. In contrast, all of the REO properties in New York City at the end of 2011 were concentrated in just 35 percent of its census tracts. Further, 55 percent of New Yorks REO stock as of the end of 2011 was located in just 10 percent of its census tracts. In the other two study areas, only about a third of the REO stock was located in the top tenth percentile of tracts.

Despite the relative concentration of New Yorks REO stock, very few of its neighborhoods have been hit as hard as those in Fulton and Miami-Dade Counties. As of the end of 2011, less than one percent of New York Citys census tracts contained at least 10 REO properties, compared to almost three quarters of the tracts in both Fulton and Miami-Dade Counties. In fact, as of the end of 2011, only seven tracts in New York City had ten or more properties in REO while six tracts in Fulton County had more than 100. Another key question is whether REOs are disproportionately concentrated in particular types of neighborhoods. To examine these patterns, we calculate a weighted average of the characteristics of the neighborhoods where properties entering REO are located. These weighted averages essentially indicate the composition of the neighborhood where the average or typical REO is located. Table E shows that in Fulton County at the beginning of the current foreclosure The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

crisis (2005 2007), properties entering REO were concentrated in black neighborhoods but in recent years have been spreading to a broader set of neighborhoods. In 2011, the average property entering REO in Fulton County was in a neighborhood with a racial composition that looked much more like the average neighborhood in Fulton County. No such trend has emerged in New York City or Miami-Dade County, and REO properties remain disproportionately concentrated in largely black and Hispanic neighborhoods, respectively, in those markets.

Our spatial analysis also reveals changes in the last few years in the average neighborhood characteristics of properties that sell quickly out of REO (sell in less than three months) as compared to those that linger in REO for over a year. In Fulton County, for properties that entered REO in 2007, those that sold quickly were in neighborhoods that had about a 10 percentage point higher share of non-Hispanic white residents than those that stayed in REO for over a year. By 2011, the trend had reversed: properties that sold quickly out of REO were in The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

neighborhoods with a five percentage point lower share of non-Hispanic white residents than those that did not sell quickly. The trend was similar in New York City. In 2007, there was little difference in the neighborhood characteristics of properties that sold out of REO quickly and the ones that stayed in REO longer. However, by 2011, properties in neighborhoods with a higher minority concentration sold out of REO more quickly than those neighborhoods with a lower concentration of minorities. Compared to the other two markets, in Miami-Dade County there was less variation between the neighborhoods where REO properties sold more quickly and slowly, but those that sold in less than three months have recently tended to be in neighborhoods with slightly higher shares of white residents. REO Purchasers and Outcomes Our second key interest lies in examining what becomes of the properties after leaving REO. Consistent with the charges made by many community advocates, we find that investors have played a large role in the market for REO properties over the past few years, especially in New York City. Table F shows the number of REO properties in our three study areas sold to likely investors versus buyers we identify as being non-investor individuals. In Fulton County, we estimate the investor share at more than half from 2004 through 2006, but find that it declined steadily in the following years. For sales out of REO in 2011, only about a quarter were to investors. 7 In New York City, the investor share was at its highest in 2010 and 2011 at about 60 percent. The investor share has also risen recently in Miami-Dade County, but it remains at only about 35 percent. Investors and individuals appear to focus on different segments of the REO market, particularly in Fulton County. Figures 7a, 7b, and 7c show that in all three of our market areas, individuals consistently purchased more expensive homes than investors. In Fulton County, investors have been purchasing extremely inexpensive homes since 2008, with a median purchase price in these four most recent years never exceeding $35,000. The median price paid by non-investor individuals in Fulton County was substantially higher every year, but also declined, from well over $100,000 in every year through 2007, to only about $73,000 in 2011. In Miami-Dade County, the difference in median prices paid by likely investors and individuals narrowed in recent years, but medians for both declined by almost 50 percent between 2008 and 2011. Some of these steep declines in sales prices out of REO are likely due to the drop in housing prices in the Atlanta and Miami areas since the housing crash. There may also have been a shift in the composition of the REO stock towards lower-end properties with worsening conditions. In New York City, individuals also tended to purchase more expensive REO properties than investors, but the difference in median sales price was much narrower than in Fulton or Miami-Dade County and the decline in sales prices has been relatively milder. We also disaggregate the investor group into three subgroups based on the number of properties they purchased: large investors purchasing more than 50 properties; medium investors purchasing between 10 and 50; and small investors, made up incorporated entities purchasing
7

For the years of overlap, our estimates are slightly larger, but broadly in line with those of Immergluck (2012).

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

fewer than 10 and individuals purchasing from two to nine REO properties. For all three locations, we find that the small investors consistently account for more than two thirds of all REO purchases by likely investors (and as much as 85 or 90 percent in New York City and Miami-Dade County in some years). However it is likely that some investors purchase properties through multiple affiliated corporate entities, so our count of medium and large investors is conservative.

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

Despite widespread concern about flipping, we find that relatively few REO properties in our sample cities were quickly resold by purchasers in recent years. Figure 8a shows the share of all properties sold out of REO in each year that were then resold by the purchaser in an arms length sale within three months. 8 In all three markets, this share was less than five percent in 2009 and 2010. Figure 8b shows that a much higher share of REO properties in New York City were resold within 12 months in recent years than in the other markets. Thirty six percent of New York properties purchased out of REO in 2010 were resold within 12 months. In Fulton and MiamiDade Counties, however, only 8 and 12 percent of properties purchased out of REO in 2010, respectively, were resold within 12 months. If we focus just on REO purchases by investors, the share that are resold within one year is, of course, significantly higher (as described above, our definition of likely investor includes all buyers who resell within one year). Yet even among investors, only about one third of REO purchases between 2008 and 2010 in Fulton and MiamiDade Counties were resold within 12 months, suggesting that short term speculation is not the predominant business model for investors in these markets. In New York City, in contrast, about 60 percent of recent REO purchases by investors were resold within one year. For the REO properties that were quickly flipped by buyers, the resale mark-up has tended to be significant. Because of the short resale window, it is unlikely the mark-up for properties resold within only three months is the result of overall market trends or significant rehabilitation. Table G1 shows for each location and each year of sales out of REO, the median percentage mark-up for the properties that were then resold in arms length sales within three months. The table disaggregates the properties based on whether they were held in REO by the GSEs or FHA/VA versus a bank or other private REO owners and shows large mark-ups across the board. For properties bought out of REO from private holders in 2009, for example, the median mark-up for a resale within three months was 89 percent in New York City, 50 percent in Fulton County, and 25 percent in Miami-Dade County. In recent years in Fulton and MiamiDade Counties, the mark-up for REO properties sold by the GSEs and FHA/VA was much lower than for properties sold by private holders, but it cannot be determined from these data whether
8

We do not show results for 2011 because they are right censored by our data timeframe.

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

that is the result of different sales practices or systematic differences in the characteristics and locations of properties that ended up in different REO stocks. In New York, there was little difference in the mark-ups between REO properties that were government-held and those that were held privately, but the sample of government-held REOs is quite small. Table G2 shows the mark-ups for properties resold within 12 months of being bought out of REO, which are more likely to reflect material physical improvements made by the investor. For these resales in Fulton and Miami Dade Counties, the median mark-up for these resales was typically higher than the mark-up for flips within three months for each cohort of properties sold out of REO. In New York, the mark-ups for the larger resale window were sometimes larger, but also sometimes smaller than for shorter-term flips, though small sample sizes for the government-held REOs limit the significance of some of the data. Finally, we track all the properties that entered REO at any point between 2002 and 2011 to see whether they entered REO for a second time at any subsequent point in our study period. In Fulton County, 16 percent of all the properties that entered REO at any point did so again at least once, a much higher share of REO returns than in the national sample (and shorter time period) reported by CoreLogic (2011). In New York City and Miami-Dade County the share of REO properties that suffered a second spell in REO was much lower, at four percent and six percent respectively.

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

Policy Implications and Conclusion Our analysis confirms that REO accumulations vary markedly across different areas of the country. Of our three sample locations, REO properties are clearly a more pressing policy concern in Miami-Dade and Fulton Counties, where the REO stock is far larger and where sales out of REO make up a about a quarter and a third of all home sales, respectively. In other parts of the country, this share is no doubt even higher. In Miami-Dade and Fulton Counties, REO properties are likely depressing the overall housing market and, given the relatively widespread accumulation of REOs in these counties, threatening the stability of a large share of the counties neighborhoods. In New York City, the policy implications are largely confined (for the time being), to concerns over the stability of the small number of neighborhoods where the citys REO stock is concentrated. Although the density of REO properties even in these neighborhoods is lower than in the hardest hit neighborhoods in the other two markets, New Yorks REO stock includes a comparatively high share of properties that have been stuck in REO for more than two years, which raises particular worries. The reduction in REO stocks in recent years that we observe provides some hope that the REO problem may be on pace to resolve itself through normal flows out of REO, even in Fulton and Miami-Dade Counties. Alternatively, it could be that NSP and other interventions are having a large impact on REO stocks. In either case, however, the slowing rate of REO outflow raises questions about the continued vulnerability of the Fulton and Miami-Dade County housing markets should a large share of current mortgage delinquencies result in REOs. If the outflow rate does not increase, REO stocks will again grow rapidly, further dragging out the effects of the foreclosure crisis on the housing market. This suggests that without a higher rate of REO disposition, the importance of foreclosure prevention for the housing market and many hard-hit neighborhoods of Fulton and Miami-Dade Counties has not appreciably lessened. Similarly, as small as the REO stock is in New York City now, it is possible, and perhaps even likely, that what has been an extremely slow trickle of new REO properties in recent months will accelerate as the backlog of properties in the foreclosure pipeline is resolved. So there too, foreclosure prevention and strategies to increase disposition rates (like NSP) may be more important in the near future than the size of the REO stock at first glance suggests. Without additional information about each property that enters REO, we assume that those that take the longest to sell impose, on average, the greatest externalities on neighboring properties, both because their conditions may have deteriorated more, and because of the length of time they have likely remained in that condition. Our findings show no clear trend in median REO duration in either sample area. However, the fact that HUD-owned properties take substantially longer to sell than REOs owned by the GSEs or private institutions suggests that these properties in particular may need to be watched more closely by local governments, or managed differently by HUD. Our findings highlight the significant impact that federal REO management can have on the Atlanta housing market more generally. About 40 percent of Fulton Countys large REO stock as of the end of 2011 was held by HUD or the GSEs, equal to more than 1,800 homes. In The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

Miami-Dade County about 1,500 REO properties were federally owned and another 800 were owned by local governments, so there too government REO management is of great importance. In New York City, however, the federal government controlled only about 250 REO properties as of the end of 2011, so aside from possible concerns about the extremely long duration of HUD REOs in the city, changes to the management of federal REO stocks are unlikely to affect the citys housing market very much. Our analysis of REO purchasers shows that investors play a major role in REO disposition in all three cities. The fact that small investors account for a vast majority of all investor purchases raises questions about capacity and suggests that the REO-to-rental plan that FHFA and HUD are currently unrolling may not be able to rely on an existing network of largescale property owners with expertise acquiring and managing small foreclosed properties. This could complicate efforts to launch any such project at a meaningful scale. More encouraging is that in all three of our sample cities only a small shareless than five percentof REO properties purchased in recent years were flipped within three months of purchase. Although policymakers should be wary about assuming this holds in very low cost markets like Cleveland, where such practices have been well documented, flipping may not warrant a specific policy response in higher cost markets like New York, or even in markets with better long term prospects, like Fulton and Miami-Dade Counties. Notably, the apparent decline in the share of sales out of REO that were to investors in Fulton County in recent years may suggest increased interest in these properties by owner-occupants. Finally, our evidence about the concentration of REO properties, particularly in neighborhoods with high minority shares, indicates the continued need for place-based policies, like NSP, that focus resources on neighborhoods most affected by REO properties and other possible sources of blight.

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

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The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.

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Treuhaft, Sarah, Kalima Rose, and Karen Black. 2010. When Investors Buy Up the Neighborhood: Preventing Investor Ownership from Causing Neighborhood Decline. PolicyLink. Accessed on April 23, 2012, at: http://www.policylink.org/atf/cf/percent7B97c6d565-bb43-406d-a6d5eca3bbf35af0percent7D/wheninvestorsbuyuptheneighborhood.pdf. U.S. Department of Housing and Urban Development, 2012 http://portal.hud.gov/hudportal/HUD?src=/program_offices/comm_planning/projectrebuild Whitaker, Stephan. 2011. Foreclosure-related Vacancy Rates. Economic Commentary. Federal Reserve Bank of Cleveland. Number 2011-12. Accessed on April 20, 2012 at: http://www.clevelandfed.org/research/commentary/2011/2011-12.pdf. Whitaker, Stephen and Thomas J. Fitzpatrick IV. 2011. The Impact of Vacant, Tax-Delinquent, and Foreclosed Property on Sales Prices of Neighboring Homes. Working Paper. Accessed on April 19, 2012, at: http://www.clevelandfed.org/research/workpaper/2011/wp1123r.pdf

The research and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of Pew, its management or its Board.