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» VISIT US ONLINE @ DSNEWS.COM COVER STORY POINT-COUNTERPOINT According to Dave Larsen Continued interference from the federal government gives me little reason to believe there will be any significant increase of REO assignments coming on the market. I don't believe that even the looming numbers of defaulting homeowners across the country— coupled with the government's actions—will generate more REOs on the market. Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties. We did see an increase in short sale listings in Q4 2012 because of the scheduled expiration of the Debt Forgiveness Act (DFA). Defaulting homeowners who were trying to stay in their homes as long as possible before being foreclosed on feared that once the DFA POINT— COUNTERPOINT mistakes the financial institutions previously made and offer and promote more housing options such as cooperative short sales, deedsin-lieu, REO-to-rental, and other initiatives that have yet to be revealed. These programs are promoting systemic health within the housing market. Recently, well-respected media reported an increase in values and sales in the traditional marketplace. Does this suggest REO is dead? Absolutely not. What it does is create a sense of security that is long overdue to the general public, letting them know it's safe to enter the water again—that the "big shark" is gone. Well, just like with the movie Jaws, there was a sequel, and true to that, REO is by no means coming to an end. We are just creatively renaming and restructuring the norm as we know it. LEGISLATIVE REVIEW Where are we now in terms of REO? It's amazing that as a country, we have lived through and survived the tsunami that was the financial crisis and are now seeing a decline in shadow inventory and the supposed demise of REO. This news is positive for many reasons, one being that the American psyche needed to hear a positive message to stimulate the economy. I'm convinced that some of the economists have a large magic 8-ball and shake it up to shake us up. In the past five years, we have encountered a tidal wave and a drought, according to economic indicators. So it does not surprise me that the recent spate of analysis indicates that REO is over, when in reality REO still has a place in the housing market. In the past, we have experienced REO in epic proportions, which was unhealthy for our housing market. We created fear and confidence—fear for buyers interested in purchasing a home and confidence for a homeowner looking to walk away without cause or consequence. This phenomenon is playing out in the environment we are experiencing now, which—out of fear—we are calling REO's demise. Eventually, we will see a death of REO as we currently know it. It will go away when unemployment rates reach all-time lows—in effect, when they sit below 3 percent for a sustainable amount of time. And when Americans are finding employment and staying employed, we then can say that REO is dying. Until then, we will see REO rebirthed and creatively repositioned. Hedge funds seem to be the golden egg today. They have the power and the money minus the red tape of financial institutions. They have figured out how to cash in on the expired, there would be nothing to hold their lenders from moving forward with foreclosure. However, in January 2013, the government extended the expiration date by one year, allowing many defaulting homeowners to postpone their short sales another year—and forcing mortgage companies to wait for the borrower to work out a loan modification or request a short sale. I expect an increase in short sale listings again by the end of Q3 2013 that will extend through the end of the year. If the defaulting homeowners do nothing, then the banks will be forced to pursue the only remaining avenue to satisfy the defaulting assets: a trustee sale or an auction. Only after final foreclosure cases are completed, eviction or cash-for-keys agreements finalized, and evaluation and possible rehab work done to bring homes to market condition will we see an increase in REO listings. With that said, I don't think we will see any significant rise until mid-2014 and continuing until the end of 2016. The untold story in this whole national crisis is that President Clinton put on steroids the Community Redevelopment Act, a wellintended Carter-era law designed to encourage minority homeownership. And in so doing, Clinton helped create the market for risky subprime loans. President Clinton's administration went to ridiculous lengths to increase the national homeownership rate. It promoted paper-thin down payments and pushed for ways to get lenders to give mortgage loans to first-time buyers with shaky financing and incomes. It's clear now that the erosion of lending standards pushed prices up by increasing demand and later led to waves of defaults by people who never should have bought a home in the first place. REO inventory across the country will continue to decline with only a trickle of properties actually coming on the market. The majority will involve defaulted homeowners who have vacated their properties, thus putting the empty residences at risk of vandalism or of squatters moving into them and requiring the banks to complete a costly eviction to get them out. TECH FOCUS According to Rochelle Jones MARKET PULSE A lthough recent market data shows that REO inventories are falling drastically, the demand for distressed assets is increasing daily from both traditional and institutional buyers. REO sales have dropped by more than 50 percent since the peak, spiking prices and putting sellers in a prime position to turn a profit or, at the very least, break even on their investment. The abrupt disappearance of REOs has some wondering if their heyday is gone for good. To answer this question, Rochelle Jones and Dave Larsen—two agents in the field—opine on the state of REO. 67

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