Investors who have been snapping up foreclosed homes are backing off in the wake of the U.S. foreclosure fiasco, driven off by sagging inventory and fears over legal title. Some economists say the trend could hurt the overall housing market.
With foreclosed properties accounting for a large portion of housing sales, and investors accounting for a large portion of buyers — particularly in some key markets with very high foreclosure rates — the implications for the broader economy could be serious.
Investors who would buy, rehabilitate and then sell or rent foreclosures were playing a "huge role," in helping to clear the market, said housing economist Tom Lawler.
But many of those investors are now staying on the sidelines.
"We're like a plane flying around in a holding pattern, waiting to land," said Tony Alvarez, an investor in southern California who is currently renting out 40 former foreclosed homes. "Nothing is going on, and why? Fear has taken hold in the marketplace."
Allegations that banks failed to review foreclosure documents properly or submitted false statements when they foreclosed on properties spurred a joint investigation by the attorneys general of all 50 states and triggered foreclosure moratoriums by some of the biggest U.S. lenders.
Bank of America and GMAC Mortgage have retreated from their foreclosure suspensions.
The investors are so essential to the housing recovery, Amherst Securities managing director Laurie Goodman wrote in a paper in Financial Analysts Journal, that an extension of federal loans for them is "the single most important demand-side action that could be taken."
The pall cast over foreclosure sales by the growing questions over the use of shoddy documents in processing foreclosures has adverse implications for the housing market and the broader economy, said IHS Global Insights economist Patrick Newport.
Fewer sales to investors mean fewer sales altogether, which will further elevate supply. That, in turn, will keep a lid on home prices, making consumers feel poorer.
"Falling home prices make consumers less likely to spend," Newport said. "In general, uncertainty is not a good thing for the economy."
Consumer spending accounts for two-thirds of the U.S. economy.
The role of investors in helping to clear the huge supply of inventory has been substantial. In August, investors generated 21 percent of existing home sales, according to the National Association of Realtors.
In markets like Orlando, Florida, and Phoenix, where rampant risky lending and speculation during the housing boom left the most foreclosures behind, those numbers can hit 40 percent and higher, Lawler said.
Nearly one-third of all homes sold in September were in the foreclosure process, according to real estate data company RealtyTrac.
The number of homes taken over by banks topped 100,000 in a month for the first time in September, though foreclosures are likely to slow as lenders review their paperwork, RealtyTrac said.
Distressed real estate investor Bruce Norris said the volume of his business in southern California has dropped 75 percent in the past two weeks as the sudden decline in inventory has led to a spike in prices.
"We're being much more cautious," Norris said. "Everything is getting bid up to a ridiculous number. There isn't any profit."
Current higher prices are not the only disincentive. Investors see lenders cutting foreclosure prices sharply at some point next year when they try to reduce the logjam that is now building up by pushing more inventory out onto the market.
"Investors are pulling back," said John Burns, whose national real estate consulting firm is based in Irvine, California. "They think it'll be cheaper next year."
Alvarez also said the uncertainties hanging over the industry will keep smaller foreclosure investors like him on the sidelines at least through the end of the year.
"We're still going through the motions of doing our typical business," he said. "But it's like a doctor; you want to monitor a patient's stats. Well, try operating without any of that information, you'd be losing patients left and right."
Timing is the investor's most pressing concern, said John Anderson, a real estate agent who specializes in foreclosures in the Minneapolis and St. Paul, Minnesota, area.
"They want to buy these properties and have them back on the market in a short time," Anderson said. "If there are major delays, they could be stuck."
The picture is not as bleak for larger players, said Jamie Rand, whose Prime Asset Fund LLC, based in the suburbs of Tampa, Florida, bought and sold over a thousand foreclosures in the past year.
When the uproar subsides, lenders and government investigators will find only a very small percentage of truly wrongful foreclosures, Rand said.
And should one of those crop up in his business, he can absorb the cost, he said.
"For me, it's an opportunity," he said. "Because of the limited amount of inventory, it'll help me as I take my assets on the market."
Still, smaller investors say they have more reasons to sit back than to act.
They worry that their title insurance will not cover them if past owners sue to reclaim their property, said Anderson, the Minneapolis-area real estate agent.
In southern California, Norris said he sees the foreclosure mess gaining momentum.
"The cat's out of the bag," he said. "And the lawyers are going to have a new cottage industry stopping foreclosures and going after people who have already purchased them."
Norris has received calls from foreclosure buyers who had upgraded the homes and were ready to sell them when a former owner sued for their return.
"There still might be concern about past foreclosures," Lawler, the economist, said. "We don't know if refiled papers will be accepted or approved by the courts. And it could be different depending on the state."
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