Foreclosure rate improves in May, banks recognizing profitability of short sales

Although a number of industry experts anticipated more foreclosures during the course of 2012, a recent report shows the rate declined on an annual basis for the 20th consecutive month in May.

Although a number of industry experts anticipated more foreclosures during the course of 2012, a recent report shows the rate declined on an annual basis for the 20th consecutive month in May.

The foreclosure rate dropped 4 percent during the month, according to a report from RealtyTrac. In the wake of the recent multibillion-dollar settlement reached between the nation's largest mortgage lenders and state attorneys general, many experts thought this would give the green light for more home repossessions in 2012. So far, this forecast is inaccurate.

"U.S. foreclosure activity has now decreased on a year-over-basis for 20 straight months including May, but the jump in May foreclosure starts shows that it's going to be a bumpy ride down to the bottom of this foreclosure cycle," said RealtyTrac chief executive officer Brandon Moore.

Although the rate fell on an annual basis, there were still an estimated 205,000 foreclosure starts in May. This is the first time this mark has been above 200,000 since February. However, as distressed borrowers continue to utilize government initiatives to avoid foreclosure, it's believed that many of these filings will end in short sales.

This option can be a much more profitable for a financial institution than foreclosed houses. Banks that repossess homes often have to pay for the upkeep and maintenance of the property as it sits vacant. This often resulting in a loss on their investment. In contrast, the average short sale sold during the first quarter netted banks $27,000 per transaction, the report said.

"More banks are now recognizing that treating the problem of delinquent mortgages with short sales rather than bank repossessions can help them minimize their losses and also avoid taking on more REOs, which they then have to manage, maintain and market for sale," Moore added. 

Although nationwide foreclosure activity improved in May on an annual basis, there were still some areas that continued to struggle. In fact, the foreclosure rate increased in 33 out of the 50 states from the previous month.

Specifically, Arizona, California, Georgia and Nevada had the most home repossessions. These states have consistently had the highest foreclosure rates since the housing market collapse, but new initiatives to sell of REO homes in bulk to investors are expected to help curb activity in the coming months.



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