2009 brought on one of the largest peaks of foreclosure activity in the United States along with some of the largest losses for lenders and borrowers. If you ask five different REO experts where they think the market is headed in 2010 you are bound to get five different answers. While some predict a bull market and others predict a second doomsday collapse, one thing is clear about the overall projection for the REO market in 2010, uncertainty.

Foreclosures reached an all time high in July and August of 2009, while REO sales dropped well below the 2008 levels. Logically, this should spell for greater REO inventory in 2010 and in vast quantities. However, dissenting opinions believe REOs will emerge in the market in a more controlled flow throughout the upcoming year as banks seek to mitigate their losses.

Some argue banks have no incentive to sell their non-performing assets at the current reduced price levels. Lenders find themselves in a predicament as they are required to comply with new foreclosure laws giving delinquent lenders extended protection, while simultaneously trying to prevent further losses. The decline in urgency can be credited to the government bailout programs, which have capitalized lenders and improved their overall financial wellbeing. One may translate this into prices increasing along with buyer demand as the national housing supply steadily declines. CEO of New York Real Estate Analytics Firm, Radar Logic, Michael Feder believes, “If efforts to ease foreclosures can and do succeed, there could be significant recovery in housing values in 2010”, signaling housing values may indeed increase.

However, dissenting opinions believe the “normal” real estate market as we know it will not recoil in 2010. Chief Economist of the Mortgage Brokers Association (MBA), Jay Brinkmann, believes as unemployment continues to peak in the first quarter of 2010, mortgage delinquencies will peak yet again soon after. Brinkmann believes this leaves the United States 2-3 years away from the closing stages in the foreclosure crisis and 7-10 years for properties to recover their value during the housing bubble.

While experts may be uncertain on the markets resiliency, one thing is for certain, 2010 may be the year of the short sale.  Many lenders and delinquent borrowers in default are turning to short-sales as opposed to foreclosure because it is better for the delinquent borrower and their respective communities. A short sale takes place when a new buyer negotiates with lenders to acquire a property for less than what the delinquent borrower owes on the mortgage. For example, in a case where a property’s equity has drastically declined, the second lien holder receives a small percentage on their notice, while the first lien holder receives a reduced amount of the initial mortgage amount. 

Short sales seem to be a win-win situation for borrowers who are delinquent but have yet to be served foreclosure notices. A foreclosure usually lowers a borrower’s credit score between 250-300 points and lasts for up to three years. Short sales have a drastically lesser affect, lowering a seller’s credit score by 50 points. In the past, short sales conventionally are much more difficult to process than REO properties. However, the drastic increase in volume of delinquent properties has bottlenecked the REO process, making short sales a more viable option that lenders, delinquent borrowers and buyers are contented to pursue. Also, because the buyer is usually not competing against other offers during a short sale situation, not only does this help them obtain the property for less, it also helps the closing process advance quicker than the current REO procedure. In some cases where a short sale evaluation period appears it may consume more time than expected or when a new buyer’s financer withdraws, some banks have been motivated to modify the existing loan if the delinquent borrower desires to remain in their home, thus completely removing the property from the market.

Another projection, which is already a noticeable trend in some regions, is bulk REO sales. Many lenders are now selling their REO properties to hedge funds, auction houses and other investors. This option is more viable for lenders because they can offload numerous depressed price level properties at one time, in bulk, thus making more sales in a shorter period of time. Bulk REO opportunities are proving to be a creative solution for a troubling situation and a lucrative one at that. In some cases buyers are purchasing bulk and auctioned properties at half the value they were sold for only one year ago. Additionally, some lenders are making joint efforts with auction houses to offload these properties from their balance sheets by providing financing for many of the new buyers.

The extension of the homebuyer’s tax credit to April 2010 is also projected to bring in more buyers as additional REO inventory is released. Critics of the extension site it will only hasten purchases that would have taken place in any case, thus creating an artificial bubble in the market. However, the majority feels the extension will allow more eager buyers to purchase homes and help stop the downward spiral in housing values and foreclosure activity. While the Home Buyer’s Tax Credit may not provide the momentum for the industry to completely recover, it certainly is an overall benefit for lenders.

While the resiliency of the market may be in doubt, 2010 will be sure to bring more foreclosures as well as more creative foreclosure preventative methods. Banks would be wise to utilize foreclosure preventative methods in order to avert increasing their already ballooning foreclosed inventory. It could only be expected that banks release inventory in 2010 in a controlled trickle down manner, as an infux of REOs on the market may cause even higher realized losses due to descending price pressure for housing. Overall, industry expectations for 2010 are bullish, but as unemployment continues to rise and more foreclosures are not too far behind, there still is tremendous potential for double decline in home prices and delinquent borrowers underwater now may only sink deeper despite efforts to ease foreclosures.