REO Liquidations Continue to Top Short Sales for Higher Share of UPB Recovery

REO liquidations have amassed a higher share of gross unpaid balance (UPB) recovery than short sales since the fourth quarter of 2012, reversing a crisis-years trend, according to Black Knight Financial Services' December 2014 Mortgage Monitor released Monday.

As of the end of October 2014, REO sales prices accounted for 71 percent of the corresponding loans' defaulted UPBs, compared to 65 percent for short sales prices, largely due to home price appreciation, according to Black Knight. Third-party sales at foreclosure auctions beat out both REO and short sales, as they have historically, with an average gross sales price of 116 percent of UPB, according to Trey Barnes, Black Knight SVP of Loan Data Products.

"Black Knight's Resolution Module combines the industry’s largest loan-level and property records databases to identify millions of involuntary liquidations, allowing our clients to accurately benchmark, calculate and model future losses on underperforming mortgages," Barnes said. "The most recent data shows that since Q4 2012, lenders have been recovering greater gross percentages of UPB through REO liquidations than through short sales; reversing a trend that held true throughout the housing market’s crisis years. Of course, REO sales have additional timelines and associated costs that impact total losses and are not accounted for in this analysis."

When separated by investor groups, Black Knight also found in its December Mortgage Monitor that REO sales prices on GSE loans had the highest percentage of corresponding loans' outstanding UPB. Private loans sold at approximately 70 percent of UPB, while Federal Housing Administration/Veterans' Administration loans averaged about 65 percent of UPB.

"REO sales on GSE loans gross a significantly higher percentage of UPB than do FHA and private/portfolio loans," Barnes said. "GSE loans are currently averaging 75 percent gross UPB recovery through REO, whereas FHA loans see just 65 percent. Portfolio and private loans land in the middle, with gross recovery of 70 percent of UPB."

The REO timelines for completing liquidation of GSE loans were shorter than for FHA or private/portfolio loans, taking about 11.5 months on average as of the end of October, according to Black Knight. Private/portfolio loans took an average of about 12.2 months to complete, while the average time to complete liquidation on FHA/VA loans averaged 14.6 months.

"Given the additional carrying costs lenders face while holding REO properties, the longer timelines associated with FHA and private/portfolio loans can add up," Barnes said.

Also in the report, Black Knight found that out of the approximately 675,000 loans that rolled from current to 30 days past due in November, more than half (53 percent) returned to current status in December. Only 13 percent rolled into 60 day delinquency. About 32 percent of the loans remained 30 days past due, while 1 percent of them were paid in full.

As reported in Black Knight's First Look at Mortgage Data for December two weeks ago, the delinquency rate (number of loans 30 days or more overdue but not in foreclosure) dropped down to 5.64 percent, a decline of 7.21 month-over-month and 12.72 percent year-over-year. The number of delinquent residential properties nationwide as of the end of December was approximately 2.87 million, according to Black Knight.

The monthly pre-payment rate, also known as the SMM (single month mortality) rate – usually a good indicator of refinance activity – jumped by 25 percent up to 1.15 percent in December, according to Black Knight. It was the largest monthly increase for the SMM rate since February 2009.