OCC Reports Foreshadow Improved Supply Conditions

According to a report from the Office of the Comptroller of the Currency (OCC) on Wednesday, March 28^th, short sales rose by more than 10% from the 3^rd quarter of 2011 to the 4^th quarter reaching a record of 63,257.  The potential for more distressed properties, longer time in the costly foreclosure process, and heightened oversight has resulted in more interest on the part of banks, investors, and the GSEs in this alternative to foreclosure.  The trend toward short sales is important as academic research suggests that a short sale has no impact on the sale prices of non-distressed homes in the same neighborhood, while REO sales can have a significant negative impact.  The OCC’s figures only measure 1^st lien loans though, so they may understate the true number of short sales by not incorporating sales where the selling price did not cover the 2^nd lien or piggy-back loan.

Also in Wednesday’s report were updated figures on the volume of loan modifications, both HAMP and non-HAMP, which fell between the 3^rd and 4^th quarters of 2011, a pattern that has been unbroken since the 2^nd quarter of 2010.  However part of this decline has been due to a dwindling number of homeowners eligible for a modifications.  As prices slid between 2006 and 2011 pushing borrowers into or further underwater, many borrower lost eligibility for HAMP or other modification programs.  The new HAMP rules widen the requirements and are likely to spur an increase in trial modifications and eventually modifications later this year.  Trial modifications jumped 34.0% between the 3^rd and 4^th quarters.  The OCC sited the banks’ familiarity with the robo-signing settlement as incentive to increased trial modifications.  The OCC’s report is culled from the data of the largest 9 banks including Wells Fargo, HSBC, Bank of America, JPMorgan Chase, MetLife, Citibank, PNC, U.S. Bank, and OneWest Bank, five of whom were directly involved in the settlement and the others were likely familiar with it.

If sustained, these two trends combined with increased demand this spring suggest that inventories are likely to shrink steadily this year.  In fact, the seasonally adjusted months supply of housing hit 6.4 in February, its lowest level since May of 2006.  With inventories falling steadily, sellers and builders will be drawn back to the market, an important trend to avoid potential supply shortages and price spikes in some local markets, but one that will create headwinds to further declines in the months supply.  In the meantime, the improved trend in short sales and modifications bodes well for a sustained recovery raises questions of whether new programs might over correct.