It comes as no surprise, but about 90% of foreclosed homes in the U.S. are kept off the market, simply to prop up the prices so the banks can fiddle the books and say those houses are worth more than they are.

This home is part of what’s known as the “shadow REO” inventory: repossessed homes across the country that banks or investors often purposely keep off the market. The practice isn’t a secret, and refraining from dumping a large inventory of foreclosures on the market helps to keep home prices from crashing.

But the extent to which lenders keep their stock of REOs — industry parlance for “real estate owned” properties — off the market may be much larger than most people think.

As many as 90 percent of REOs are withheld from sale, according to estimates recently provided to AOL Real Estate by two analytics firms. It’s a testament to lenders’ fears that flooding the market with foreclosed homes could wreak havoc on their balance sheets and present a danger to the housing market as a whole.

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Analytics firm CoreLogic provided an even lower estimate, suggesting that just 10% of all REOs in the country are listed by their owners, which include mortgage giants Fannie Mae and Freddie Mac as well as the Federal Housing Administration. As of April 2012, 390,000 repossessed homes sat in limbo, while about 39,000 were actually listed for sale, said Sam Khater, senior economist at CoreLogic.

Banks don’t want to have the losses on their books so its in their interest not to sell foreclosed homes.

But Realtors who want more bargain-priced homes to sell may not get their way anytime soon. Foreclosed properties are an extreme liability to lenders, holding the potential not just to dent their profits but to actually bankrupt them altogether.

That’s because when a lender carries an REO on its books, it is allowed to value the home at the price that the foreclosed-on borrower originally paid for it. Once the lender sells the home, it must book a loss: the difference between the original purchase price and the current value. And since home values have fallen by nearly a third since the housing bust, that translates into huge losses for the bank.

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Adding insult to injury, REOs typically sell at a 33% discount.

Fears of a Domino Effect

Releasing REOs onto the market also chips away at home prices in general, depressing the value of the homes of other customers — who could already be teetering on the brink of foreclosure — and the additional REOs that lenders hold on their books.

A deluge of sales would have a devastating affect on the economy.

In fact, if lenders turn their REO release valve to full blast, the deluge of foreclosures cascading onto the market could plunge the country into a recession, said Thomas Martin, president of consumer advocacy group Americas Watchdog.

“If they let the dam essentially break. It could be a catastrophic disaster for the U.S. economy,” he said, predicting that some major banks would fail and home prices would nosedive by 20 percent.

Source: http://www.thestreet.com/story/11616596/3/shadow-reo-as-many-as-90-of-foreclosed-properties-held-off-the-market.html

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