As the foreclosure crisis continues, many communities are faced with a glut of properties that have completed the foreclosure process and are now owned by banks or other mortgage lenders.  These properties, referred to as “real estate owned (REO),” often sit vacant for extended periods and, recent studies suggest, depress neighboring property values.  They also impose significant costs on local governments, which must try to address the risk of crime, fire, and blight that vacant buildings pose. In addition, many worry that REO properties sold to unscrupulous short term investors hasten neighborhood decline.

Policy makers at all levels of government have adopted a variety of strategies to deal with REO properties.  These strategies include demolition, vacant property registries, incentives for bulk sales by financial institutions to non-profits or governments, subsidies for acquisition and renovation of vacant homes by non-profits, and subsidies for new owner-occupants to buy REO properties.  However, policymakers must often craft policies with little understanding about the nature of the market for REO properties, and how it varies across different housing markets.  As a result, there is little agreement on such basic questions as how policymakers should promote investment in the REO stock by responsible for-profit investors, whether bulk sales should be encouraged, whether financing restrictions on the buyers of multiple properties should be lifted, and whether “rehab to rent” or “rent to own” models for REO properties should be encouraged. 

Our paper aims to shine some empirical light on the REO problem – by studying the volume and characteristics of properties entering bank ownership, the length of time they stay in bank ownership, and what happens to those properties after they are sold to private owners.  Earlier studies have focused on individual cities, typically those with severely distressed housing markets or submarkets (e.g., Cleveland, Atlanta, Chicago), and analyze data only through 2008 or 2009.  Our paper adds to the existing literature by analyzing patterns in three cities with very different market conditions: Atlanta, Miami and New York City.  We use consistent metrics to allow for direct comparisons.  We also address a broader set of questions than earlier studies – most notably, we track longer term outcomes of properties that sell out of REO to see how quickly they resell again, and whether they re-enter foreclosure.  Finally, we analyze data through 2011 to better gauge current conditions. 

We undertake our analysis using a combination of longitudinal administrative data sets on foreclosure filings, auction sales, and property transactions.   We are able to calculate for each city REO inflow, outflow and inventory size. We can also determine who owns the REO properties (FHA, GSEs, private lenders) and examine how concentrated they are in particular neighborhoods.  We can track which properties are selling out of REO and at what rate and estimate who is buying them (owner-occupiers, small investors, large investors).  Finally we can examine how quickly investors are reselling the properties they purchase, track subsequent transactions, and explore implications for neighborhoods.