Banks chip away at REO inventory

The inventory of foreclosures held by private banks dropped for the fourth straight quarter to $50.4 billion worth of properties at Sept. 30, according to the Federal Deposit Insurance Corp. The REO level at the end of the third quarter is down 1.5% from $51.3 billion the previous quarter and 5% lower than $53.1 billion in a year earlier. The amount of loans between 30-days and 90-days delinquent declined for the sixth straight quarter to $100.2 billion in the third quarter. The total is down less than 1% from the previous period but down more than 30% from the first quarter of 2010. The peak for early delinquencies occurred in fourth quarter of 2008 with nearly $160 billion such loans held by FDIC-backed banks. Loans more than 90-days delinquent increased in the third quarter by less than one percentage point to $121.4 billion. The steady decline measured in other distressed buckets has not been seen on these more troubled loans. The peak occurred in the first quarter of last year at more than $143 billion of loans more than 90-days delinquent. The uptick in the third quarter reflects similar analysis of mortgage servicer activities. According to the Mortgage Bankers Association, roughly 1.08% of outstanding mortgages were in foreclosure during the third quarter, an increase from 0.96% in the previous quarter. But the delinquency rate dropped to 7.99% in the third quarter from 8.45% the prior three months. Taken together, much work remains to clear the shadow inventory of privately held REO and troubled loans, according to the FDIC data. The banks held more than $272 billion loans either already through the foreclosure process, on the verge of entering it or have fallen delinquent. The bank balance sheets are improving as they work through the backlog. Earnings at the FDIC-backed banks increased 48% from last year, signaling hope to some that restricted lending practices may begin to thaw. “Banks are aggressively seeking out borrowers with a strong capacity to repay loans” said James Chessen, chief economist for the American Bankers Association. “Slow economic growth and high levels of uncertainty are still restraining lending, but that tide is beginning to turn.” Write to Jon Prior. Follow him on Twitter @JonAPrior.