What's Really Behind The Spike In Bank Repossessions

Realty Trac
Realty Trac

Sometimes when you look inside the numbers, you find something interesting.

In a recent report on foreclosure filings from RealtyTrac.com, I noticed the number of bank repossessions was rising faster than overall foreclosure filings. Then, during an interview with the company's Rick Sharga, he said, "One of the reasons we've seen such a spike in bank repossessions is because of the huge increases in deeds in lieu of foreclosure, as homeowners are just mailing the keys back to the bank."

I've heard of deeds in lieu, but never really paid much attention to them, as I thought they were a very small subset of bank repo's.

A deed in lieu is essentially when the bank and the borrower agree that the bank will take title to the house as full compensation for the amount still owed on the mortgage. This is a negotiated settlement, and the bank has no recourse to go after the borrower. The borrower will take a credit hit, but not as bad as a foreclosure.

Why would a bank do it?

Well they didn't do it during the housing boom, because back then, with ever-rising prices, they could actually make money reselling a foreclosed property. Not so much anymore. Now they're taking a loss, not to mention the lengthy and expensive process of foreclosure. The bank has to go through all kinds of legal hoops in the foreclosure process, evict the tenant, and then run the risk that the tenant trashes the house. The deed in lieu is a tad more civil. More and more borrowers are doing it.

Why doesn't everyone do it?

Well, some borrowers think they can fight foreclosure, and with more and modification programs from banks, perhaps they can. Also, borrowers who can't get new or modified loans may choose the foreclosure route simply because it takes so much longer, so they can live rent-free longer. I'm hearing that a lot of banks that are offering borrowers the deed in lieu can't get the borrowers to call back.

It's kind of a sad commentary on the whole crisis, but perhaps, for some, it's a better option than fighting a fight that you can't win.

Questions? Comments? RealtyCheck@cnbc.com