uploads///foreclosure heat map

Why state foreclosure laws matter for REITs like CYS Investments

By

Nov. 20 2020, Updated 12:12 p.m. ET

State foreclosure affects foreclosure inventory

There are basically two different types of state foreclosure laws—judicial and non-judicial. In non-judicial states, foreclosures are handled through a streamlined process and generally take a few months. In judicial states, foreclosures can take years, as judges are often reluctant to push a delinquent borrower out of their home.

As you can see from the map above, the states with the biggest foreclosure inventory are the states with judicial foreclosure processes—New York, New Jersey, and Florida.

Foreclosure inventory affects home price appreciation

Article continues below advertisement

We’ve seen that home price appreciation varies widely by location. In California, the foreclosure pipeline has been worked through and we’re seeing price appreciation and bidding wars reminiscent of the peak of the bubble years. In the judicial states—particularly New York, New Jersey, and Connecticut—we’re seeing much lower home price appreciation. In fact, there’s very little residential construction at all—at least compared to some of the other states.

New York State has started to examine the issue of “zombie homes”—where the home is no longer occupied by the borrower but responsibility hasn’t transferred to the bank. These homes become decrepit and can affect the value of real estate in the neighborhood. Streamlining the foreclosure process for non–owner-occupied homes in New York would go a long way towards fixing this issue.

Implications for mortgage REITs

Article continues below advertisement

Real estate prices are a bigger driver of non-agency real estate investment trusts (or REITs) such as CYS Investments (CYS), Newcastle (NCT), and Redwood Trust (RWT) than they are of agency REITs such as Annaly (NLY) and American Capital (AGNC). When prices rise, delinquencies drop. This is important because non-agency REITs face credit risk. Even for agency REITs, which invest in government mortgages, rising real estate prices can drive prepayments, which negatively affects their returns.

Rising real estate prices also help reduce stress on the financial system. This makes securitization easier and lowers the cost of borrowing. Finally, those REITs with large legacy portfolios of securities from the bubble years are able to stop taking mark-to-market write-downs and may revalue their securities upwards.

Since REITs must pay out most of their earnings as dividends, higher earnings mean higher cash flows to the investor.

Advertisement

More From Market Realist

  • Upstart logo
    Financials
    Upstart Stock Jumps on Strong Earnings, Buy at a Discount
  • Woman using a smartphone and laptop
    Financials
    Investing in TQQQ Versus QQQ ETF: Which Is Right for You?
  • PancakeSwap logo
    Financials
    PancakeSwap (CAKE) Price Prediction: $100 Milestone Is in Sight
  • Cartesi logo
    Financials
    Cartesi's Price Is Rising, Looks Like a Good Crypto Investment
  • CONNECT with Market Realist
  • Link to Facebook
  • Link to Twitter
  • Link to Instagram
  • Link to Email Subscribe
Market Realist Logo
Do Not Sell My Personal Information

© Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.