Foreclosure Discount: Definition and Dynamic Patterns

Real Estate Economics, Forthcoming

Posted: 8 Jun 2014 Last revised: 10 Jun 2014

See all articles by Hanqing Zhou

Hanqing Zhou

Federal Home Loan Mortgage Corporation (FHLMC)

Yuan Yuan

Federal Home Loan Mortgage Corporation (FHLMC)

Christopher Lako

University of California, Berkeley - Haas School of Business

Michael Sklarz

Collateral Analytics

Charles McKinney

Federal Home Loan Mortgage Corporation (FHLMC)

Multiple version iconThere are 2 versions of this paper

Date Written: May 30, 2014

Abstract

The lack of a consistent definition of foreclosure discount and variety of methods to quantify the phenomenon gives rise to discount rates that vary from nonexistent to sizeable across different locations and time periods. We define the foreclosure discount as the discount of the realized real-estate-owned (REO) sale price relative to a normal-sale estimated market value. Our study spans 16 CBSAs for the January 2000 to December 2012 period, covering 1.34 million REO sale transactions. We report three noteworthy empirical findings. First, a high REO sale concentration in a market increases the foreclosure discount. Second, the foreclosure discount rate is negatively related to recent house-price appreciation. Third, after controlling for property condition we find that lower value properties exhibit a lower foreclosure discount than higher-value properties.

Keywords: Foreclosures, REO Discounts, REO Sales

Suggested Citation

Zhou, Hanqing and Yuan, Yuan and Lako, Christopher and Sklarz, Michael and McKinney, Charles, Foreclosure Discount: Definition and Dynamic Patterns (May 30, 2014). Real Estate Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2447020

Hanqing Zhou

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
McLean, VA 22101
United States

Yuan Yuan

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
McLean, VA 22101
United States

Christopher Lako

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Michael Sklarz

Collateral Analytics ( email )

United States

Charles McKinney (Contact Author)

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
McLean, VA 22101
United States

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