Over the past month, foreclosure-to-REO (F2R) transition rates rose significantly across sectors and vintages and in the negative amortization and Alt-B space, Barclays Capital analysts said. This is the second month it increased.

According to Barclays' figures, the higher F2R and lower liquidation rates resulted in a 4.6% month-over-month spike in REO inventory to 646,000, the largest rise since July 2008, and a clear reversal of the 16-month trend of declining REO stock.

REO stock has been tightly controlled through modification programs and foreclosure moratoria. These have kept the level of distressed sales low and, overall, home prices have not fallen by as much. In some cases, they the prices even recovered.

However, the increase in F2R rates means that servicers have finally started to push the loans unsuitable for modification or foreclosure alternatives into REO.

“The sharp build-up in nonperforming loans would need to be taken through the REO route at some point,” Barclays analysts said. “With HAMP having been around for some time, most of the loans that have failed to qualify or perform should start hitting REO.”

Consistent with the increase in REO stock and distressed share, recent home price data from Radar Logic, LoanPerformance, and Federal Housing Finance Agency indicate that NSA home prices fell about 1-2% in December, and LoanPerformance is showing another 1.9% decline in January.

Analysts said they anticipate the headline January reading to fall 0.9% m/m to 144.6, with additional weakness lagging into February.

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