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Foreclosure Update: the Good and the Bad

posted by Adam Levitin

Here's the good news: foreclosure starts in Q1 2010 fell a bit, to 691,017, their lowest number since 2008, according to HOPE Now. It's encouraging to see the numbers fall, rather than rise, but they are still at extremely high levels.  

Here's the bad news: completed foreclosure sales in Q1 2010 rose significantly to 291,381, their highest number in US history. Some of this might be a matter of reporting over quarters--the Q4 2009 numbers were down, perhaps because of Yuletide forbearance. But the clear message from these numbers is that we are nowhere close to being out of the woods on foreclosures.

It's hard to tell what impact HAMP has had from these numbers. But for HAMP, things might be a good deal worse, but HAMP has certainly not rolled back the tide on foreclosures.  

Foreclosure Starts and Sales,jpeg  

Comments

Good news! But I have a question: is an increase in completed foreclosure sales really bad news? With respect to consumer-debtors, it doesn't seem to be bad news... In a recourse obligation, wouldn't a debtor *prefer* a sale at the highest price possible? It seems otherwise, a debtor wouldn't particularly care--they've lost the property either way! Ultimately, it seems more completed sales could signal an improving RE market, better balance sheets for creditors, etc. Barring all this, wouldn't we expect foreclosure sales to simply lag starts?


Completed foreclosure sales mean that a family lost their home.

If the market is bottoming out, we'd expect foreclosure starts to fall before completed sales. So this data is consistent with the RE market hitting bottom. I'm not convinced that is what is going on, however. We've had a "pig in a python" amassing for a while, as lots of borrowers are in foreclosure--that is a foreclosure has been started--but the sales haven't been completed because other loss mitigation actions have been taken. A lot of homeowners go through multiple loss mitigation actions, but it seems that in there will be many who can't hang on to their home. The jump in completed foreclosure sales could be the pig started to come out (of the back end) of the python.

In the end, I don't think we can put great stock in the movement quarter to quarter. Rather, the real story is in the absolute levels, which remain very high for foreclosure starts and completions.

We've had a bit of a "pig in a python" going on with lots of defaults, but not nearly as many foreclosures--a lot of borrowers are somewhere in the loss mitigation system, but it's not clear

Probably the two best characterized sources of data on home forfeitures (mostly foreclosure sales, but also shorts sales and deeds in lieu) are the Mortgage Metrics report and the FHFA reports to Congress regarding the GSEs. These both show forfeitures rising steadily for 2009 Q1 to 2010 Q1. So I don't think the Hope Now rise in Q1 was just quarterly noise.

With several million mortgages either seriously delinquent or in the foreclosure process, it is certainly true that "we are nowhere close to being out of the woods on foreclosures"!

The long-term effect of HAMP is very small -- it will probably end up really saving on the order of 3% of seriously delinquent mortgages. The big effect of HAMP has been a temporary delay of foreclosure. However now that new trial modifications, which delay foreclosure actions, are falling off steeply, while cancellation of modifications, which once again put the mortgage into candidacy for foreclosure, are rising steeply, HAMP is probably actually raising the foreclosure rate.

For graphs and details see

http://www.clearonmoney.com/dw/doku.php?id=public:us_home_forfeitures

http://www.clearonmoney.com/dw/doku.php?id=public:large_scale_mortgage_modification

The sad fact is, there is solid reason to believe that home evictions are likely to actually increase in the coming months. How can that be, if the foreclosure rate in January went down?

HAMP modifications are definitely causing the "pig" to grow. Even where judicial foreclosure sales have been noticed through publication we are postponing sales based on the bank's need to review the application. In our small market I don't see how HAMP is raising the foreclosure rate either in starts or in completed sales.

Once Judicial foreclosure has begun the only real way out of foreclosure is bankruptcy.

Again, and I believe another user had a similar although different more current statistics, I don't agree that foreclosures are necessarily "bad news", while nobody likes to see people lose their home, is this not a normal function, how many people overpaid for their home and are either strategic defaulting or lose their job and are moving to another state or are selling there home so newcomers can move in.

The HAMP is not designed to prevent these foreclosures and it was not intended to, it was designed in cases of hardship where the home was still worth 10% or so of what was paid for the home (assuming recent purchase and mortgage).

There are delays although one needs to point out it can vary by judicial process and not necessarily judicial v. non judicial but rather state laws and protection and court load.

In addition there have been a few cases where a bank decides last minute not to foreclose on properties such as in the Midwestern states where a home has already been cleared up and has little or no value anymore.

Are these also home equity loans also, I would like to see the statistics on new home equity loans too particular in areas not hit with the foreclosure crises in which the mortgage was paid off a long time ago.

Sometimes families lose their home and downsize or go back to renting, common knowledge as described often, but there seems to be a new wave of foreclosure hotspots in places such as Idaho and Utah , a "second" wave. Any comments?

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