Where Are the Foreclosures?

Bloomberg has a story Foreclosure Wave Averted as Doomsayers Defied. I think it's a great example of defining deviancy downward. There's no question that we haven't seen a foreclosure tsunami in the wake of the federal-state servicing fraud settlement. But there was little reason to expect one and let's not lose sight of the big picture--foreclosure levels are still incredibly high. 

Here's why it didn't make a lot of sense to expect a huge pick up in foreclosures: there simply isn't the system bandwidth to handle them. Servicers really can't move significantly more foreclosures through the courts/trustee systems if they wanted. States have adopted all kinds of approaches that have significantly slowed down the foreclosure process. If I started a foreclosure in New York state today, I probably wouldn't have title and possession until early 2015. To the extent they could, it would risk pushing down housing prices and triggering more defaults. Moreover, the banks' plan for several years has been to slowly recognize losses against earnings. If all defaults had been foreclosed at once, the banking system would look a lot less solvent. The game plan has always been to run the clock.  Hence all the "kick the can down the road" mods. As a result, what we're likely to see is not a foreclosure tsunami, but rather an extended foreclosure high-tide.  

Assuming no major hiccups (e.g., interest rates rising), it will still take a few years before foreclosure levels return to historic averages. Unfortunately, that's when a lot of 2009-2011 HAMP mods will start to have their interest rates rise. Probably not a crisis from that, but certainly not good. 

The article also buys into the belief that there's a meaningful distinction between a foreclosure and a short sale. They are different, but in terms of the social displacement from foreclosures, they look pretty similar.  Maybe there's a negotiated exit time frame with the short sale, etc., making it a softer landing, but let's not see short sales as Mission Accomplished. The chart below shows HOPE Now data on foreclosure starts, foreclosure sales, short sales, and foreclosure & short sales.  While there's been a 48% increase in short sales since Q1-2010, the number is still small in absolute terms. Viewed as a whole, there hasn't been any real change in total foreclosure or short sale activity since the end of 2010. Foreclosure starts have been coming down, but they're still perhaps 4x what they usually are. So yes, we haven't had a an increase in foreclosures, but the situation already was a disaster. This is hardly success. So no storm surge, but extended high tide. 

Comments

[rjs]

both LPS & the MBA have more than 1 in 9 in the US still not paying on their mortgages, so this crisis is hardly over..

[Barry Ritholtz (@ritholtz)]

Note that Foreclosures ticked up 1% in September and 3% in October. The foreclosure abatements during the robosigning negotiations are now starting to come on line.

Next Spring will be very interesting

[Mike Dillon]

If I'm not mistaken, you've also got several voluntary moratoriums in place on, I believe, 10 states that were impacted by Hurricane Sandy. How long they will remain remains to be seen.

[Nat Cole]

You really want to stop a FORECLOSURE? I went to Financial Screen Shots – got the link from stopforeclosurefraud com. I ordered the Loan Search Within 2 days I got back the info showing my loan was securitized. I order the full package of all My documents and it contained everything! I have absolute evidence my mortgage note was sold in 2008. I stopped paying 2011 and I am being foreclosed by Bank of America. My lawyer says they have absolutely NO STANDING and he plans to sue the lawyers bringing the case into court. I finally have BOFA in a lie! More proof at http://deadlyclear.wordpress.com/2012/03/15/securitized-distrust/ Anyway, felt such a need to express myself. Good luck everyone.

[Rob Harrington]

Fighting fraudulent foreclosures (and fascism/corporatism, AND defending property rights, fact and law, and due process - 7 days a week - National WAMU Homeowners Support Group. http://www.huffingtonpost.com/social/Rob_Harrington/matt-taibbi-jamie-dimon-treasury-secretary_n_2210871_209951750.html

[MB]

Whether it's equities or real estate (and bonds), it's rigged by the powers that be. Don't fight the Fed is more than equities - it's permeated every asset class.

I've been trying to buy up in Silicon Valley, but the banks are doing a masterful job of controlling inventory supply (thanks to Fed $ to banks) and prices are rising accordingly because the average person or investor here (all cash and an excess of it) just doesn't quibble over a few hundred grand above the bank loans where the theoretical prices should be back pre-crash.

Banks not happy to just make loans and profit off of that, forget any such thing as the market setting the price. When the bank is the seller and controls the bulk of supply and has all the cash in the world, where is the equilibrium? And the individual is just supposed to dance to their BS "supply and demand". The only thing going for the average person is low mortgage rates.

With all cash competing bidders, it doesn't even matter because if it's all cash, then appraisal is irrelevant and the bubble is inflated anew. Loved the article today, too about Blankfein seemingly positive about a return to high risk loans. I'm so glad the bailouts helped the banks get back on their feet.

[Knute Rife]

The trustee system can handle plenty more nonjudicial foreclosures. The banks are just being very selective about what they want to add to there REO inventory, and since nothing is forcing them to book their assets in a way that reflects reality, they have no need to proceed otherwise.

[Simon Campbell]

A more recent article from Bloomberg said that an increase in foreclosures signaled a strengthening housing market. Now that makes more sense. In part it stated, "U.S. lenders are notifying more delinquent homeowners they face foreclosure, a step toward clearing a backlog of properties and helping to accelerate a housing recovery."

Nevertheless, mortgage delinquencies are dropping. So, in order to use the foreclosure market to gauge the economy, we have to separate the listing of foreclosures from delinquent mortgages. As the economy improves, there will be less defaulting on the mortgages; but it is going to be a long haul for the banks to unload their entire inventory of REO properties. They cannot do that all at once, so we will see a pendulum effect for some time yet.

Here is the article if anyone wants to read more: http://business.financialpost.com/2012/07/12/surge-in-foreclosures-signals-strengthening-u-s-housing-market/

Simon Campbell - http://www.bankforeclosuressale.com