Most folks who buy and sell distressed property for a profit secretly expect that eventually the day will come when foreclosures will no longer account for one out of every three homes sold in America.
Someday the Foreclosure Time will indeed end, though most likely not within the next two years. It’s end, however, is inevitable and the forces that will bring about its twilight are already hard are work.
Why? The tighter lending standards put in place following the subprime debacle in 2006 changed forever the mortgage approval process. They have returned mortgage lending to the pre-boom environment requiring documentation, significant down payments and demonstrated ability to repay. The standards, which are widely blamed today for making life difficult for buyers, are already having such a positive effect on mortgage backed securities marketed after housing bust that MBS research firm UFA reports that residential mortgage default and prepayment risks are on the road to recovery.
Tighter standards and stabilization of the economy have also driven mortgage delinquencies down to levels not seen since 2008 or 2009. Of the total number of mortgages that are either 90 or more days delinquent or in foreclosure, the number that are delinquent 90 days or more days has shrunk to levels not seen since 2008. Moreover, a growing number of the shrinking number of defaults are not new. Some 45 percent of October foreclosure starts were redefaults, or mortgages that had previously defaulted and were modified unsuccessfully either by the lender or the federal government. For delinquencies over 30 days, “first time” delinquencies account for only a quarter of total new delinquencies—further signs of an improving trend.
Pending another recession, the slow decline in delinquent loans, a precursor for foreclosures, is expected to continue. After rising slightly to a rate of 6.02 percent in the first quarter next year, 60-day mortgage delinquencies will resume their decline, falling to about 5 percent of all performing mortgages by the end of next year, according to Transunion.
The near term picture for foreclosures, however, is dramatically different. The national foreclosure inventory hit an all-time high at the end of October of 4.29 percent of all active mortgages. Some 3.9 million loans are delinquent 90 days or more or in foreclosure, according to Lender Processing Services’ November Mortgage Monitor. Only about 4.5 to 5 million total existing homes are sold each year; the 4 million strong national foreclosure inventory will certainly take several years to be absorbed.
Like a patient on life support, the lifespan of the foreclosure era is being extended by servicers who have slowed processing to a snail’s pace in the wake of last year’s robo-signing scandal. Today the median processing time is 336 days, unless you live in New York State where it’s 3.2 years. REOs come onto local markets in first and starts, sending prices and inventories into temporary disarray.
Finally, add to the equation the fact that negative equity is still a huge factor in foreclosures. Ironically, negative equity is caused by low property values which in turn are the direct result of the foreclosures that negative equity causes when vulnerable homeowners can’t mee their mortgage payments. About 23 percent of the nation’s mortgaged homes is still underwater despite several less than successfully federal programs to reduce negative equity. These homeowners are highly vulnerable to public and personal economic misfortune and it won’t take much of a re-recession to send large numbers of them into default.
These factors could delay the end of the Foreclosure Time; they certainly make it difficult to forecast. Still, the question is not whether the foreclosure era will end but when. We’ll know we’ve entered the twilight when foreclosure inventories slowly decline and cease being refreshed with new move-in ready properties.
Foreclosures will remain a significant segment of most real estate markets for years to come, but their market share will shrink and their depressive effect on values will lessen. As the twilight deepens into night, median prices will rise, market by market, and a new sense of normalcy will return. For investors who bought during the Foreclosure Golden Era, it will be a better time to sell and to realize the profits they so richly deserve for the risks they took when no one else was buying.