Weather Report on the Foreclosure Storm

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Foreclosure reports have been unusually sunny lately.  On March 12, the multi-state Attorneys General agreement was filed, ending the Robogate scandal and opening the way for expedited foreclosure processing.  Foreclosure activity hit a five-year low in the first quarter according to RealtyTrac and Lender Processing Services  reports first-time foreclosures remained stable in February as repeat foreclosures saw an 8 percent month-over-month decrease.  Even delinquencies were down 12.2 percent from last March, according to LPS.  Foreclosure sales are down one-third, 32.2 percent, reports FNC.

But don’t break out the bubbly quite yet.  There’s a monstrous cloud on the horizon.  Some 1.6 to 2 million foreclosures have plugged up the processing pipelines for the past 18 months and now the AG settlement will free them to pour into hundreds of real estate markets across the nation.

In a statement that may go down in foreclosure history for its graphic candor, RealtyTrac CEO Brandon Moore certainly got our attention last week.

“The low foreclosure numbers in the first quarter are not an indication that the massive reservoir of distressed properties built up over the past few years has somehow miraculously evaporated,” he said.  “There are hairline cracks in the dam, evident in the sizable foreclosure activity increases in judicial foreclosure states over the past several months, along with an increase in foreclosure starts in many judicial and non-judicial states in March. The dam may not burst in the next 30 to 45 days, but it will eventually burst, and everyone downstream should be prepared for that to happen – both in terms of new foreclosure activity and new short sale activity.”

Hairline cracks?  Bursting dams? Thirty to 45 days?

Wait, it gets worse.  Stepped up foreclosure starts are not being matched by REO sales.  First-time foreclosure starts, either default notices or scheduled foreclosure auctions depending on the state’s foreclosure process, increased 7 percent from February to March, the third straight monthly increase. Foreclosure starts in March exceeded 100,000 for the first time since November 2011, although they were still down 11 percent from March 2011.  All these new foreclosures are going in one end while very little is coming out the other because faster processing has yet to start.

These new foreclosures are piling up largely in the 26 judicial states, which already have the greatest inventories because lenders have been very carefully processing at a crawl to avoid liability actions while the multi-state agreement was being negotiated. Judicial states combined accounted for 243,074 properties with foreclosure filings during the quarter, an increase of 8 percent from the previous quarter and an increase of 10 percent from the first quarter of 2011.

So combine the new starts with the backlogged inventories, add in the normal flow of foreclosures, which are down from the peak years but still substantial and the numbers get scary.  About 800,000 foreclosures were sold last year.  To clear out an inventory of 1.6 million foreclosures alone would take two years… but all the new foreclosures would pile up to create a continuing problem.  And the problem would be much bigger problem in some places than in others.  How long would it take for the markets to absorb the backlog as well as new defaults, and their current rate?

According Lender Processing Services, as cited in USA Today, the timeline for some markets is frightening.

In New York and New Jersey, it would take lenders more than 50 years at their current pace to clear the lenders’ pipelines of homes that are seriously delinquent or already in the foreclosure process. In Washington, DC, 57 years; Maryland, 21 years; Connecticut, 20 years; Illinois, 10 years; Pennsylvania nine years; Florida, eight years and California, two years.

Investors looking for bargains can anticipate the release of REOs into markets in these states will increase the REO inventory, destabilize markets and drive down prices.  How long it will take markets to recover will largely depend on local economic factors, especially job growth.

Look for more large lenders with big inventories in these states to follow Bank of America’s lead and rent out large numbers of REOs to keep them off the market until prices improve.

Stay tuned and get ready for the deluge.

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About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.

1 Comment

  1. Jeff Brown

    You’re the man, Steve. From many parts of the country, I’ve been, um, challenged due to this exact take on the topic. Thanks for a stellar explanation of the position. Much appreciated.

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