Will the Foreclosure Time End with a Whimper or a Bang?

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In my very first post for BiggerPockets.com two and a half years ago (Twilight of the Foreclosure Time), I discussed how the volumes of foreclosures that attracted so many investors to residential real estate would end…and when.  It’s ending more or less on schedule in most markets, but in a way that may surprise many.

The Foreclosure History

The flood of foreclosure that first hit the sand states in 2007 and 2008, mostly resulting from borrowers defaulting subprime and “alternative” loans that should never been made, clobbered the housing markets like Sandy hit the Jersey Shore.  When the national Great Recession followed, it was off to the races, and a regional disease became a national plague.

In the time that has passed since Twilight of the Foreclosure Time was published several things about the end of the Foreclosure Time have become clearer.  Reports released this past week by RealtyTrac and CoreLogic paint a rather clear picture of what the final months and weeks of the Foreclosure Time will be like,

image001The Foreclosure Time will not come to an end uniformly across the nation. Significant volumes of foreclosures will linger in a handful of judicial states where state laws or legal roadblocks have processing times significantly.  The average time to foreclose was 1,033 days in both New York and New Jersey — the longest among the states. New York’s timeline was down 2 percent from the previous quarter while New Jersey’s timeline increased 3 percent. Other states with the longest average foreclosure timelines are Florida (907 days), Hawaii (824 days) and Illinois (817 days). Investors large and small will find significant inventories to do business, though the climate in these markets may be hotly competitive.

“Halfway through 2013 it is becoming increasingly evident that while foreclosures are no longer a problem nationally they continue to be a thorn in the side of several state and local markets, particularly where a backlog of delayed distress has built up thanks to a lengthy foreclosure process,” said Daren Blomquist, vice president at RealtyTrac. “The increases in judicial foreclosure auctions demonstrate that these delayed foreclosure cases are now being moved more quickly through to foreclosure completion. Given the rising home prices in most of these markets, it is an opportune time for lenders to dispose of these distressed properties, either at the foreclosure auction to a third-party buyer, or by repossessing the property at the auction and subsequently selling it as a bank-owned home.”

image002In most states bank repossessions declined during first quarter, which means that they have worked through their backlog of defaulted properties and their inventories of new starts are a fraction of what they once were.  Bank repossessions in the first half of 2013 were down 19 percent from the previous six months and 23 percent from the first half of 2012. RealtyTrac reported only 127,790 properties had foreclosure filings in June, down 14 percent from the previous month and down 35 percent from a year ago to the lowest monthly level since December 2006 — a six and a half year low.

Though data on short sales are harder to come by, one can assume they also are down significantly and, like foreclosures, are headed for a minor role in the real estate economy.  Like foreclosures, short sales begin with delinquencies.   Fewer new problem loans, declining levels of negative equity and shrinking inventories of bad loans from the boom era have helped to reduce mortgage delinquencies by the largest year-to-date decline since 2002.  Last week the May Mortgage Monitor report from Lender Processing Services found that the national delinquency rate continued to fall in May. Delinquencies are down more than 15 percent since the end of December 2012, coming in at 6.08 percent for the month.

How Will It End?

Finally, the Foreclosure Time will not end suddenly, as it began. It will indeed end quietly  in most places aside from those laggard states noted above.  Nor is the end far off.

“We continue to see a sharp drop in foreclosures around the country and with it a decrease in the size of the shadow inventory. Affordability, despite the rise in home prices over the past year, and consumer confidence are big contributors to these positive trends,” said Anand Nallathambi, president and CEO of CoreLogic. “We are particularly encouraged by the broad-based nature of the housing market recovery so far in 2013.”

CoreLogic estimates the current residential shadow inventory as of April 2013 was less than 2 million units, representing a supply of 5.3 months. As of May 2013, approximately 1.0 million homes in the U.S. were in some stage of foreclosure, known as the foreclosure inventory.   That’s a total of fewer than 3 million homes, certainly less than a year’s supply.

Did you hear a whimper?

Photo: Profound Whatever

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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.

3 Comments

  1. Mark Ferguson

    Thank you Steve for the info.
    I was at an REO conference in May and the experts I listened to had a very different opinion than Core Logic on what will happen. They all predicted foreclosures to rise at the end of 2013 or the beginning of 2014 and continue to rise through 2014. They said there is still a lot of shadow inventory, but it is hard for anyone to know how much. Many banks will not report delinquencies because they do not want to be put on the FDIC watch list for being insolvent.

    None of the experts predicted a massive surge in REO, just a steady increase and then a slow decrease in 2015. They also showed some graphs that I wish I had showing reos vs short sales and hedge fund buyers. There is still a very similar amount of delinquent loans, but more are being sold as short sales and being sold to hedge funds.

    • Hi Mark,

      Thanks for your comment
      .
      I think the day has come when it’s a little meaningless to discuss REO inventories without being very specific regarding locale. There never was a national REO market and there is less of one now than ever,

      I can see where REOs in certain markets might rise slightly before they fade away to pre-bust levels (see the processing time chart in my article from RealtyTrac.) However, I am very bearish on REOs for another reason: hedge funds. In markets where the big dogs are active, like Atlanta and Tampa, you’re not seeing many foreclosures make it to the REO stage. I also doubt that CoreLogic’s shadow inventory numbers aren’t perfect (that’s why they call it a shadow inventory!), but in my experience they’re been on top of it a lot longer than anyone else.

      I guess if I was running at REO conference, I wouldn’t like people saying my business was going to dry up in two years or so. But I think it’s inevitable. The only question is when…and where.

      Good luck,

      Steve

  2. Mehran Kamari on

    Wow, great article Steve! I’m hoping Mark is right and there more inventory than Core Logic expects. This will give me time to acquire more :) This is definitely a local thing and I’m glad we have a community of people all over the U.S. here on BP where we can be in touch with many markets very easily.

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