Twilight of the Foreclosure Time


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.

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. Sadly, the foreclosure forecast is not a pretty picture for the next few years. Banks, unfortunately are the real bottleneck, not the homeowner. The Fed and the Administration must do more to incentivize banks to work down the staggering inventory of foreclosures as well as facilitate those about to come onto the real estate landscape. The banks by themselves will continue to do business as usual, which in this case is no business. The short sale is a viable alternative to a foreclosure, but again, banks have been largely unwilling to write down the mortgage to complete the transaction. Buyers are frustrated to say the least with the amount of time it takes to get approval of a short sale, making them unwilling to invest the trouble and the time to deal with a short sale.

  2. Excellent insight Steve. The volume of foreclosures will eventually decline but there will always be people who can’t afford to pay their mortgage. I know investment groups that have been buying houses at the courthouse steps here in Phoenix for the past 40 years. At the height of the boom in 2006, when foreclosures were at their lowest point in history, I bought 13 houses from distressed homeowners.

    • Thanks, Marty. Your perspective is a valuable one; many people think foreclosures were born yesterday. I remember that in 2006 at NAR we first started to get calls from reporters about foreclosures because prices had zoomed so high that foreclosures w ere being touted as the newest way to get rich quick.

  3. Do more foreclosures necessarily bring with them more economic calamity? I’m not entirely sure it does, and here’s why.

    During 2011, we saw the supply of available homes drop from 24 months to 7 months here in South Florida, and prices stabilize.

    The reason? Not because there were any fewer homeowners defaulting, but rather because banks decided to ‘take a break’ from filing due to statewide legislative and legal issues.

    During that same time, we also witnessed a surge in short-sales as banks scrambled to accept and process offers in record time.

    With values back to their pre-boom levels, I trust we’ll see investors and owner-occupants step up and absorb the new foreclosure inventory without any further price declines, as I know I’m certainly ready for a break in the cycle!

    • Todd,

      You make an excellent point.

      Conventional wisdom holds that there is more or less a direct relationship between fair market values and market saturation of foreclsoures. However, since I wrote this piece I spent some time on the phone with Alex Villacortes, director of research and analysis at ClearCapital. ClearCapital not only tracks distressed properties in every market they cover but they have REO saturation data by market. Alex says that in their analysis of heavy REO markets over time, they have found that in many when inventories stabilize they reach an equilibrium between fair market value and distressed value. When this occurs, they see prices appreciate over time for fair market properties as well as distresssed properties, even when REOs are 20-40 percent of the market.

      If this is so, it will certainly change the way we think about foreclosures and prices. Perhaps we should anticipate the development of permanent, true two-tiered markets where far market properties and distressed properties appeal to very different buyer segments.

  4. Several of my fellow agents in hard-hit markets like Vegas and LA tell me that the foreclosure rate is indeed slowing, but that the banks are keeping inventory off the market. I would assume they’re doing that because they don’t want to flood the market (any more than they already have) and put even more downward pressure on pricing. Also I expect that banks operate on a much longer timeline than individuals, so if they have to wait a few years to make a better return it’s worth it. Either way it sounds like we will have plenty of inventory for the next few years even with the foreclosure rate slowing. Would you agree?

  5. Excellent thoughts Steve. Then there’s always the possibility that the foreclosure process will also be continually adjusted and tweaked by government and possibly some additional bailout plans for certain segments of the market which would decrease the foreclosure numbers even more.

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