Home Foreclosures Roll on at Record Rates

Foreclosure -- the beast that is eating the housing market -- barely paused in October, despite the latest housing scandal.

Experts thought foreclosures might go into hibernation after lenders botched thousands of foreclosures with skipped steps and faulty documentation. In at least one case, a single bank official signed as many as 8,000 foreclosures a month, falsely claiming to have "personal knowledge" of each bad loan.

But banks keep seizing homes at close to record rates.
The robo-signing scandal broke in late September, but lenders foreclosed on 93,000 U.S. properties in October, according to foreclosure research from RealtyTrac. That's down about a little from the record high rate in September, but still up by more than a fifth from a year ago.

"The controversy won't cause as much of a drop-off in foreclosures as anyone anticipated," says Rick Sharga, senior vice president for RealtyTrac. "It will almost be over before it started."

What's Going On?

First, the robo-signing scandal did have some effect on the rate of foreclosures. "The only reason we saw a drop of nine percent in October is because of the robo-signing issue," says Sharga. He expects the rate of home foreclosures to slow even more in November because of the controversy over foreclosures.

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But only a few thousand scheduled foreclosures have been seriously delayed. More than 90,000 homes were seized as scheduled, more or less, in October. Another 90,000 or so homes are likely to be seized in November.

Also, the delays won't last. These few thousand homes have been through most of the stages of foreclosure already, and the foreclosures are likely to be completed soon. The rate of home seizures is likely to creep upward once again to approach 100,000.

All three major loan servicers who announced that they would stop seizing homes in the wake of the scandal have begun seizing homes again. That's in part because of the condition of the loans in question. "Many homeowners hadn't made a payment in 12 to 16 months," says Sharga. In these cases, it quickly became clear that the homes would be seized by the banks, the only question was whether the proper process had been followed.

The banks will suffer consequences for screwing up process for thousands of foreclosures, even though the actual foreclosures are very unlikely to be reversed or seriously challenged. "You will see ramifications long after," says Sharga. "There may be massive fines leveed against the servicers by the U.S. attorney general. Maybe even criminal charges."

In the Future: More of the Same

The rate of foreclosures is not likely to change much for the next two years, despite shocks and surprises like the robo-signing scandal.

Banks seem to be managing the rate that they take properties in foreclosure -- seizing and selling about as many properties as they can without driving housing prices lower, says Sharga.

More than 5 million homeowners are more than 60 days late in paying their mortgage -- but only 1.2 million of them have actually received the "letter of default" from a lender that starts the foreclosure process, according to RealtyTrac. The vast majority are hanging in a kind of late-payment limbo -- they may not have made a mortgage payment in more than a year, but they haven't officially started the foreclosure process.

"You probably know someone who hasn't made a payment in a year but hasn't gone into foreclosure yet," says Sharga.

Banks are sending out roughly 100,000 letters of default a month on these 5 million. Banks also seized properties in foreclosure at an average rate of 91,000 a month throughout 2010, from January through October. The rate has crept upward a few thousand at a time -- just enough to set new records, but not enough to take a big bite out of the inventory of seriously delinquent loans.

At this rate -- plus loans that are successfully modified, minus new loans that slip into deliquency -- it will take all of 2011 and much of 2012 and even some of 2013 to work through the millions of very delinquent mortgages.

The good news is that if banks continue to foreclose homes a little at a time, as they have been doing for the last year, then home prices are probably going to stay about where they have been for the last year: stagnant in most markets -- but not crashing in a new housing collapse. Banks certainly aren't likely to seize all 5 million seriously delinquent homes at once and flood the housing markets with foreclosed homes.

Says Sharga, "That would be self-destructive."

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