Foreclosures Fall, and Why That's Bad News
Yes, you read that right. Banks seized fewer homes in January, and that's bad news for everyone. Here's how Rick Sharga, senior vice president with RealtyTrac, explains it:
"With the number of foreclosures falling, you would figure the housing market is on its way to recovery," said Sharga. "That's not the case. The number is artificially low... and that could extend the housing market's downturn."
What's going on? The answer to this riddle gets to the heart of what's wrong with the housing markets.
Not long ago, if a homeowner fell three months behind in his mortgage payments, that homeowner could expect to receive a letter called a Notice of Default that would begin the foreclosure process. If the homeowner could not resolve the situation, the home would be seized some months later.
That all stopped with the housing crash. There are now more than 4.4 million people who are foreclosure process, according to the latest National Delinquency Survey from the Mortgage Bankers Association.
That means banks and loan servicers could probably send out 2.2 million default notices in February -- up from 75,000 in January! But that won't happen.
"It's in nobody's interest to flush all these properties through the housing market all at one time," says Sharga. If banks seized and tried to sell all these properties at once, we would see another housing collapse.
Instead, banks and loans servicers have been pacing themselves – seizing and selling properties, and recognizing the resulting losses on bank balance sheets, at a gradually accelerating rate of roughly 90,000-a-month over the last year.
Here's the good news: 90,000-a-month or so is not enough foreclosed properties to tank the housing market. It's what Sharga calls "managing the inventory of foreclosed properties."
Now here's the bad news: at that slow rate of foreclosure, plus another 100,000 or so delinquent loans modified-a-month by banks, it will probably take at least two years to burn through the 4.4 million loans that are more than 90 days past due.
Now the pace of foreclosures has slowed. Lenders and loan servicers took a total of 261,000 foreclosure actions in January, down 17 percent from the same time last year, though up slightly from December, according to the latest report by data company RealtyTrac. Banks actually seized 78,000 homes in foreclosure, down 11 percent from last year.
It would be great news if some fundamental change had improved the housing markets – but there are still more than 4 million people more than 90 days late on their home loans.
Instead the bank and loan servicers have run into steep legal problems – they cut corners in the foreclosure process, and now must defend themselves against a swarm of lawsuits and go back over the details of foreclosures that were supposedly completed.
Meanwhile, millions of delinquent borrowers continue to wait in limbo for the foreclosure notice that might come today... or tomorrow... or next year. At the same time prospective homebuyers struggle to make sense of the conflicting data.
Hopefully, banks will put more energy into modifying troubled loans, essentially creating a payment plan for troubled borrowers, now that the foreclosure process is failing them. In the meantime, the housing markets in foreclosure towns such as Las Vegas and Phoenix continue to sag under the weight of troubled loans.
Says Sharga, "The housing market is not going to come back as long as there is an overhang of distressed properties."
For more on mortgages and related topics see these AOL Real Estateguides: