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November 30, 2012

Lack of a “Foreclosure Wave” Determined By Banks

Posted in: Uncategorized

Here’s a pretty jerky victory lap clearly planted by the mortgage lending industry, with the boastful title “Foreclosure Wave Averted as Doomsayers Defied.” Let’s hear this out for a second.

When banks pulled back on foreclosures two years ago following a government investigation into allegations of faulty practices, market researchers, academics and Wall Street analysts said that a surge of delinquent homes would deluge the U.S. market once lenders resolved the claims and worked through backlog, driving down prices for years to come. RealtyTrac Inc., a seller of property data, warned a year ago of a “new set of incoming foreclosure waves.” Susan Wachter, professor at the University of Pennsylvania’s Wharton School, said in February that a logjam may be “unleashed” and destabilize the market.

In fact, the flood failed to materialize, even after the five biggest U.S. mortgage servicers reached a $25 billion settlement with federal and state regulators in February. Instead, the number of properties for sale shrank to the fewest in a decade, prices appreciated at the fastest pace since 2005, and the gradual healing of the housing market helped boost consumer confidence and the economy.

“We don’t have enough homes now to meet the needs of the market,” Paul Jacobson, a Stockton native and real estate broker for 22 years, said as he cruised the city’s northern fringe, where suburbia meets farmland. “People see a foreclosed home for sale in this area and they’re going to jump on it.”

Missing here is any understanding of who controls the timing of a so-called foreclosure wave. Banks do the foreclosing, after all, and it’s really up to them whether or not to put inventory on the market or to foreclose at all. And in both cases, they haven’t moved forward for very specific reasons. Professor Adam Levitin had a solid response to this article.

First of all, we aren’t seeing a “foreclosure wave” because mortgage servicers still don’t have the capacity for mass foreclosures above and beyond their current pace. Aside from them not hiring enough specialists, many states responded to the crisis and the foreclosure fraud scandal by passing their own due process laws designed to stop illegal foreclosures. The industry calls these states dirty names, but they happen to be the REASON for the lack of a foreclosure wave.

In addition, as Levitin writes:

Moreover, the banks’ plan for several years has been to slowly recognize losses against earnings. If all defaults had been foreclosed at once, the banking system would look a lot less solvent. The game plan has always been to run the clock. Hence all the “kick the can down the road” mods. As a result, what we’re likely to see is not a foreclosure tsunami, but rather an extended foreclosure high-tide.

Assuming no major hiccups (e.g., interest rates rising), it will still take a few years before foreclosure levels return to historic averages. Unfortunately, that’s when a lot of 2009-2011 HAMP mods will start to have their interest rates rise. Probably not a crisis from that, but certainly not good.

A very good and overlooked point there. HAMP modifications are TEMPORARY. They expire in five years, which means we have the rate recast threat that we saw with adjustable-rate mortgages, not a main driver of the crisis but certainly something that made the crisis worse.

Not to mention the fact that the potential expiration of the Mortgage Forgiveness Debt Relief Act (thanks for catching up, Wall Street Journal!) will make principal reductions and short sales a thing of the past and generate a lot more foreclosures. One of the reasons we haven’t seen a foreclosure wave comes from banks using alternative options like short sales and, in select cases, principal reduction. Incidentally, the endgame in the short sale is that the homeowner loses the home, so while it’s better for the borrower, it’s hard to see the social benefit to saying “Nyah nyah, there hasn’t been that foreclosure wave, just a lot of forced short sales!”

The point is that any slowing in the foreclosure process, as much as banks whine about it, helps their bottom line and should be seen as deliberate. It’s one of the things propping up the market; the slow absorption of home defaults. “Foaming the runway,” if you will.

Foreclosure starts remain four times above traditional levels. If Bloomberg considers that extended high level a “strategy” that is “paying off” because prices have risen, well, congratulations.

UPDATE: Incidentally, if you don’t believe that banks are holding back inventory and goosing prices, this is from the article, referring to Stockton, California:

There were 6,650 properties with unresolved code violations as of Sept. 30, about two-thirds of which were vacant because the owners walked away and banks hadn’t foreclosed, Lemos said. His team stages night raids to oust squatters from abandoned properties. To give the appearance homes are occupied, they paint dry lawns green.


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