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Foreclosures: The Eye of the Storm

We have seen many headlines recently reporting that foreclosures and foreclosure sales have decreased over the last few months. However, though the headlines are technically accurate, they don’t reflect what is actually taking place.

Foreclosure statistics are being impacted by the issues surrounding the challenges with faulty paperwork which the banks have spent the last several months trying to correct.

James J. Saccacio, CEO of RealtyTrac addressed this issue in a recent press release:

“We’ve now seen three straight months with fewer  than 300,000 properties receiving foreclosure filings, following 20 straight  months where the total exceeded 300,000. Unfortunately this is less a sign of a robust  housing recovery and more a sign that lenders have become bogged down in  reviewing procedures, resubmitting paperwork and formulating legal arguments  related to accusations of improper foreclosure processing.”

While these issues are being addressed, the number of foreclosures are still continuing to mount. Mike Fratantoni, VP for single family research at the Mortgage Bankers’ Association said:

“While the foreclosure starts rate fell during the fourth quarter, the percentage of loans in foreclosure rose to equal the all-time high… As we predicted last quarter, the percentage of loans in the foreclosure process increased in the fourth quarter, largely due to the foreclosure paperwork issues that were being addressed in September and October. These issues caused a temporary halt in foreclosure sales, particularly in states with judicial foreclosure regimes…  With fewer loans exiting the foreclosure process through sales, the foreclosure inventory rate naturally increased.”

When will this inventory make its way to the market?

That’s the million dollar question. There have been new challenges created by the courts and there have been some rather interesting responses to these new problems. Still, many experts believe it will occur sooner rather than later. Rick Sharga, a RealtyTrac spokesman said:

“We expect a spike in the first quarter.”

Just how many foreclosures (REO) can we expect this year?

Another question that does not have a simple answer. Delinquency rates are showing improvement. Yet, if prices continue to soften, more houses will fall into a negative equity situation. That could lead to an increase in strategic defaults (where homeowners simply walk away from their mortgage obligation. Housing Wire has reported:

Analysts said the number of REO properties could double over the next 12 months to 4 million from 2 million.

Bottom Line

Don’t be fooled by some current headlines. Major foreclosure challenges still exist. We just happen to be in the ‘eye of the storm’.

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5 replies
    • Steve Harney
      Steve Harney says:

      @ Jonathan,
      Great question. We must realize that delinquencies and foreclosures are two different things. The fact that delinquencies are declining is fabulous news. That means there will be less foreclosures down the road.

      However, 98% of those that are currently 90 days delinquent will turn into a distressed property of some sort. Look at the graph in the WSJ article you reference. Some of the blue will turn red. That is what this blog post is referring to. There is absolutely no conflict between my post and the article. As a matter of fact, in our blog, I linked the MBA press release that the WSJ article is reporting on.

      The WSJ itself says:

      “But the sheer volume of foreclosures still in the pipeline poses a significant challenge to housing markets across the country and is likely to keep pressure on prices. Prices tend to fall more quickly as the share of bank-owned and other distressed sales rises because banks are more motivated to sell.”

      Hope this helps.

  1. Linu
    Linu says:

    This is the best time to buy when prices are rock bottom and interest rates still low. The big question is how many can afford a loan and get through the hurdle. It is getting tighter and more expensive to qualify for a loan these days.


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