May162014

California foreclosures up 27% YoY, REO inventories rising nationally

Banks kicked the can for five years, but they finally began ramping up foreclosure processing to clear out delinquent mortgage squatters.

dont_bother_to_knockThe headlines in the financial media give the false impression the foreclosure crisis is past. It’s not. Millions of borrowers are not paying their mortgages, and millions more are making partial payments on doomed loan modifications. The banks bought time with loan modifications, but this was a temporary measure that allowed them to better manage their REO inventories and delay final resolution on their bad bubble-era loans. The day of reckoning, though delayed, has finally arrived, and banks are increasing their foreclosure processing to finally clear out the trash.

Most housing economists failed to see this coming, which is no big surprise. In the post Bold California housing market predictions for 2014, I made the following prediction:

Foreclosure processing will increase from 2013 levels

The conventional wisdom states the foreclosure problem is behind us. Forecasters nearly universally agree foreclosure processing will decline because borrowers are going back to work and catching up on their mortgage payments. I believe they will be proven wrong. First, almost nobody cures once they go 90 days delinquent. Most borrowers end their misery by selling, lately by equity sale, but also by short sale or foreclosure. Since most market forecasters erroneously believe these borrowers cure their loans when they regain employment, these forecasters will be surprised when the high delinquency rates prompt lenders to begin foreclosure processing.

So what is happening with foreclosures and REO in 2014?

CoreLogic: Completed Foreclosures Up 5.9% In March

by MortgageOrb.com Tuesday April 29 2014forget_renting_nightmare_alley

About 48,000 foreclosures were completed in March, an increase of 5.9% compared to the approximately 45,000 completed in February ….

About 5 million homes have been across the country have been foreclosed upon since the financial crisis began in 2008. …

“The inventory of homes in foreclosure and serious delinquency status are back to 2008 levels, yet remain elevated from a historical perspective,” says Mark Fleming, chief economist for CoreLogic, in a release. “…, the housing market is a long way from being fully recovered. By way of comparison, distressed stock inventories are more than three times higher than the levels of the early 2000s, before the most-recent housing boom and subsequent financial crisis.” …

Foreclosure processing is up because banks are finally resolving their bad loans. With about 6 million active loan modifications, we still have a long way to go.

foreclosure_tipping_point

So what is happening with this REO?

4 Percent Increase in Bank Repossessions

May 13, 2014, By RealtyTrac Staff

… Bank repossessions increased from the previous month in 26 states and were up from a year ago in 16 states, including New York (142 percent increase), Oregon (91 percent increase), New Jersey (58 percent increase), Illinois (55 percent increase), Indiana (52 percent increase), Maryland (45 percent increase), Connecticut (44 percent increase), California (27 percent increase), and Nevada (15 percent increase).

reo_increases_states

California bank repossessions are up 27%. This should help alleviate the shortage of homes on the MLS, assuming the banks start listing them for sale rather than wait for higher prices.

The rise in bank repossessions in many states is a sign that those markets are working through the final remnants of foreclosures left over from the recent housing crisis,” said Daren Blomquist, vice president at RealtyTrac. “Many of these bank-owned homes are bottom-of-the-barrel properties in terms of location or condition, but they will provide some much-wanted inventory of homes for sale in some markets in the coming months. Investors and other buyers willing to do more extensive rehab will likely be best-suited for these incoming REOs.” …

This should be good news for flippers.Where-oh-where-REO

Scheduled auctions increased from the previous month in 22 states and were up from a year ago in 17 states, including Oregon (up 229 percent), Utah (up 101 percent), Colorado (up 87 percent), New Jersey (up 73 percent), Alabama (up 25 percent), New York (up 25 percent), and Florida (up 8 percent).

Foreclosure starts, which are scheduled auctions in some states, increased from the previous month in 26 states and were up from a year ago in 16 states, including Massachusetts (up 101 percent), Indiana (up 60 percent), New Jersey (up 15 percent), and Wisconsin (up 13 percent).

With the lack of available MLS inventory, banks should have no problem disposing of their REO, but despite this fact, they are accumulating more of it.

REO Inventory Rising Once Again

Recent Improvement in the Stock of REO Properties Fades in 2014

May 14, 2014, Sam Khater

Real Estate Owned (REOs) Properties Are on the Rise

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This chart is a huge surprise to most real estate economists who were telling everyone the foreclosure crisis was past.

After reaching a trough in August of 2013 of 375,000 properties, the number of real estate owned (REO) properties increased 15 percent to 430,000 as of March 2014 (Figure 1). The increase in REO properties was broad based, rising in 46 states. While the increase was moderate nationally, some states had large increases. Idaho led the way with the stock of REO properties nearly doubling between August 2013 and March 2014. Maryland had the 2nd largest increase in the number of REO properties, which increased 78 percent, followed by Nevada (up 70 percent), Oregon (up 47 percent) and North Dakota (up 42 percent) (Figure 2).

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The rise in REOs across most states reflects several inter-related factors. The “robo-signing” scandal in the fall of 2010 caused servicers to delay the foreclosure process, increasing foreclosure timelines. The number of REO properties had been increasing until September 2010 when the issue became public and after September the flow of completed foreclosure immediately fell by one-third in October 2010 and remained lower. That caused a rapid fall off in the number of REO properties until very late 2011 and early 2012 when the number REO properties began to rise again. Not surprisingly, the rise in the number of REO properties coincided with the National Mortgage Settlement, which was signed in February 2012 and provided more clarity and standards on foreclosure resolutions which led to the rise in REO properties.

As lenders began to accelerate the foreclosure process in early 2012, investor demand for REO properties began to rapidly increase. Investor demand more than offset the acceleration of foreclosure resolutions and led to a rapid decline in the number of REO properties. However, investor demand began to drop off last September partly in response the twin impact of rapid price increases and the rise in mortgage rates. In addition, short sale activity reached its peak in late 2012 and early 2013 and began to decline in subsequent months due to the Mortgage Forgiveness Debt Relief Act of 2007. Some properties that may have avoided foreclosure as short sales are instead being foreclosed upon and contributing to the rise in the REO stock.

The combination of all these major factors began to coalesce during the fall of 2013 and led to a rise in the inventory of REO properties.

Rising prices caused investors to lose interest in these properties. The banks hoped owner-occupants and boomerang buyers would step up and absorb the excess, but that isn’t happening. Also in Bold California housing market predictions for 2014, I predicted boomerang buyers would fail to materialize. In March I noted a lack of boomerang buyers keeping purchase originations down.

While the level is lower than the peak in the crisis, it signals that the rapid improvement in the REO stock during the last two years is over and the market has entered a new phase as it continues to process the legacy of the foreclosure crisis.

So is this a small problem easily absorbed by the market? Given the weak demand we have today, I don’t think this problem goes away easily.

not_paying

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