Delinquent mortgage squatting ends in 2012
The lending Ponzi scheme that inflated the housing bubble popped in August of 2007 with a credit crunch. Lenders realized their collective folly and abruptly stopped lending to prevent further losses. Without the lender air needed to sustain the bubble, house prices abruptly collapsed, and millions of borrowers who never could afford their payments gave up trying. The surge in mortgage delinquencies far outpaced the ability of lenders to process foreclosures and absorb them in the resale market. Rather than accumulate 10 million REO or push house prices back to 1990s levels through an MLS fire sale, lenders decided to allow millions of delinquent borrowers to occupy properties they were not paying for. Shadow inventory was born.
Overhead supply of distressed properties is not good for housing. Large numbers of properties held by motivated sellers is a recipe for continuing declines in house prices. Long-term price declines takes its toll on potential buyers. Many choose to wait until prices bottom before making purchases. The reduced sales volumes delays market clearing and ensures price declines persist. Japan witnessed this downward spiral continue for nearly 25 years. How long will in continue here?
The first step toward clearing the market is to process the pent-up foreclosures of delinquent mortgage squatters. Home occupants who pay neither rent nor mortgages are dead weight to a housing market. Perhaps their spending stimulates the economy in other ways, but they are a drag on the housing sector. Renters provide value to landlords, and money renters paying their mortgages provide value to lenders. Delinquent mortgage squatters provide no income to benefit either landlords or lenders. Each delinquent mortgage squatter who is evicted pays rent and adds value to the housing sector and contributes to the national economic recovery.
The pig in the python is suddenly moving.
Thousands of foreclosures that were stuck in process due to delays over the so-called “Robo-signing” paperwork scandal are working their way through a revamped banking system and heading toward final bank repossession.
Foreclosure starts surged 28 percent in January from December, according to a new report from Lender Processing Services. More than 230,000 loans began the foreclosure process in January.
The Robo-signing settlement gets the headlines, but the real catalyst for increasing foreclosures is the plan to sell REO to investors. Even with the Robo-signing settlement out of the way, lenders still have the same basic dilemma: too many houses for the market to absorb. If they process all the foreclosures on their books, they will either end up owning 10 million houses, or they will push prices back to the 1990s through MLS sales. The only way they can avoid these outcomes is to process the foreclosures and sell them to investors who will not sell them on the MLS for at least three years. Bulk sales to investors will allow lenders to recover some portion of their capital without and MLS sale that would push prices lower. It’s bulk sales that really give lenders the green light to process foreclosures.
Even more indicative of this new surge in processing is that repeat foreclosures hit an all-time high in January, representing 47 percent of all starts, according to LPS. Repeat foreclosures are either failed loan modifications, or loans that banks were attempting to modify but couldn’t.
Prior to bulk sales of foreclosures to investors, lenders sought to keep properties off the MLS through loan modifications. Lenders gained some public relations points for loan modifications, and they obtained a few more payments from some borrowers during the last three years, but mostly loan modifications simply pushed foreclosures off to the future. Here we are three years later, and nearly half of all loan modifications failed. I for one am not surprised.
“This large amount of foreclosures that have been sitting out there, with borrowers not making payments for an extended period of time, this may be coming to an end,” says LPS’ Herb Blecher. “This is what the market is looking for.”
I am cautiously optimistic this may be the end of delinquent mortgage squatting. The only reason lenders may have to delay processing at this point would be for balance sheet reasons. Lenders have to maintain certain capital ratios, and recognizing too many losses too fast will reveal them as insolvent. Banking regulators suspended mark-to-market accounting in 2008 for this very reason.
That’s because while painful to housing in the short term, moving the huge pipeline of delinquent loans to their inevitable end will help the overall market in the long term. There are nearly 4 million loans now in some stage of delinquency which have not even entered the foreclosure process. Banks are modifying loans more aggressively now, but many of these mortgages simply cannot be saved, and the sooner they are processed and new buyers are found for the properties, the sooner overall home prices can recover.
“It’s the resolution of the crisis. It started with a flood of new troubled loans, bottlenecks presented themselves as delinquent loans piled up. “The necessary resolution before we can get back to a healthy market is that that inventory goes away,” says Blecher.
The new surge in foreclosure starts consequently created an equal surge in foreclosure sales, that is bank repossessions or short sales (when the bank allows the property to be sold for less than the value of the mortgage. Foreclosure sales rose 29 percent month to month in January, indicating that there will be a new surge of distressed properties coming to the housing market in the next few months, as banks try to sell these homes.
The unusual decline in inventory in January was not due to dramatically increased demand. The real reason inventory declined was because lenders approved more short sales and sold more REO. If it were due to increased demand, the sales would have been accompanied by an increase in price. That’s not what happened. Prices continued to fall in January and February and lenders became more aggressive about closing sales already in the pipeline. They did this to clear the way for the next wave of REOs and short sales entering the pipeline.
While the pipeline is moving, there is still a stark contrast between states that require a judge in the foreclosure process and states that do not. Foreclosure sales in non-judicial states outnumbered those in judicial states by three to one, according to LPS. But signs are that even judicial states are ramping up, with foreclosure starts increasing twice as much as they did in non-judicial states in January.
While new mortgage delinquencies are falling, the backlog of distress is large. More than 40 percent of loans in foreclosure are more than two years past due, and judicial states have 63 months of foreclosure inventory to work through. Of course that’s better than last February, when foreclosure inventories hit an all-time high of 147 months.
During 2010 and 2011 lenders tried to keep current on their foreclosure filings. New loans which went delinquent were generally processed quickly. The loans in shadow inventory were allowed to age. Lenders didn’t make much headway on processing shadow inventory over the last two years, but they were successful in not adding much to it. That’s a start.
Now lenders are gearing up to process their backlog. Personally, I believe this processing will cause prices to decline for the next two years despite record affordability on a monthly payment basis. Prices became affordable in Las Vegas in 2008, but that didn’t stop prices from cutting in half since then. It all comes down to how lenders process these properties. If they package them up as rentals and sell as bulk REO — in my opinion the most likely scenario — then prices will bounce around the bottom for the next three years. Perhaps 2012 will be the bottom, but if so, 2014 won’t be priced much higher.
A new era of affordability has dawned for the US housing market. This window of opportunity will be open for at least three to five years, and if large numbers of properties are sold in bulk to be resold later, the era of affordable housing may extend for another decade. Being a supporter of affordable housing and a critic of HELOC dependency and abuse, I look forward to the next decade in housing. I wish the current state of affairs were permanent, but I have no doubt realtors and lenders will find some innovative way to screw it up.