Nov182014

With the foreclosure crisis past, why are foreclosures rising?

The financial media perpetuated the fantasy that the foreclosure crisis is past. Now, can-kicking ends and foreclosures rise once again.

squatter_scourgeThe foreclosure crisis never ended, it was merely delayed by lender can-kicking. Bankers designed policies to promote loan modification over foreclosure, specifically to drive down the reported delinquency rates. Further, HUD sold off non-performing loans to hedge funds that don’t report their delinquencies, which also lowers the reported rate.

Lowering delinquency rates should be a big plus; however, lowering delinquency rates through methods that don’t permanently cure the loan (can-kicking) is a farce designed to influence public perception. Lenders want to report better delinquency rates to improve confidence in the housing market to encourage buyers to bid up prices to aid lenders in their capital recovery on their bad loans. Politicians want HUD to report better rates purely for public relations benefits to improve their approval ratings. In other words, lenders and politicians lie to the public for self-serving reasons.

The financial media goes along because they gain more readers by providing false emotional support to people seeking reassurance rather than providing hard facts and accurate analysis. Unfortunately, people often make important and complex financial decisions based on erroneous or biased information they obtain from the financial press. When these investment decisions go bad, people are often wondering what went wrong. The problem is they suspended rational disbelief and trusted the veracity of what they read in the mainstream media.

So what do you get when lenders and politicians collude to peddle a lie through the mainstream media? The illusion that the foreclosure crisis is past.

Mortgage delinquencies and foreclosures will rise again, and they will remain elevated above historic norms for much longer than anyone currently anticipates. This will “surprise” economists and others who accept the financial media spin without understanding why and how the mortgage delinquency rates were lowered in the first place, through temporary measure and can-kicking. Despite reports to the contrary, permanent loan modifications did not permanently solve the delinquency and foreclosure crisis.

Projected_mortgage_delinquency_rates_2014-9

The next wave of foreclosures won’t be as damaging as the 2008 tsunami. The whole point of lender can-kicking was to meter out these foreclosures over time, and in that regard, they succeeded. We likely won’t see substantive price declines from the upcoming REOs, but it will be welcome added supply that may help sales volumes.

Why more homes are being sold at foreclosure auctions even though the foreclosure crisis is over

By Dina ElBoghdady, November 13

Six years after the housing bust, lenders are still offloading homes that have been in foreclosure limbo. And they’re stepping up their efforts.

In October alone, nearly 60,000 of those homes were scheduled to be auctioned off by banks, up 24 percent from the previous month and seven percent from a year ago, according to RealtyTrac, a housing data firm. That’s the highest level since May 2013. …

imrs.php

In the post Bold California housing market predictions for 2014, I said “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.”

Here we are.

Notice that Los Angeles, San Francisco, and San Diego all have year-over-year increases in foreclosure activity.

imrs.php2

The reasons behind the uptick in auctions are slightly different in every state, said Daren Blomquist, a vice president at Realty Trac. But the underlying theme is that banks are finally getting around to clearing a backlog of foreclosures that have been delayed.

Some of the delays were in states that require a lengthy court approval process for every foreclosure, such as Maryland. In other cases, states passed laws to slow down the foreclosure process or lenders bungled their handling of foreclosure documents.   Some of the nation’s largest banks reached a settlement with state attorneys general to address those practices.

Some of the increase is also caused by hedge funds buying non-performing note pools. These investors are either fix-and-flip investors buying because the discounts are steep, or sometimes it’s REO-to-rental companies looking for an inexpensive source of new rental units. In either case, these hedge funds generally move quickly to foreclosure so they can extricate the former owner and either flip or rent the property.

Separately, lenders also had an incentive to delay, said Greg McBride, chief financial analyst at Bankrate.com. They were basically waiting for home prices to rise, as they have in the past two years. That way they could get a better return on those homes, McBride said.

squattingOne of the few acknowledgments of can-kicking I’ve read in the mainstream media.

While there is no longer a deluge of foreclosures hobbling the housing market, the auctions that are underway are a reminder of the residual effects of the crisis. “The rise in foreclosure auctions indicates that the banks and the courts are preparing for a spring cleaning,” Blomquist said.

The 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.

[listing mls=”OC14241305″]