Feb222012

Foreclosures rose in wake of bank settlement deal

Last fall the major banks all increased their foreclosure activities. Some banks may feel they are strong enough to take the necessary write downs, and B of A appears to be desperate for cash. Perhaps in anticipation of the Robo-signer settlement deal or perhaps out of a desire to clear out the shadow inventory, for whatever the reason, lenders are increasing foreclosure rates everywhere.

Foreclosures on the Rise Again

Published: Thursday, 16 Feb 2012 | 12:04 AM ET
By: Diana Olick
CNBC Real Estate Reporter

After a year-long reprieve from rising foreclosures, the numbers are going up again.

One in every 624 U.S. households received a foreclosure filing in January, up 3 percent from the previous month, according to a new report from RealtyTrac.  Foreclosure activity froze in many states in 2011, due to processing delays after fraud, or so-called “Robo-signing,” were uncovered in the fall of 2010.  The thaw is now on.

Last week I noted Foreclosure settlement and bulk sales will dramatically increase foreclosure rates. Banks started increasing their foreclosures in January in anticipation of increased buyer demand in 2012 and the signing of the Robo-signer agreement. I expect to see the foreclosure filings pick up dramatically now that the foreclosure settlement is final.

We expect the pattern of increasing foreclosures to continue in the coming months, especially given the finalized mortgage and foreclosure settlement reached in early February between 49 state attorneys general and five of the nation’s largest lenders,” said RealtyTrac’s CEO Brandon Moore in a written release.  “Foreclosure activity increased on a year-over-year basis for the first time in more than 12 months in Florida, Illinois, Indiana and Pennsylvania, following a pattern we saw in late 2011 in states such as California, Arizona and Massachusetts.”

While states that do not require a judge to preside over foreclosure proceedings, like California, saw a jump in filings toward the end of last year, judicial states have all but stalled. That will now change, thanks to the $26 billion dollar government-lender/servicer settlement. There will still be some delays on individual state levels, but the wheels are turning again, and that means more bank repossessions and more foreclosed properties heading to the re-sale market.

Not necessarily. Lenders may hold these properties while they negotiate bulk sales deals to keep them off the MLS.

Bank repossessions, the final stage of the foreclosure process, increased at least 30 percent  year-over-year in several states, including Massachusetts, which saw a 75 percent spike.  Bank-owned or REO (real estate owned) activity hit a 16-month high in Illinois and a 15-month high in Indiana.  Default notices, the first stage of foreclosure, were flat nationally in January, but spiked in judicial states, like Connecticut and Pennsylvania (up 112 percent) and even in non-judicial states like Maryland (up 100 percent).

Banks have a lot of work to do in the judicial foreclosure states to catch up on the foreclosures delayed by Robo-signer.

Nevada still posted the highest foreclosure rate, with one in every 198 households receiving a filing, despite an 8 percent drop in foreclosure activity. Nevada is a non-judicial foreclosure state, so the foreclosure backlog has been clearing for the last several months.

The situation is the same in California, where foreclosure activity dropped to a 50-month low, but the state still posted the second highest foreclosure rate in the nation. More than 51,000 borrowers received a foreclosure filing in January. California cities still account for nine of the top ten metro foreclosure rates, according to RealtyTrac.

Until banks work through the enormous backlog of foreclosures, which number in the millions, home prices will not hit a firm bottom, especially in the most troubled local real estate markets.

Expect house prices to be choppy at the low end and slowly decline at the high end over the next few years. Since many properties will be sold to private equity groups as rental holds, don’t expect much appreciation after that. The supply will slowly come onto the market as the demand is capable of absorbing it.

California Foreclosures

NODs were up in January from the low in December. It’s too early to tell if this is a new uptrend, but based on recent news events, foreclosure processing will greatly increase.

January saw a dramatic increase in foreclosures as well as a large decline in cancellations from December. These third-party sales will make their way onto the MLS as flips within the next 60 to 90 days.

Inventories are down over last year as lenders have slowed foreclosure rates and increased sales rates.

Low interest rates are stimulating buyer demand, and lenders will likely take advantage of this demand to liquidate more properties.

Orange County Foreclosures

Orange County witnessed the same increase in NODs over December’s lows.

The uptick in foreclosures was particularly dramatic in Orange County. Banks took back 20% more REO than December. The number of sales to third parties in January 2012 exceeded the largest month of foreclosures in all of 2011. More supply should be on its way.

The inventory of REO in Orange County has been remarkably steady. Lenders have found the carrying capacity of the market, and they manage to that number.

Irvine Foreclosures

NODs are down in Irvine as compared to 2011, but the NOTs are up substantially. Notice the oscillating pattern. There is a 90-day delay between NOD and NOT, so I anticipate NOTs falling off in the spring due to the lowereed processing in the 4th quarter of 2011. I also expect lenders to increase their NODs to further clear out the shadow inventory.

The foreclosure numbers are small in Irvine, so tiny variations in the numbers look huge on a percentage basis. The number of properties sold to third parties was up a whopping 225%! Of course, that’s only 9 more properties, but it displays a willingness to increase foreclosure processing.

Inventories are down, and NODs were well down over last month and last year. Are they out of delinquent mortgage squatters in Irvine? I doubt it. Expect the NOD number to rise going forward.