Solving the foreclosure crisis created the problems with lack of MLS inventory today
The foreclosure crisis stopped when lenders quit foreclosing and forced homeowners to wait until they had equity to sell the property. Many homeowners are still waiting, so MLS inventory is quite low.
I’ve stated many times my contention that the housing recovery is built on a foundation of market manipulation; distressed inventory dried up because lenders opted to modify loans rather than foreclose and purge the bad debt from the economy. Unfortunately for lenders, today’s loan modifications are tomorrow’s distressed property sales, and in my opinion, the mortgage mess is not resolved, the outcome has merely been delayed by loan modifications.
Lenders designed loan modifications to maximize lender profits while giving borrowers feeble hope of clinging to their family homes. Lenders only began granting loan modifications in response to the deluge of defaults that began when subprime borrowers faced resets on their 2/28 toxic loans issued during the bubble. Lenders foreclosed on those borrowers per the lenders prior loss mitigation procedures and swamped the market with foreclosures that pounded prices back to the 1990s in some markets. Lenders braced for a second wave of defaults when alt-a and prime borrowers with similar toxic mortgages faced reseting and recasting loans, but instead of foreclosing on those delinquent borrowers and pushing prices even lower, lenders began kicking the can with loan modifications and allowing deadbeats to squat.
Starting in 2009, lenders began modifying loans in large numbers to avoid more distressed sales. It took lenders three years to gain control of MLS inventory by modifying loans and stopping foreclosures. Finally, they also stopped approving short sales, so with the distressed inventory removed from the market, the MLS inventory completely dried up, and with a little additional demand from all-cash investors, house prices bottomed and rebounded dramatically over the last two years.
It’s critically important to recognize that removing distressed sales from the current market does not remove the distress. Lenders merely deferred the problem for another day, and the backlog of distressed inventory still must be resolved. At this point, it looks like the final resolution will be an equity sale, but until that owner has enough equity to move up, they don’t list their homes for sale, and the MLS inventory is depleted.
Daren Blomquist, SVP of ATTOM Data Solutions, recently wrote in Housing News Report, ATTOM’s monthly newsletter of industry news, on the distressed property crisis in areas of the country most affected by foreclosure. Citing the ATTOM Solutions 2016 Year-End Foreclosure Market Report, Blomquist noted that New York properties foreclosed in Q4 2016 have taken an average of 3.5 years to process, and that 31,838 loans actively in foreclosure originated between 2004 and 2008.
New York is the squatting capital of the United States. The average foreclosure takes 3.5 years; many haven’t made a payment since 2008.
Six total New York counties were in the list of top 20 counties with the biggest backlogs of loans from this era. Blomquist spoke to Luana Malavolta, a real estate broker with Exit Reality Search in Bronx, New York, which ranks at number 18 on the list.
“There is less and less inventory coming on the market that is purchasable for mortgage products,” said Malavolta. “I feel it is because the financial institutions do not move fast enough on foreclosures and short sales, letting the properties stay in distress much longer. The longer the property is in distress, the less marketable it is for first time homebuyers utilizing mortgage products.”
To say that financial institutions don’t move fast enough is the understatement of the decade.
In New Jersey and elsewhere, long stalled foreclosures are finally starting to be pushed through. Ed Kirn, a foreclosure attorney with Powers Kirn Law Firm, believes that “…it will be the beginning of a recovery period for our housing market. …Urban blight is going to decrease. Zombie properties are going to decrease … it’s better for everybody.”
Why does this matter? Because the overhang of bad mortgage debt was largely responsible for the weak economy over the last eight years.
If the mortgage mess were truly behind us, if the bad debt were purged from the system, nothing would stand in the way of a wage-growth induced economic expansion. The lack of bad debt would not weigh down the economy as capital would be more efficiently deployed, and workers wouldn’t be burdened by excessive debts. The improved economy would stimulate spending and employment, and the elusive “escape velocity” economists desire would be real. However, as long as the system is burdened with bad debt, the economy will sputter, and the overhang of bad mortgage debt will loom over the housing market. So whether or not the mortgage mess is resolved or delayed is important, and unfortunately, I believe the final resolution has merely been delayed.
It’s better now, but mortgage debt is still a drag on the economy. The most recent symptom is the lack of MLS inventory, particularly for first-time homebuyers.