Housing Market Recovery Undermined by Seriously Delinquent Homeowners

Guest author: Keith Jurow is the author of the MVP Housing Market Report. This article was posted at Minyanville with the title “Seriously Delinquent Homeowners Undermine Hopes of a Market Recovery.”

According to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey released in mid-February of this year, nearly half of all nationwide home purchases in January 2011 involved a distressed property — either a foreclosed home or a short sale. Their January distressed property index reading of 49.5% was up from 47.2% in December and was the highest level since March of 2010.

This index rose in spite of cutbacks in the sale of repossessed homes last fall by servicing banks because of the robo-signing mess. Short sales continued to climb because most banks finally concluded that it was in their interest to accept a short sale offer rather than go through the time, expense, and complications of foreclosing and then selling the property.

As bad as this distressed property index is, it hides what is going on with the “shadow inventory” about which I have written extensively. Take a look at this amazing chart from Lender Processing Services.

The percentage of homes with a notice of default (NOD) where the owner has not made a payment in more than two years has risen steadily since January 2009. It is now 30% of all defaulted properties. At the end of 2009, it was a mere 10%. Many of them are “walkaways” who have stopped making the mortgage payment in spite of having the financial means to do so.

Homeowners are not stupid. The word gets around that the banks are not foreclosing very quickly on delinquent homeowners. In the NYC metro area, homeowners are finding out that the banks are hardly foreclosing at all. (We’ll take an-depth look at the New York City market and its suburbs in the July issue of my Housing Market Report.)

Leaders of the major banks continue to keep their heads in the sand. Their response to the housing debacle is still to kick the can down the road by not foreclosing on these seriously delinquent homeowners. The banks just don’t see that there is no housing bottom in sight.

Many of these delinquent homeowners have been able to sock away $50,000 or more by not paying their mortgage. As one attorney said in my recent article on strategic defaults: “More and more Floridians who pay their mortgage feel like chumps compared to the defaulters; they turn over their disposable income to the bank and know it will take most of their lifetimes to recover.” As home prices sink further, how much longer will these underwater owners keep paying?

Take a good look at this next chart from Lender Processing Services which looks at the problem in a different way.

This chart is really astounding. It shows the average number of days that homeowners with defaulted loans (NOD) have not made a mortgage payment. For New York, one of the states which requires court approval (judicial) of a foreclosure, it is more than 21 months. Can you imagine how many seriously delinquent loans there are in that state?

This figure for the average number of days delinquent continues to grow in nearly every state. It is the source of the “shadow inventory” pipeline. As prices continue their descent, the total number of properties in this situation will almost certainly increase. That’s because a growing number of seriously underwater homeowners are beginning to sense that their property’s value will not return to what they paid for it for many years, if ever.

The findings of a shocking new survey reported jointly by trulia.com and realtytrac.com were released on May 18 of this year. It revealed a dramatic change in consumer attitudes about when the housing market will “recover.” Only last November, 37% of those polled believed the recovery would begin no later than the end of 2012. That number plunged to 18% by April.

Most ominous in the report is that 54% of those surveyed thought the recovery would not occur until “2014 or later.” This percentage was only 34% in November 2010. Such an extraordinary shift in six months tells me that the number of potential walkaways is growing by leaps and bounds.

Additional Note from editor: In today’s NYT, it was reported that lenders now hold 872,000 properties.  This is even larger than the foreclosure numbers analyzed in Keith Jurow’s post.  At every turn the numbers keep getting worse.

For much more from Keith Jurow, see his Housing Market Report. Keith provides actionable data, charts, in-depth analysis and specific advice to help investors make better property decisions. Learn more.

Watch Keith talk about why he started the Housing Market Report

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