Foreclosure Problem Still Has 2/3 to Run

With the announcement of the Mortgage Abuses Settlement agreement this past week many have suggested the event would mark the increase of a flood of backlogged foreclosure filings.  In view of those opinions it seems a good time to review just what the data might indicate in that regard.  In this article we will review the data for the six years completed in the decline from the top of the housing bubble in 2006 for the major markets represented by the Case-Shiller Comp-10 Index.  As can be seen in the following graph the peak was not reached until 2007 for the FHFA national data.

The data on the number of foreclosure filings and foreclosures completed (REO – bank real estate owned) has been collected from a number of sources for 2006-2011, plus an estimate for 2012, and is listed in the following table:

The foreclosure filings process is divided into three categories:

  1. Notice of deficiency (preliminary)
  2. Notice of auction
  3. Notice of repossession

The accounting is such that each property is only counted once in each category no matter how many separate court actions ensue.  A commonly applied rule of thumb is that each category should be about 1/3 of the total for all three.  The following table shows that the average over seven years has the accumulated average for REO very near 1/3.  However, the ratio for REO was much below the average in 2006 and 2007 (when the flood of foreclosures was starting to build) and in 2011 when the robo-signing mess caused banks to slow the foreclosure completion process.

Realty Trac has published a graph for foreclosure filing activity in the second half of 2011:

A data table constructed from the graph shows that in the second half of 2011 the REO ratio was apparently much larger than for the first half of the year.

What does this data so far tell us about the potential foreclosure shadow inventory already in the foreclosure pipeline?  The first table tells us that there have been 15 million foreclosure filings 2006-2011 and 4.5 million homes taken into REO.  Using data published by the NAR (National Association of Realtors) we know that the approximate number of foreclosed homes resold has been approximately 20% of the 12.7 million existing home sales for 2009, 2010 and 2011, or approximately 2.5 million.  Since 2.95 million homes were repossessed in those three years there are about 400,000 more REO properties added to inventory than sold.  There could have been an excess for 2006-2008 as well, but we haven’t dug deep enough to try to get those numbers so they will be left out of the analysis for now.

A second category of shadow comes from the homes that have entered the foreclosure process but have not yet made it to repossession.  Taking the numbers that include the 2012 estimates, 18.7 million total filings minus 5.5 million completed that leaves 13.2 million in the two pre-REO categories.  Splitting them evenly between delinquency notice and auction gives 6.6 million homes already in foreclosure proceedings that will not have not completed the process by the end of 2012.  It is likely that there are more homes already in the foreclosure process but not completely through it than will have been repossessed by the end of this year.

Finally, what about the delinquent mortgages that have not received the first foreclosure filing notice?

Michael David White of Housing Story reports that 1 in 5 outstanding mortgages is likely to default.  With approximately 55 million mortgages that gives a round number of 11 million defaults.  Subtracting the 6.6 million homes already in foreclosure but not repossessed, there are more than 4 million more homes that can be expected to enter foreclosure proceedings.  That number, of course, could increase if home prices fall further and the economy continues to make slow progress (or even worse, regresses back into recession).

However, if the economy picks up and employment starts to add 2.5 to 3 million jobs per year some of the distress may be removed and the 4+ million waiting to enter foreclosure could be whittled down.

So adding up the numbers:

Only about 1/3 of the eventual number of home repossessions will have been completed by the end of 2012.

That means the number of REO properties yet to be sold on the market is of the order of 11 million (4 million not yet in foreclosure plus 6.6 million in foreclosure proceedings but not yet repossessed plus 0.4 million REO properties not yet sold).

One final note:  All the data we have been reviewing is for the total national data set.  The following “heat map” from Realty Trac shows that there are large variations in foreclosure activity from one part of the country to another.

The story will not be dismal everywhere.  But where it remains bad it could be very, very bad for several more years.

References and Sources:

Housing 12 Feb 2012

Realty Trak 11 Feb 2012

CNN Money 10 Feb 2012

The Washington Post 10 Feb 2012 20 Jan 2012

Bloomberg 31 Dec 2011

Housingwire 10 Jan 2011

The Wall Street Journal 12 Dec 2010

Mortgage Daily News 20 Jun 2010

Businessweek 14 Jan 2009

CNN Money 29 Jan 2008

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