Fewer Foreclosures but Housing Outlook Worsens

It sounds contradictory, but the headline is correct.  According to Realty Trac, foreclosure actions declined 4.4% in October and are likely to fall further in the next month (or even longer).  The final stage of the process, repossession, saw a decrease of 8.7% MoM.  These declines have been attributed to effects of foreclosure freezes resulting from the mortgage mess from faulty documentation producing ownership questions.  These legal problems may have an impact on overall foreclosure filings, but the variation from September to October in repossessions looks very much like a typical fluctuation, as shown in the following graph from CNN Money:

   The possible impact of the foreclosure documentation mess on the top ten foreclosure states is evident in the following table from Realty Trac.  Four of the states (Nevada, California, Michigan and Idaho) have had much larger declines in foreclosure activity than the remaining top six.

To explain the terms in the table Realty Trac provides the following:

Report methodology
The RealtyTrac U.S. Foreclosure Market Report provides a count of the total number of properties with at least one foreclosure filing entered into the RealtyTrac database during the month — broken out by type of filing. Some foreclosure filings entered into the database during the month may have been recorded in previous months. Data is collected from more than 2,200 counties nationwide, and those counties account for more than 90 percent of the U.S. population. RealtyTrac’s report incorporates documents filed in all three phases of foreclosure: DefaultNotice of Default (NOD) and Lis Pendens (LIS); Auction — Notice of Trustee Sale and Notice of Foreclosure Sale (NTS and NFS); and Real Estate Owned, or REO properties (that have been foreclosed on and repurchased by a bank). The report does not count a property again if it receives the same type of foreclosure filing multiple times within the estimated foreclosure timeframe for the state where the property is located.

The foreclosure outlook is worsening because, as home prices fall, more mortgages go into negative equity and those already under water go deeper into the red.  Continuing high unemployment negatively effects foreclosure rates.  Unemployment remains at stubbornly high levels; the number of employed remains below 140 million (139.1 million in October) and 9.1 million were employed part time for economic reasons (involuntary part time).  When you subtract 18.2 million who are working part time by choice, the current number of people employed full time is 111.8 million.  That is down nearly 10 million from 121.7 peak in November 2007.  That represents a potential decline in demand for housing up to 3 million units from 2007, estimated using the average household size of 2.62 persons and assuming at least 25% of the full time jobs loss did not result in loss of ability to maintain independent household units.

Finally, the current home ownership rate is 66.9%, so up to 2 million home ownerships are exposed to default because of unemployment and under employment alone.  Michael David White reports that more than 11 million homes will default in this cycle, so the employment data does not explain approximately 80% (9/11) of the potential foreclosures.

A close correlation for the 11.57 million number is the number of mortgages underwater.   Out of  a total approximately 51 million mortgages, 21.5% had negative equity in the second quarter.  This totals 11 million, very close to the White number of eventual foreclosures.  With home prices likely headed lower it remains to be seen if the 11.57 million foreclosure estimate may be too conservative.  While unemployment may be producing some of the foreclosures, the largest effect can be attributed to the loss of home market values.  And those losses may not be over.

Even though there is likely much pain to come, it will probably felt more in some markets than others.  The map below from the Washington Post shows the distribution of foreclosures by metro real estate markets.

Related Articles

The Mortgage Mess  by Yves Smith

Unemployment and Foreclosures  by John Lounsbury

Housing Price Decline Continues  by Steven Hansen

The Aggregate Picture on Mortgage Delinquencies and Foreclosures  by Edward Harrison (Credit Writedowns)

Courts Helping Banks Screw Over Homeowners  by Matt Taibbi (Rolling Stone)

7 replies on “Fewer Foreclosures but Housing Outlook Worsens”

  1. I am still yet to fathom the reasons for the US administration not stepping in to stop the banks from further foreclosures in the aftermath of the bursting of the real estate bubble a couple of years ago.

    Foreclosures lead to further downward pressure on home prices which makes the rest of the borrowing community left holding property whose value reduces with every new foreclosure. It would not have been a bad idea at all for the Government to have stepped in with a broad loan guarantee and put pressure on the lenders to reschedule payments in most cases and , lastly, give direct monetary help to the houseowners through part repayment of their loans . The money that the government has advanced to he corporate world ( which shows little sign of having achieved anything substantial) may have shown better returns had it been directed to the root of the problem viz. the distressed home owners who, in turn, would have paid their dues to the banks and solved their liquidity problems.

    It is still not too late to take a holistic view and stop the foreclosures which have huge potential to wreck not only the homeowners lives but also the economy itself.

  2. Sunil – – –

    You have made a comment worthy of further exploration.

    The problem with what you propose has several aspects, all related to overvaluation of homes from a historical perspective.

    First, 8-10 million people have lost employment and a few million more are working for much lower pay. This represents as many as 4-5 million who entered into mortgages which they can no longer afford, even if they were drastrically reduced.

    Next, several million mortgages were entered by people who couldn’t even afford them at the start. Poor or non-existent underwriting led to the issuance of no income, liar, and other fraudulent contracts were born from the actions of brokers who were compensated for creating the mortgage which was then sold into packages of securities.

    Finally, several million more housing units were built over recent years than were needed. Over building was especially large in the up-scale end of the market.

    Let’s consider the possibility that the foreclosure problem might be reduced if all troubled mortgages were reduced by $100,000. Maybe that could reduce the number of eventul foreclosures by half? With current estimates that 11+ million foreclosures will occur, that would be a cost of $1.2 trillion to save 5-6 million of the 11+ million troubled mortgages.

    But the argument would be raised that all mortgages (about 51 million) should all get the same treatment on the basis of equitable treatment. That would be about $6 trillion.

    The equitable treatment argument would not stop there. Why shouldn’t all households receieve the same treatment. With about 131 million households in the U.S. the total would become about $15 trillion.

    In spite of the fact that banks seem to be enabled to skim trillions out of the U.S. over time, doing the same for the people would not happen. And the extent of the $100,000 solution described is greater than the size of bank “skimming” which has been enough to bring us to a sorry economic condition.

    Yes, stopping the foreclosures would be great. Taking direct action with government paid intervention just wouldn’t work.

    Getting to the government loan guarantee that you suggest would involve similar arguments of equitable treatment. Giving every household a $100,000 loan guarantee would have the same problem to a lesser scale. Because of the guarantee many households would view this as free money and there would certainly be unwise use and loan defaults anyway. If 20% of those guarantees ultimately defaulted the government cost would by in the range of $2.5 trillion.

  3. I agree John that I was being somewhat naive. I really did not appreciate the extent of the problem including the large number of excess houses in the country and the huge mass of currently unemployed people not able to make timely repayments.

    Neverthless, I do feel that a way has to be found out to make foreclosures (and resale ) the last option. Moreover, the culpability of the banks and large companies should not be brushed aside. Which brings me to my main concern :

    Is it right to trust this group again with the large chunks of government ( read public) munificence ?

    As a country, India, does not have too much to show by way of economic achievements over the last few decades ( barring the last few years). But certainly our “mixed” economy model has been quite steady like the proverbial tortoise. It has helped us avoid a good number of economic disasters as the private enterprise has always been kept in regulatory check while the government owned industry has ensured competition, transparency in pricing and and equitable distribution of wealth ( read salaries). The country , after struggling for forty years, is now poised for a long cycle of faster growth. This cycle appears to be quite invincible right now as it is backed by a fair mass of a growing middle class.

    Going down the line, I feel that the US may discover that the unfettered free enterprise model that it fathered may be going out of date and incapable of delivering results in the context of a shrinking economy and over ten million unemployed people. The companies will find it hard to come out of the “high wages /high bonus for some” mindset rather than a more equitable lower wages higher employment framework. Therefore, the country appears to require a dose of higher government regulation. Maybe, the government as a bigger employer in some key areas is also not a bad idea. But one thing for sure, the recovery process in the country needs a good amount of direct government intervention and lesser dependence on the corporate sector.

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