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Good news on the foreclosure front continues as defaults fell 7 percent in May. Overall foreclosure activity fell 3 percent during the month and is virtually unchanged from the level of a year ago, according to RealtyTrac’s latest report.
Bank repossessions hit a record high for the second month in a row in May, with a total of 93,777 U.S. properties repossessed by lenders during the month – an increase of 1 percent from the previous month and an increase of 44 percent from May 2009. All 50 states posted year-over-year increases in REO activity.
“The numbers in May continued and confirmed the trends we noticed in April: overall foreclosure activity leveling off while lenders work through the backlog of distressed properties that have built up over the past 20 months,” said James J. Saccacio, chief executive officer of RealtyTrac. “Defaults and scheduled auctions combined increased by 28 percent from 2007 to 2008 and another 32 percent from 2008 to 2009 – creating a build-up of delayed bank repossessions. Lenders appear to be ramping up the pace of completing those forestalled foreclosures even while the inflow of delinquencies into the foreclosure process has slowed.”
The significant drop in notices of default is good news for the real estate markets in the month ahead and a further sign, along with decreasing delinquencies, that the flood of foreclosures that have driven down property values may have peaked.
A total of 96,462 U.S. properties received default notices in May, a 7 percent decrease from the previous month and a 22 percent decrease from May 2009. It was the fewest default notices since November 2008 and down 32 percent from the peak of 142,064 default notices in April 2009.
With one in every 79 housing units receiving a foreclosure filing in May, Nevada continued to document the nation’s highest foreclosure rate despite a nearly 12 percent decrease in foreclosure activity from the previous month and a 16 percent decrease from May 2009. The state’s foreclosure rate was more than five times the national average.
Arizona foreclosure activity increased less than 1 percent from the previous month and was down nearly 5 percent from May 2009, but the state posted the nation’s second highest foreclosure rate for the second month in a row. One in every 169 Arizona properties received a foreclosure notice during the month – more than twice the national average.
One in every 174 Florida properties received a foreclosure notice in May, the nation’s third highest foreclosure rate, and one in every 186 California properties received a foreclosure notice in May, the fourth highest state foreclosure rate.
Foreclosure activity in Michigan increased nearly 6 percent from the previous month and was up 46 percent from May 2009, helping the state post the nation’s fifth highest foreclosure rate – one in every 223 Michigan properties received a foreclosure filing in May.
Other states with foreclosure rates ranking among the top 10 in May were Georgia, Idaho, Illinois, Utah and Maryland.
This article, like many “positive spin” articles is misleading on many fronts.
First, the article starts with “Good news on the foreclosure front continues as defaults fell 7 percent in May.”, but later states “The significant drop in notices of default is good news for the real estate markets in the month ahead and a further sign, along with decreasing delinquencies, that the flood of foreclosures that have driven down property values may have peaked.” I have a problem with that wording since “Defaults” and “Notices of Defaults” are being used interchangeably as though they were the same thing – they’re not. A “default” automatically occurs when a borrower violates the terms of the note and fails to cure within a specified period of time. For our purposes, we will limit “default” to meaning that a borrower fails to pay the mortgage loan for more than 30 days. A “notice of default” on the other hand, is a legal filing that the mortgage company sends the borrower notifying them of their “default”. Therefore, an easy question to ask is what happens when mortgage companies just delay sending “notices of default” (many are)? According to this article, that reduction in “notices of default” would be a positive for the real estate market. I don’t buy it. The real measure is mortgage loan delinquencies and I have seen nothing that indicates those are leveling off. After all, if a borrower is delinquent eventually it will be foreclosed if they do not cure the “default” or do not find another alternative solution (i.e. loan modification, short sale, etc.).
Second, this “leveling off” is occurring in the midst of unprecedented and unsustainable government intervention into the real estate market. That government intervention includes: Making Home Affordable/HAMP (loan refinance and loan modification programs), the $8,000 first time home buyer tax credit (probably enabled a lot of financially distressed to sell at inflated prices as buyer rushed to take advantage of the “fool’s gold”), expansion of the FHA which enabled more people to buy homes (and resulted in a 20%+ FHA mortgage loan default rate) and the US government’s $1.25 trillion mortgage securities purchase program and expanded Fannie Mae and Freddie Mac mortgage loan purchases (all together well more than $1.50 trillion resulting in artificially low interest rates). The question is what happens when this all goes away? I would venture to say that the decline will continue. Stan Humphries, chief economist for Zillow.com, seems to agree.
Third, Pending Homes Sales activity is already declining significantly. less financially distressed homeowners will be able to use a sale as a means to escape their predicament. As a result, foreclosures will increase.
Fourth, the huge “shadow inventory” of foreclosed, soon to be foreclosed and homeowners ready to sell if the market shows any signs of improvement totals over 10.3 million homes. That is nearly 2 years worth of inventory based on current projections for 2010 closed home sales. How do you think the market prices of homes will react to this large supply when it hits? Downward maybe?
Fifth, official government unemployment continues to hover around 10% (the real unemployment number is more like 17%) despite over $1.2 trillion in absurdly wasteful government spending, which will eventually have to be repaid in the form of higher taxes. High unemployment and eventual higher taxes which both reduce peoples’ disposable income will both hurt home prices and result in more foreclosures.
Last, foreclosure activity is going to increase in the future due to the massive resetting of the Option ARM mortgages which will not peak until around mid-2011 and end in late 2011. Given the speed at which mortgage lenders actually pursue loan defaults, the negative effects on the real estate market will likely last through 2012.
In summary, I cannot see how any knowledgeable economist can predict anything positive for the US housing market in the next several years. Additionally, further housing price declines are part of what is needed to help correct the US economy, which was simply making homes too expensive for most people.
Jim,
Thanks for your comments. You make some good points.
1. Regarding defaults and notices of default, the terms are not the same. Thanks for your comment. The decline in NODs however, also suggests a decline in defaults. That a decline in notices of default is a good thing is not our judgment, but the view of RealtyTrac, as reported in the article. By the way, mortgage loan delinquencies have indeed fallen. You’ll be glad to know that the delinquency rate for mortgages decreased from 10.44 percent in the fourth quarter of 2009 to 9.38 percent in the first quarter of this year, according to MBA.
2. You’re certainly right about government intervention in the marketplace. I agree with you that the impact on the market of the end of the credit, HAMP, FHA “reform” and the MBS purchase program is/will be huge and has not at all been realized yet. I see lots of parallels to “Cash for Clunkers.” Regarding government’s future role, I don’t suppose we will know the answer until we find out what the plans are for Freddie and Fannie.
3. Pending sales rose 6.0 percent to 110.9 based on contracts signed in April, from an upwardly revised 104.6 in March, and is 22.4 percent higher than April 2009 when it was 90.6. That follows gains of 7.1 percent in March and 8.3 percent in February. I suppose that could be leveling, but certainly not a significant decline. However, like you, I expect a significant decline in May contracts.
4. Regarding the shadow inventory, S&P today came out with a new estimate that’s higher than what has been suggested that ranges from 20 to 34 months’ supply. So based on this new data, your two year figure looks right. My reaction is that a sizeable percentage of these will be short sales, not REOs, and that the balance will indeed be a drag on the market. That’s the major reason most economists, including Stan Humphries, are saying don’t look for the recovery until 2013.
5. Regarding unemployment, I go by what the BLS says. They know more about it than I do.
6. You and I should make a gentleman’s bet on Option ARMS. I say they are not having the impact many predicted. Two reasons: rates have been low enough that many owners have refied into a fixed rate loan and their impact will be limited because they were marketed largely in four states. Options ARMS should be recasting big time right about now. Show me the money.
Jim, thanks again for your comments. Keep coming back and keep us honest!