RealEstateEconomyWatch.com

Not so long ago, foreclosures were rare and mortgage-backed securities were considered sleepy, conservative, super low risk investments.

All that changed with the meltdown in subprime mortgages that began in the second half of 2006.  Since then, foreclosures have poisoned the real estate markets like a cancer, flooding them with discounted properties that drive down home values.  When the supply of subprime victims was exhausted, sometime in 2008, foreclosures metastasized, spreading from the subprime markets in California, Florida, Arizona and Nevada to devastate homeowners across the nation who could not keep current on their mortgages because of lost jobs, high health care bills, fraud, credit card debt and homes worth less than what was owed.

The cost has been breathtaking.  The total value lost by American homeowners since the market peaked in June 2006 is now estimated at $9 trillion.  That’s more than the entire net worth of Canada. 

Foreclosures are still at near-record highs, up 2 percent last year over 2009.  With 5 million borrowers currently at least two months delinquent on their payments, some experts predict 2011 will set another foreclosure record.

In fact, there is reason to hope that the end of the multi-year foreclosure nightmare is finally in sight. The flow of future foreclosures has steadily slowed over the past year. Delinquency and default rates have been falling consistently.  Fewer new homeowners are becoming 30, 60 or 90 days delinquent on their mortgage payments.  Fewer are defaulting and initiating the foreclosure process.  Even though the Administration’s Home Affordable Modification Program (HAMP) fell far short of making the impact on foreclosures that it promised, the slowly improving economy is having a healing impact on mortgage defaults.

 Here are some sign posts of the improving default picture:

• Today RealtyTrac reported that default notices were down1 percent in January from the previous month and have decreased 27 percent from January 2010 – the 12th straight month where default notices decreased on a year-over-year basis. January was also the fourth straight month where default notices decreased on a month-over-month basis, giving it the lowest monthly total for default notices since July 2007.
•  In December, default notices were down 35 percent from December 2009 and scheduled foreclosure actions were down 20 percent from last year, according to the Mortgage Bankers Association’s quarterly delinquency survey. Nearly a year ago, MBA’s chief economist, Jay Brinkmann, said, “The continued and sizable drop in the 30-day delinquency rate is a concrete sign that the end may be in sight.”
•  The 90-day delinquency rate of single-family mortgages held by Fannie Mae fell to 4.52 percent in November from 5.29 percent a year ago. Freddie Mac’s rate of single-family home loans more than 90-days delinquent inched up to 3.85% from 3.83% a year ago.
•  Last June, Equifax found evidence that delinquencies were peaking during 2010. It analyzed nearly 200 million credit files of U.S. consumers and found that past due first mortgages declined last May for the fourth consecutive month, while home equity loan delinquencies dropped on both a month-over-month and year-over-year basis.
•  According to ForeclosureRadar, for the first time since the foreclosure crisis began, Arizona, California, and Nevada-three of the states where the crisis began-saw a drop in the filing of new foreclosure actions last year.

 Certainly, there will be rocks in the road to recovery.  Some expect that further price declines resulting from the extraordinary number of foreclosures currently in the pipeline will drive more homeowners upside down on their mortgages and lead some owners to “strategically default” -voluntarily walk away from homes that have become financial liabilities.

 Robo-gate will exact its revenge on the entire housing economy, not just the lenders responsible for it.  Before Bank of America and Wells halted foreclosure processing and froze thousands of properties in place last November, the average property took about 438 days from first missed payment to resale, according to a study by LPS.  Earlier this week, Fitch Ratings predicted that the intensive scrutiny of foreclosure processing resulting from the Robo-gate scandal, both internally and externally, will extend the time frame to four years.  (See Robo-gate Will Haunt REO Inventory for Four Years.)

 It will take years of appreciating values for significant numbers of homeowners to achieve positive equity in their homes.  Only then will they be relatively safe from foreclosure.  When that time comes, we will look back on the Foreclosure Years with sadness at the great cost in national and personal wealth, and the loss of so many families’ homes.

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