Capital Region Holds its Breath

For years, the Washington metro area has ranked high on every list of the nation’s hottest markets. Now, however, the region’s multiple listing service, MRIS, is holding its breath and closely monitoring the situation as a wave of backlogged foreclosures freed by the resolution of the Robogate processing scandal prepares to wash over local markets and threaten vulnerable jurisdictions.

The Capital region includes two jurisdictions, or “judicial states”, where court orders are required to foreclose, Maryland and the District of Columbia. Both have seen foreclosure activity contract as lenders brought processing to a standstill in the wake of the Robogate scandal. Now, the piper is waiting to be paid.

Indeed, the piper, in the form of stepped up lender foreclosure activity, may have already arrived. Initial default notices that start the foreclosure process in Maryland increased 100 percent in January 2012 compared to January 2011, the third straight month of year-over-year increases in default notices. Virginia scheduled auctions, the first public notice of foreclosure in that state, increased 12 percent in January 2012 compared to January 2011 - the first year-over-year increase after 14 consecutive months of year-over-year decreases, according to RealtyTrac.

Whether the wave of backlogged foreclosures affects values many depends more on how it arrives that its size. Current foreclosure inventories are modest. The Capital region’s foreclosure inventory is only 2.3 percent. Baltimore’s is higher, at 3.10 percent, but both are below the national average of 3.4 percent according to CoreLogic. Maryland currently has about 16-month supply of REOs, according to RealtyTrac, and more are on the way as foreclosure starts pick up.

Maryland homeowners are more vulnerable than those in suburban Virginia or DC. With only 12.4 percent of mortgages under water and another 4.2 percent nearly so, District ranks the 36^th among states in negative eqyuity. Some 26 percent of Maryland’s homeowners with mortgages are seriously underwater-their home values are more than 25 percent below what they owe on their mortgages. The state’s underwater percentage is slightly below the national average of 28 percent, according to RealtyTrac. About 4.64 percent of all mortgages in the state were over 90 days delinquent at the end of the year, according to the MBAA. That was the third highest percentage in the country, behind Nevada (6.33 percent) and Mississippi (4.65 percent). A report by a state foreclosure task force earlier this year found that 1.9 million homes in the state have lost more than $31 billion in value since 2009.

Maryland’s two poorest counties, Baltimore City and Prince George’s, may be the most vulnerable. In the third quarter of 2011, RealtyTrac data reported that over 27.0 percent of all foreclosures statewide occurred in Prince George’s County, by far the largest share among all Maryland jurisdictions. Baltimore City with 507 foreclosure filings (15.6 percent of the total) had the second highest number of foreclosures in Maryland. In March CoreLogic reported that some 125,000 homes in the Baltimore region were worth less than what their owners owed on the mortgages at the end of last year, up from nearly 120,000. CoreLogic ranked the Maryland ninth nationally with nearly 30 percent of its mortgages below or near negative equity.

Short sale discounts in the region are substantial and rank higher than the national average, a sign of market instability. In DC, short sales sell on average 55 percent below normal prices. The median discount in Maryland is 29.19 percent and in Virginia it is 26.31 percent, compared to the national average of 21.28 percent according to RealtyTrac.

The DC home price index in February decreased 0.8 percent from the previous month, the fifth straight month-over-month decrease for the index after hitting a 17-month high in September 2011. Meanwhile Washington area foreclosure activity in February increased 2 percent from the previous month, the third straight monthly increase in overall foreclosure activity.

As it monitors the potential impact of increased foreclosure activity in local markets, MRIS, whose footprint includes counties in Maryland, Virginia, West Virginia and DC., has to deal with the confusion caused by different terms used by the region’s jurisdictions to describe properties as they go through the pre-foreclosure and foreclosure processes.

“Local laws label foreclosures and short sales differently at different points in the process. The result makes it virtually impossible to compare data and trends in adjoining jurisdictions and to understand the big picture,” said John Heithaus, chief marketing officer at MRIS. MRIS is working with the Association of Real Estate License Law Officials (ARELLO), states and the MLS’s customers to resolve the problem and create greater uniformity.