Foreclosure Tsunami

Data from the Mortgage Bankers Association and elsewhere have confirmed the large, continuing rise in the share of loans that are delinquent or in the process of foreclosure.  MBA data for the first quarter of 2008 showed 5.64 percent of all mortgage loans were delinquent (not seasonally adjusted), and an additional 2.47 were in the process of foreclosure.  The corresponding percentages for the first quarter of 2007 were 4.33 and 1.28.  Assuming that the MBA survey covers about 80 percent of all mortgages on 1-4 family homes, the number of foreclosures started in 2007 was roughly 1.6 million, and the number of foreclosures in 2008 may exceed 2.5 million.  In 2004 and 2005, the annual number of foreclosures started was in the range of 800,000.

Foreclosures are commonly not initiated until loans are about 5 months in arrears.  Foreclosures that are started do not always end with the lender owning the property, but where that occurs the process takes two months to more than a year, depending on state (and, sometimes, local) laws and procedures, with 5 months being about average.  A table from the "Hope Now" group of lenders shows estimates of the range among states.  An alternative, more detailed, analysis may be found in a Freddie Mac report by Cutts and Merrill.

If the foreclosed property is sold at auction, the lender is typically the only bidder, and whether there is an auction or not, the lender ends up with REO (real-estate owned).  There may be a delay of several more months before the REO home is put up for sale, frequently because of the need to repair damage caused by vandalism or neglect.

In recent years, it appears that less than half of foreclosures resulted in the lender taking title to the home.  Despite various widely heralded plans to reduce foreclosures and evictions, the proportion of foreclosures resulting in forfeiture of the property is already rising and likely to increase further.

Thus, the problems shown by the recent rise in delinquencies and foreclosures still haven't been fully reflected in the housing market.  Even without additional increases in delinquencies and initial foreclosure actions, more homes and residents will be dumped on the market over the next year.

Foreclosures are costly, for communities as well as for borrowers and lenders.  Tenants in rental housing are also typically displaced when a foreclosure occurs.  It would be nice if all this pain could be avoided, but often there is no feasible alternative, and dragging out the process may end up making the situation worse.  The foreclosure process is only one factor in the housing market disarray, but recovery in states where foreclosure is longest and messiest may be delayed even more than elsewhere.

June 15, 2008 -

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