The Fourth Inning and Foreclosures

By John W. Schoen, Senior Producer
If the U.S. foreclosure crisis were a baseball game, we’d probably be in the bottom of the fourth inning.

That’s roughly the message from the latest data on home foreclosures and delinquencies released by an industry association Thursday.

The pace of new home foreclosures edged up again in the third quarter and the number of borrowers falling behind on their payments eased a bit, according to the Mortgage Bankers Association. The good news was that the rate of borrowers who have fallen three or more months behind on their payments has dropped to about 3.5 percent of all mortgages. That’s down from a peak of 5 percent in late 2009. But it’s still three and a half times the “normal” rate of about 1 percent that prevailed before the mortgage meltdown hit in late 2007.

“If you look at the pace of improvement I think we’re three to four years away from the typical pattern of seriously delinquent loans," said Michael Fratantoni, MBA's vice president of research and economics.

Since the mortgage meltdown began in 2007, roughly six million homes have been lost to foreclosure. (Estimates vary somewhat because multiple foreclosures are often recorded on a given property as the homeowner and lender try to avoid it.) Another four million homes are estimated to be at some stage in the foreclosure process. New foreclosures are currently started at the rate of about two million a year.

That pace of new foreclosures may begin to ease more, though. The delinquency rate –- the number of borrowers who have fallen behind on their payments -- fell in the third quarter to the lowest level in nearly three years. For all loans, the rate fell to 7.99 percent from 8.44 percent in the second quarter. That’s down from 9.13 percent a year ago and the lowest level since the fourth quarter of 2008.

Borrowers with subprime adjustable mortgages saw the biggest jump in new foreclosures in the third quarter. Some 4.65 percent of those subprime loans entered the foreclosure pipeline. That's up from 3.62 percent in the second quarter, a 28 percent increase. The MBA said the rise was due in part to an increase in the number of loans that failed to get lender approval for a modification. Some states also ended their moratoriums on foreclosures during the quarter. Overall, the pace of new foreclosures for all loans edged up to 1.08 percent in the third quarter from 0.96 percent in the prior three month period. That’s down from 1.34 percent in the same period a year ago.

A lot depends on the outlook for the economy which, though showing gradual signs of improvement, is not creating jobs fast enough to put much of a dent in the unemployment rate, which is hovering at around 9 percent.

advertisementThe uptick in the pace of foreclosures comes as the U.S. homebuilding industry is beginning to show a pulse three years after nearly shutting down. Though still on track this year to set a record low since 1960, when data were first collected, single family housing starts were up 3.9 percent, and permits jumped 10.9 percent. (Many economists believe permits are a better barometer of housing market strength because they are less affected less by weather and signal a pickup in future construction.)

“This was a good report," said Patrick Newport, an economist at IHS Global Insight. “It has supporting evidence that the single-family market is finally getting off the mat.”

Continued improvement in home sales and prices, though, will depend heavily on the volume of foreclosed homes coming back on the market. Thursday’s MBA data showed that lenders have barely made a dent in the overall backlog of foreclosed homes. Since it began rising in 2007, the foreclosure inventory rate -– the percentage of loans in foreclosure -– has remained stuck at roughly 4.5 percent. That’s four and a half times the “normal” rate of about 1 percent of all homes in the foreclosure pipeline.

Not all of those homes will eventually be seized. Some foreclosures can be “cured” with a loan modification or by a homeowner catching up on missed payments. But the remainder will sit on a lender’s books until they can find a new buyer, often at a “distressed” price. Each new home that enters the foreclosure pieline becomes part of that “shadow” inventory.

“The large number of homes still in the shadow inventory will cast a cloud over the housing market and the wider economy for a few years yet,“ said Paul Dales, a senior economist at Capital Economics.

Dales figures there were something like 4.2 million homes waiting to hit the market at the end of the third quarter. As they do, they’ll continue to depress home prices, which have begun falling again after stabilizing this summer. Falling prices put more borrowers at risk of foreclosing as they burn through the remaining equity in their home and end up “underwater,” owing more than their house is worth. Some 11 million homes, or about 22 percent of all mortgaged homes, are currently underwater. Another 2.4 million have less than 5 percent equity, according to CoreLogic.

Underwater borrowers are more likely to enter a so-called “strategic” default by simply walking away from their home and no longer making mortgage payments. The rate of that default varies widely from state to state, based on both housing market conditions and state laws governing a lenders’ ability to collect the unpaid debt. Some “non-recourse” states protect homeowners from those collection efforts.

advertisementAs more homeowners fall underwater, strategic default has become a bigger headache for mortgage lenders. A recent study by the MBA's Research Institute for Housing America found that strategic defaults tend to cluster around homes already in foreclosure as friends, family and neighbors exchange advice on whether to walk away.

“It’s a concern because of the manner in which it’s become part of the public conversation,’ said Fratantoni.

Estimates of the levels of strategic default are all but impossible to make, the study found, largely because it’s very difficult to determine whether a default was truly “voluntary.” But the study found that one of the most critical variables affecting the pace of such defaults was the length of time a given home was in the foreclosure process.

The longer that process takes, the longer the idea of strategic default has to spread from one borrower to another. Today, foreclosures can take several years to play out in some parts of the country, up from historical levels of three to five months, according to the study.

“This is disastrous for a housing sector trying to recover from a crisis,” the MBA researchers said.

Delinquent payments on mortgages are down but CNBC's Diana Olick explains why they don't tell the whole story.

Home Sales vs. Building

NAR Reports Increased Home Sales, but Prices Drop
Nov 9 2011, 11:16AM
According to the National Association of Realtors® (NAR) home sales rose in every state during the third quarter compared to the same period one year earlier but prices continued to decline. The median price of a single family home declined from the third quarter of 2010 in 111 of the 150 metropolitan statistical areas (MSAs) tracked by the Association and rose in 39. In the second quarter 41 MSAs had annual price gains.

Lawrence Yun, NAR chief economist said that the market is holding fairly even. "Home sales need to recover first - only then can prices stabilize. Existing-home sales are little changed from the second quarter but are notably higher than a year ago," he said. "The good news is inventory levels have been trending gradually down."

Home sales which include single family residences, condominiums, and cooperative apartments, were down nationwide by 0.1 percent to a seasonally adjusted annual rate of 4.880 million units compared to 4.883 million in the second quarter but this was 17 percent above the 4.170 million pace recorded during the third quarter of 2010. That quarter, it should be noted, began just as the popular homebuyer tax credits expired.

Every state posted a gain but in 45 states (including the District of Columbia) those increased sales over a year ago were in double digit territory. The greatest increases were in North Dakota (+39.1 percent), Utah (+38.2 percent), and Nebraska (36.1 percent). On a regional basis, sales in the Midwest were up 25.1 percent, 16.7 percent in the West, 15.5 percent in the South, and 11.6 percent in the Northeast.

Median prices nationally declined 4.7 percent from 177,800 in the third quarter of 2010 to $169,500 in the most recent period. Distressed homes accounted for 30 percent of home sales compared to 33 percent in the second quarter and typically sold at a discount of about 20 percent.

NAR noted that median prices are a reflection of the types of homes that are selling and can be misleading at times because the level of foreclosures can vary notably in given markets. Annual price measures generally smooth out any quarterly swings.

Metropolitan area median condominium and cooperative prices were $167,600 in the third quarter, down 2.2 percent from the third quarter of 2010. Twelve metros of the 54 MSAs tracked by NAR showed increases in the median condo price, the remaining 42 declined.

The median existing single-family home price in the Northeast fell 6.5 percent from the third quarter of 2010 to $236,700. In the Midwest and the South median prices declined 2.2 percent to $142,300 and $153,200 respectively. The median existing single-family home price in the West dropped 9.0 percent to $205,700 in the third quarter from the same quarter of 2010. "Western home sales are dominated by cash investors in the lower price ranges," Yun explained.

NAR's Housing Affordability Index which measures the relationship between median home price, median family income, and mortgages interest rates stood at 183.8 in the third quarter, the second highest on record behind the first quarter of 2011. The higher the index, the greater the household purchasing power.

Twenty-nine percent of home purchases during the quarter were all cash compared to 30 percent in the second quarter and 29 percent one year earlier. Investors, who make up the bulk of cash purchasers, accounted for 20 percent of transactions in the third quarter compared to 19 percent in both the second quarter and a year ago.

First-time buyers purchased 32 percent of homes, down from 35 percent in the second quarter and 34 percent in the third quarter of 2010. Historically, entry-level buyers are responsible for about 40 percent of home purchases.

NAR President Ron Phipps said home sales should be notably higher given the buying power in today's market. "Housing affordability conditions have been at a record high this year, rents are rising and homes are selling for less than the cost of construction in most of the country. For people with secure jobs, good credit and long-term plans, today's conditions will be remembered as a golden opportunity to enter the housing market."