As published in Scotsman Guide's Residential Edition, September 2012.
More than 311,000 U.S. properties started the foreclosure process this past second quarter, a 9 percent increase from the previous quarter and a 6 percent increase from second-quarter 2011 — the first year-over-year increase in U.S. foreclosure starts since fourth-quarter ’09.
The second-quarter number was the highest foreclosure-start total since first-quarter ’11, indicating that lenders are beginning to push more properties into the foreclosure pipeline after this past April’s national mortgage settlement between five of the nation’s largest lenders and 49 state attorneys general.
By setting clear guidelines for what constitutes a proper foreclosure, and also providing the major lenders with concrete goals in terms of loan modifications and other foreclosure-prevention efforts, the settlement is helping to break the foreclosure-processing logjam that was triggered by the robosigning scandal in fourth-quarter ’10.
But what types of distressed loans and properties securing those loans are now entering the foreclosure process? Is there something about the nature of these loans and properties that gives lenders and servicers the confidence to start the foreclosure process even though the settlement does not allow for so-called dual tracking — where the foreclosure process is progressing while the distressed homeowner is actively pursuing some type of foreclosure alternative, such as loan modification, refinancing or short sale?
To help answer those questions, let’s look at several key characteristics of loans that started the foreclosure process this past second quarter in three states with sizable quarterly increases in foreclosure starts: Illinois, Nevada and Washington. This analysis was limited to residential properties only.
These three states represent three distinct variations of the foreclosure process used by most states. Illinois employs a three-step judicial foreclosure process, while Nevada uses a three-step nonjudicial fore- closure process, and Washington has a two-step nonjudicial process where the default notice and scheduled auction notice are combined into one document.
Although the average year built, square footage and estimated current market value on foreclosure starts vary in these three states, the common thread is a high loan-to-value (LTV) ratio and a high default amount in the two states where that amount is included on the foreclosure document — Nevada and Washington.
The default amount is the amount the homeowner is behind on payments when the foreclosure process starts. The $25,180 average default amount in Nevada represents at least one year of missed payments based on a conservative estimate of monthly mortgage payments. The $46,858 average default amount in Washington conservatively represents at least two years of missed payments.
The LTVs of more than 100 percent represent homeowners who owe much more on the loan in foreclosure than the property securing that loan. Homeowners now starting the foreclosure process in Nevada have an absurd average LTV of 324 percent — meaning that if their home is now worth $100,000, the loan amount is $324,000.
What does this all mean? Most foreclosures started this past second quarter were on distressed homeowners who are in such a big hole there is little hope a loan modification or refinancing could help them avoid losing their property to foreclosure.
Daren Blomquist is vice president at RealtyTrac. With RealtyTrac since 2001, he is the company’s primary media spokesperson and expert on foreclosure statistics and trends. Blomquist is managing editor of the Foreclosure News Report and creates foreclosure market and sales reports cited by thousands of media outlets.
He interfaces with the Federal Reserve, U.S. Senate Joint Economic Committee and Banking Committee, U.S. Treasury Department, and numerous state housing and banking departments. Reach him at email@example.com.