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Foreclosure rate is likely two years away from a return to true normal, CoreLogic economist says

The U.S. foreclosure rate and mortgage delinquencies have fallen to levels not seen since before the housing crash eight years ago, but that doesn’t necessarily mean that the housing market has return to normal. CoreLogic’s Chief Economist Frank Nothaft spoke with Scotsman Guide News about the improved housing market and why the foreclosure rate could take another two years to return to its traditional norm.

Completed foreclosures ticked up for the month in March, but overall the trend has been down, right?  

NothaftWhen you look on a year-over-year basis, and we compare our latest data from March 2015 to March 2016, the news is very good, and it has been very good for  a number of years. The total amount of foreclosure inventory — that is the percentage of mortgaged property that is some stage of  the foreclosure process — that’s dropped 23 percent from a year ago. We are now at the lowest inventory level, the lowest foreclosure rate, since November 2007 prior to the onset of the Great Recession. It is still elevated if we compare it to what the foreclosure rate was 15, 20 years ago, so we are not back to a normal foreclosure rate yet, but we have made substantial progress in the U.S.

Do you believe we’ll get back to a foreclosure rate that would be considered normal and, if so, when?

Yes, I do think we will, but I think it is probably still a couple of years away. There are still a lot of what we refer to in the industry as "the legacy books," that is, the book of loans that originated in ’05, ‘06 and ’07, which continue to have poor performance — in other words, high default rates. The loans that have been originated since 2009 have performed exceptionally well. The default rate [on loans] originated from 2009 onward is extraordinarily low and, over time, as the industry works through the legacy books, the overall foreclosure inventory will continue to shrink. I am expecting another sizable drop in the foreclosure inventory over the next 12 months and the 12 months beyond that. But I think it will take that long, two more years or so, before we see the foreclosure rate down from where it is today, at 1.1 percent, to roughly half a percent, which is more like what we saw 15 or 20 years ago.

Are there any areas of the country that you are concerned about?

One has to be vigilant and look all around the country, but the markets where we have seen an uptick in default rates have been in North Dakota and West Virginia. Those are states that have been impacted by the declines in the usage of energy resources. Clearly in West Virginia, it is coal, and the coal-mining industry has been affected over the last few years. Mines are closing. Miners are being laid off. That is affecting the local economy and translating into a pickup in default rates. Likewise, North Dakota, which had been the star of the last several years in terms of economic performance, has totally changed over the last 18 months as oil prices have fallen sharply in the global market. That makes the extraction of the oil from the shale less economical, less profitable. That is a very expensive way to extract oil. When a price of a barrel of oil is $100 or higher a barrel, it is very profitable to extract the oil in North Dakota. When it has fallen to $40 or $50 a barrel, it is not profitable, and so North Dakota has been affected by the huge drop in the price. That is resulting in layoffs, declines in employment. That is further triggering an uptick in default rates.  

Are there any other places affected by this?

If you look at some cities, small cities where they have a large portion of their employment in energy production, they are being affected as well. Those would be smaller cities, like Midland and Odessa, Texas, even Houma, Louisiana. If you look statewide, Texas is still doing fine. Louisiana is still doing fine, and default rates are still declining, but there are pockets where a large portion of the employment base is based on energy production. In those pockets of those states, we’ve seen an uptick in default rates. Keep an eye on those markets. I think they are potentially at risk for further increases in default rates, especially if oil prices stay at the current low level. Most experts in the oil industry have forecast that oil prices are probably not going to change a whole lot from their current levels. They will probably gradually move a bit higher in the next year, but not anything like what would be necessary for a sharp rebound in energy production in places like North Dakota and so on.

But on the whole, you are not worried about a recession that could drive foreclosures back up across the country.

That is right. According to the latest data, the economy grew about 2 percent in 2015. We expect the growth rate to stay at that pace in 2016.  We just received the release of the first quarter data from the federal government, and the economy didn’t grow that well in the first quarter. I think it was roughly half a percent economic growth, but I do think we are going to see growth pick up from the level in the first quarter. If we hit 2 percent economic growth, that should be sufficient to generate approximately 2.5 million additional jobs in the U.S. economy, and that will be very positive for helping to improve family finances and enable the bulk of homeowners to remain current on their mortgages. Now, you can never rule out a recession. We are not forecasting a recession, but there is some small probability that it could happen. I put the probability of a recession happening in 2016 at  20 percent, which is, by economists’ standards, a pretty low probability, but you can’t rule it out.   



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