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Residential Department: DataDecoded: May 2016

 

DataDecoded

A new wave of foreclosures is unlikely this year

U.S. Foreclosure ActivityThe housing market is notoriously cyclical, and nowhere has this phenomenon been more reliable than in the case of foreclosure activity.

Since peaking seven years ago, foreclosures have been declining rapidly, but the number of completed foreclosures has increased steadily in the past year. Some industry analysts are concerned that this increase may signal the next wave of increased foreclosure activity, which would spell trouble for the still-recovering housing market.

In fact, the real estate owned (REO) activity has increased on an annual basis for 10 consecutive months. Almost 450,000 properties were repossessed in 2015, up 38 percent from 2014, but still 57 percent below the peak of nearly 1.1 million repossessions in 2010.

This activity, however, does not foretell a new wave of foreclosures. What is driving these numbers is the fact that lenders are finally processing seriously delinquent loans on highly distressed properties. Roughly 80 percent of the loans in foreclosure were originated in 2010 or earlier. A high percentage of these repossessions are in judicial foreclosure states like New York, New Jersey, Illinois, Florida and Maryland, where foreclosure processes sometimes take more than 1,000 days to execute.

On the other hand, the overall foreclosure activity has continued to decline. Foreclosure starts in 2015, according to RealtyTrac, were at a 10-year low. Roughly 570,000 loans entered the foreclosure process last year, down 73 percent from the 2009 peak of the foreclosure crisis.

Inventory levels of REO homes also continue to decline. Fannie Mae and Freddie Mac reported that their collective REO inventory fell 34 percent from 2014 levels. The Mortgage Bankers Association (MBA) reports that 1.77 percent of outstanding loans were in the foreclosure process at the end of third-quarter 2015 — the lowest foreclosure inventory rate seen since third-quarter 2007.

Delinquencies also are declining, according to the MBA. Since the housing-market bust, lenders have been incredibly risk-averse, and the tighter-than-usual credit terms have resulted in mortgage loans performing better than they ever have.

The share of overall loans in serious delinquency — loans that are 90 days or more past due — was 3.44 percent, the lowest rate since third-quarter 2007. Overall delinquency rates were at 4.8 percent, lower than the historical average of 5.4 percent. So the pipeline for new foreclosures appears to be essentially shut off.

Some point to borrowers who are underwater on their loans as a risk, but according to Zillow, the U.S. negative- equity rate, which peaked in first-quarter 2012 at 31.4 percent, fell to 13.1 percent this past fourth quarter, down from 16.9 percent a year earlier. This means that roughly 6.3 million American homeowners remained underwater at year-end 2015, but this is down from about 8.7 million the prior year, and down considerably from the peak of the market, when 16.1 million homeowners were underwater.

The homes that are foreclosed on are finding ready buyers, with the inventory of existing-home sales nationally languishing at about four months supply — and much lower in some of the hotter housing markets. Sales of distressed properties — REO homes and short sales — are now running at about 10 percent of existing-home sales, according to CoreLogic, which is about one-third of the volume they accounted for at the peak. These properties are in high demand and selling much closer to full market value than they did during the earlier phases of the housing-market recovery.

So are we in danger of a new wave of foreclosure activity this year? Market signs certainly don’t point to it. Lending standards are still tighter than usual. Delinquencies and defaults are declining. There are fewer underwater borrowers. In addition, there are no underlying forces that seem poised to change any of these trends. So it seems like an unexpected meltdown of the U.S. economy might be the only thing that could take the market into a new cycle of foreclosure activity.


 

Rick Sharga is executive vice president of Ten-X. He is one of the country’s most frequently quoted sources on real estate, mortgage and foreclosure trends. Sharga has appeared on top television shows and briefed government organizations and corporations on foreclosure trends. He also conducts foreclosure training for leading real estate organizations. Before Ten-X, Sharga was an executive vice president and primary spokesman for Carrington Mortgage Holdings. Reach Sharga at rsharga@ten-x.com.

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