Foreclosures could reach 25 million before housing crisis ends

Shelby Bateson's picture

25 million foreclosures in the next few years sounds like an astronomical number. Since this housing crisis started in 2007, there have been close to 8 million foreclosures through the end of September 2009.

2007 Total foreclosures 2,203,209
2008 Total foreclosures 3,157,806
2009 Total foreclosures 1,528,364 (January – June 2009)
2009 Total foreclosures 937,840 (third quarter – 2009)
Total foreclosures to date 7,827,219

One out of every 136 home owners received a foreclosure notice in the last three months. That equates to a new foreclosure filing occurring every 10 seconds across the country. At this pace, and with the high numbers of people continuing to walk away from undervalued homes, it is forecast by Housing Predictor.com that the total number of foreclosed properties could be as high as 25 million before this housing crisis ends.

In addition to new foreclosure filings, bank repossessions jumped 21% from the second quarter to the third quarter.

"REO (bank owned) activity increased from the second quarter in all but two states and the District of Columbia indicating lenders may be starting to work through some of the pent-up foreclosure inventory caused by legislative delays, loan modification efforts and high volumes of distressed properties," said James Saccacio, CEO of RealtyTrac. However, REO listings still do not come close to the number of foreclosures that have been recorded. Banks continue to hold onto REO properties for several reasons, including:

• Many of the properties have title issues that need to be resolved
• Many of the properties are in states of utter disrepair
• A number of states have strict redemption rights periods, which prevents the lender from reselling the property
• A few states have extended the length of eviction proceedings
• The sheer volume of REO activity has created a “pig in the python” phenomena, (to put this in perspective, there will be roughly four times the number of REOs this year as in the last “normal” year, 2005)

While total foreclosures increased for the quarter, there was a bright spot. Notices of default actually dropped 4% from August to September.

Still, we’re not out of the woods. Six states account for 62% of the nation’s foreclosure activity: California, Florida, Arizona, Nevada, Illinois and Michigan. These are the states that saw the biggest property value increases during the housing boom. These are the same states that used the highest percentage of non-conventional types of financing, such as Pay Option ARM loans and interest only loans.

Pay Option ARM loans have just begun to re-set. Home owners with Option ARM loans starting deferring interest; therefore increasing their principal balances with their very first mortgage payments.

When you add the deferred payments to the drops in home values, and the fact that these payments are likely to increase from 1-2% interest only payments, to conforming rates closer to 5% on the current loan balances, these home owners are likely to go into what is known in the mortgage industry as severe “payment shock.”

These home owners could see their monthly payments triple when their payments re-set.

“Strategic foreclosures” are on the rise. Strategic foreclosures are those where home owners who are not having problems with making the payments, are walking away from homes where values have dropped so much that they can buy the home down the street for half what they owe on their current homes.

It has been predicted that between strategic foreclosures and Option ARM resets alone, we could see an additional 4.9 million foreclosures in 2010. That would drive the total foreclosures through 2010 to an astounding 12,727,219.

By the end of 2010, if predictions become reality, we will be more than half way to that 25 million mark.

If foreclosure filings continue at this rate, will home values continue to drop? If home values drop enough, will this move more of the buyers on the fence into purchasers?

Statistics show increased buying activity in 2009. The $8000 home buyer tax credit contributed to the buying, but there were more factors at work here.

There is pent up demand for home ownership, and the “affordability factor” has increased. The affordability factor considers income, home prices, mortgage rates and other factors. With mortgage rates close to record lows, prices at 2003 levels, and for those employed, income stable, the affordability factor has been rising for the last few years.

Some of the solutions that are being proposed by the Obama administration to stop foreclosures include:

Principal forgiveness – This is where the principal balance will be reduced by the lender to bring it closer to the actual real value. While investors (those who own the loans) seem to be going along with this idea, the loan servicers (who collect mortgage payments) are fighting principal forgiveness.

Payment forbearance – The FDIC is pushing forbearance as a short term (6 month) solution for those home owners who are unemployed, but who were making their payments as agreed prior to losing their jobs.

Streamlining of the loan modification process. The administration already has steps in process to make this a reality soon.

Extension of the the buyer tax credit has support and opposition. It remains to be seen if the tax credit will be extended beyond the November 30th deadline.

Clearly, the administration, the lenders, the investors, and any other interested parties have to come to some sort of working arrangement to stabilize the rate of foreclosures.

There are many economic indicators that show this momentum could slow. I would like to believe 25 million foreclosures is a number that is way too big.

Articles you might like to read for more information about topics covered in this article:

Congress considers extending the home buyer tax credit

Loan modifications are going to be made easier

California suspends foreclosures

Foreclosures reported third quarter

The new wave of foreclosures - Who is likely to default next?

Banks urged to offer payment forbearance

Resources quoted in this article include:

RealtyTrac.com

HousingPredictor.com

Photo credit

Written by Shelby Bateson

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