Over the next few days, you will be reading about Foreclosure Starts for Oct 2012 and for the 3rd Quarter 2012. The articles will be mentioning how Foreclosure Starts and Delinquency Rates are falling, Year over Year. This gives the impression that the Foreclosure Crisis is improving. For a sample of such articles:http://www.calculatedriskblog.com/2012/11/mba-mortgage-delinquencies-decreased-in.htmlMBA: Mortgage Delinquencies decreased in Q3The MBA reported that 11.47 percent of mortgage loans were either one payment delinquent or in the foreclosure process in Q3 2012 (delinquencies seasonally adjusted). This is down from 11.85 percent in Q2 2012.
From the MBA: Mortgage Delinquency and Foreclosure Rates Decreased During Third Quarter
The delinquency rate for mortgage loans on one-to-four-unit residential properties fell to a seasonally adjusted rate of 7.40 percent of all loans outstanding as of the end of the third quarter of 2012, a decrease of 18 basis points from the second quarter of 2012, and a decrease of 59 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.
The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. ... The percentage of loans in the foreclosure process at the end of the third quarter was 4.07 percent, down 20 basis points from the second quarter and 36 basis points lower than one year ago. The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 7.03 percent, a decrease of 28 basis points from last quarter, and a decrease of 86 basis points from the third quarter of last year.
“Mortgage delinquencies decreased compared to last quarter overall, driven mainly by a decline in loans that are 90 days or more delinquent,” observed Mike Fratantoni, MBA’s Vice President of Research and Economics. “The 90 day delinquency rate is at its lowest level since 2008, and together with the decline in the percentage of loans in foreclosure, this indicates a significant drop in the shadow inventory of distressed loans-a real positive for the housing market. The 30 day delinquency rate increased slightly, but remains close to the long-term average for this metric. Given the weak economic and job growth in third quarter, it is not surprising that this metric has not improved. ”
“The improvement in total delinquency rates was accompanied by a further drop in the foreclosure starts rate, which hit its lowest level since 2007. Moreover, the foreclosure inventory rate decreased by 20 basis points over the quarter, the largest quarterly drop in the history of the survey. The level however, is still roughly four times the long-run average for this series as we continue to see back logs of loans in the foreclosure process in states with a judicial foreclosure system. The foreclosure rate for judicial states decreased slightly to 6.6 percent and the foreclosure rate for non-judicial states showed a steeper drop to 2.4 percent. The difference in the foreclosure rates of the two regimes is at its widest since we started tracking this metric in 2006."
Yes, Foreclosure Rates are down, but here is why.
1. The OCC 2011 Consent Decree and the Attorney General's Settlement Decree required lenders to change foreclosure and servicing procedures. Additionally, they transcribed new procedures for Loan Modification efforts. The result of all the changes forced lenders to radically reduce foreclosures while making the changes. Oct 1, 2012, the changes were required to take effect.
2. New statutes in many states in 2010 and 2011 forced lenders to either alter foreclosure practices, or in cases like New Jersey and South Carolina, cease foreclosures for 12-18 months. Nevada implemented a modification program that reduced foreclosure starts by 95%, while lenders attempted to comply.
3. HAMP modification programs are still going on, and the HAMP mods take several months to go from trial to permanent. And if the mod is denied, then the person can re-apply, extending out further the time in the home without foreclosure starting. (60% of such permanent mods will fail within two years.)
4. Short Sale attempts also reduce the Foreclosure Starts, and when a Short Sale is actually granted, it permanently reduces the Foreclosure rate. Denied Short Sales will eventually drive up the Foreclosure rate, but only after 6-12 months while the Short Sale is attempted to be worked out.
The bottom line is that Foreclosure Starts have been delayed by all these actions. Now that new procedures have taken effect, the Rates should begin to increase again.
Mortgage Delinquencies are down Year over Year by 174,000. This is about 14,500 per month. What factors may be a result of this?
1. More loan mods being done, which we know is happening.
2. More Short Sales being completed, which is occurring.
3. Completed foreclosures, which will be less likely to seriously reduce delinquencies, since the completed foreclosures are being replaced by new filings, though at a decreased rate.
The simple fact is that based upon foreclosure prevention efforts, delinquencies should be down.
Where do we go from here?Yes, foreclosure start numbers have improved, but likely only temporary. Foreclosures will begin to increase after the beginning of the year. This is because the Modification efforts that delay foreclosures will be completed, with increasing frequency. Those denied, and most will be, will find that the Foreclosure Process is initiated shortly after. Foreclosures will also begin anew because the state imposed moratoriums will expire, allowing lenders to foreclose in different states.
But this is only the "short term" effects. What else can we expect?
1. The Alt A loans have now turned adjustable, except for some 7 & 10 year terms. These loans have current interest rates of no more than 3.25% generally, since they are tied to either the LIBOR or MTA Indexes. Essentially, they have received "temporary modifications". As Index values increase, which they will, the loan interest rates increase, so all of these loans will be at risk.
2. 50% of Subprime loans remain. All are at their Start Rates, since the LIBOR Index is so low. When rates go up, the loan rates will increase again, at 1.5 to 2% per year. More loans will fail.
3. Most modified loans, whatever type loan, have been modified at 2% rates for 5 years, and then they go up 1% per year, until they max out at the "contract rate", which up to the last year was between 4 and 6%. Expect them to begin failing after 5 years. (This was done by design, simply to delay foreclosures. The Treasury admitted this.)
4. Prime loans are failing in greater numbers, even though they are 30 year fixed. They will continue to fail due to lack of or decreasing income. Liquidity Crunch will doom these borrowers.
5. Currently, home values are claimed to be rising at a 2% Year over Year rate. This number is absurd because the 2% rate is the Median of all sales. Since higher priced homes are now selling more frequently, the "value" will be higher. Additionally, in areas of restrained inventory, prices are becoming over inflated again. (Does anyone seriously believed that 25% Year over Year price increases in Arizona reflect reality? In my own area, 1600 square feet homes in the same neighborhood, all similar, can go from $140k to $220k. This is no rational for the prices being paid, except that there is a one month supply of homes listed. Inventory is being held back to force higher prices.)
28% of homes currently have negative equity. As foreclosures increase, values will fall again, creating more negative equity. At 150% negative equity, at least 40% will default strategically default, if they see no likely increase in values.
If honesty in reporting existed, the true nature of housing would be reported. But that would further depress the market, so you will not hear that.
BTW, I am working on an article which covers where the new buyers, if any, have to come from. It will show why we should not expect any home sales recovery in the near to intermediate future.
. Modification procedures before the foreclosure process is started will take at least three months on any loan being considered for a modifications