The Truth Behind the Numbers on Declining Foreclosures

Recent first quarter research from numerous sources supports industry sentiment that the bottom of the current real estate cycle has been reached, and the new cycle has begun. In an unlikely alliance, government, the private sector, and even the media have all identified the unrelenting wave of foreclosures as the source of the problem and directed all of their efforts to hunting down the beast and killing it. Based on recent numbers, the foreclosure crisis could appear to be contained. According to the numbers:

• Overall foreclosure filings are down 19% -- their lowest level in four years.

• The volume of “pre-foreclosure” sales hit a record 109,593 transactions as homeowners and banks adopted short sales as a preemptive strike to losing their homes.

• Analysts monitoring mortgage delinquency rates, the accepted metric predicting foreclosure volume, are reporting continuing month-over-month declines in delinquencies.

• Credit-reporting agencies, well known for keeping falling FICO scores top of mind, are now proud to report that consumers shed mortgage debt to the tune of $350 billion over the last year and are continuing to trim the fat.

• The Obama Administration’s assault on the housing crisis through no less than 12 separate programs since 2009 have provided millions of distressed homeowners permanent modifications, refinancing opportunities, forbearances, short sale incentives and even in some cases, mortgage forgiveness.

While these are impressive metrics, the real estate industry would be wise to season its interpretation of the data with a dose of skeptical pragmatism. Too much emphasis is being placed on surveys and reports to validate a recovery instead of taking a hard look at what is transpiring on a day-by-day and case-by-case. Albeit mitigated, the foreclosure crisis is still very much alive and well.

When the pundits are silenced, and the analysts are deprived of their spreadsheets, what remains is a staggering number of homeowners, over 3.5 million, having lost their homes since 2008. No metric accurately represents this devastation on families, their surrounding communities, and the overall economy. Granted, foreclosure filings are at record low levels and continue to fall. Nevertheless, nearly 200,000 new borrowers received Notices of Default during the first quarter of 2012.

Looking at the crisis from the lender perspective, the numbers don’t fully portray the battle lenders face to minimize losses. While data publicizing lower defaults points to a possible end to the drag of REO on lender balance sheets, that end is years away and the current cost of loss mitigation has proven to be expensive. Case in point: recent settlements with individual states over foreclosure improprieties cost lenders $25 billion, and still provide loopholes for more claims. Tougher standards implemented to avoid lax processing of foreclosure filings require more auditing and personnel to implement. And clearly, lenders have been forced to accept larger losses on REOs and to embrace short sales to prevent further hemorrhaging. In short, the numbers use a wide brush to paint a possible outcome of the foreclosure crisis, but ignore the present reality that homes are still being lost today.


A more holistic approach is needed to properly measure the effectiveness of the war on foreclosures. To be fair, the real estate industry and consumers alike should feel real hope as a result of data showing a consistent downward trend in new foreclosures quarter after quarter. The housing industry is at its strongest place in three years and is getting stronger. However, we shouldn’t allow backwards-looking or forward-projecting reports distract us from the ever-present reality of the severity of the foreclosure crisis. Conditions are improving, but the battle is far from over. Success is measured not by aggregate numbers, but by one homeowner at a time who avoids a foreclosure.

Foreclosure Settlement Falls Short

As published in the Los Angeles Business Journal, March 5, 2012:
 

The recent landmark foreclosure settlement between the nation’s five largest lenders and 49 states has certainly captured the headlines. After over a year of intense brinksmanship between the involved parties to mitigate bank liability while setting a realistic level of restitution to compensate victims of the robo-signing debacle, an agreement emerged.  The resulting accord may have minimal impact on the final wave of projected foreclosures still on the horizon, and won’t provide a meaningful boost to help real estate. At best, it’s a punitive solution for past abuses that will not be adequate to actually help the industry recover.

To be fair, any part of the settlement that provides relief for struggling borrowers can provide a stimulus to the market.  An estimated $18 billion of the $25 billion total settlement amount will go to California, with $3.92 billion of that earmarked for Los Angeles County.  Over 59,000 foreclosure filings occurred in Los Angeles County in 2011.  While awards up to $2,000 for borrowers wrongfully foreclosed on won’t bring back their homes, it at least provides some compensation to begin a fresh start. 

Recent estimates suggest that approximately a million borrowers in California alone who are currently underwater could be eligible for up to $20,000 in principal reductions thus making payments much more affordable.  An ancillary benefit to lower payments or any principal reduction on the senior deed could occur in situations where a 2^nd trust deed exists on properties and borrowers would be encouraged to stay current on payments giving life to lenders on the verge of being wiped out by foreclosure.  At first glance, this could appear as welcome news.

Deeper analysis reveals that the agreement falls short of addressing the 180,000+ REO inventory in Fannie and Freddie’s possession or the borrowers separated from these homes through the foreclosure process. Nor does it address the thousands of underwater mortgages held by the GSEs to which the GSEs are resistant to enact refinancing solutions.   Moreover, mortgage lenders now face a new wave refinancing applications generated by homeowners seeking to qualify under the new agreement. 

Borrower Backlog

One lender has already been quoted as citing processing times as long as 90 days for refinancing applications. Borrowers not qualified for refinancing under the new proposal could create such a backlog that eligible borrowers would be forced to wait. Or worse still, the market could see the return of higher interest rates to slow and manage the flow of mortgage applications.

Private capital has long been courted as the white knight to lead the recovery.  While prevailing sentiment would hardly characterize the private investor segment as a “victim,” the principal reductions proposed in the current agreement which would significantly affect investor returns, could result in the mass exodus of private capital from the market. Remember, too, that private capital is comprised not only of private equity firms and high-net-worth individuals, but also of insurance, pension and other institutional investors seeking maximum return for their beneficiaries.  Private investors provide a necessary back stop that if removed, may require more taxpayer and / or government intervention to fill the void.

While this $25 billion mortgage settlement plan gives genuine hope to many Angelenos to receive compensation or even lower monthly payments, it truly serves to provide regulators, lenders and government with a concrete example they can point to confirming that they took definitive action to restore economic equilibrium. There are some substantial cracks in the pavement, however, that will limit the true intent of the settlement in providing real help to the real estate market.