Foreclosure Numbers

You can talk all you want of renewed interest in housing, slowly increasing sales and supposed stabilization in prices, but the elephant in the room is slowly growing, and banks, Fannie, Freddie and the government know it. I'm talking about foreclosures.

Economist Mark Zandi, often quoted by lawmakers on both sides of the aisle, told the Senate Budget Committee this morning that while he's "optimistic" with regard to the economy's prospects, "At the top of my list of concerns, at least in the near term, 6 to 12 months, is the ongoing problem in the housing market and the foreclosure crisis."

REO inventory is rising, he proved through some slides. Four million seriously delinquent loans, out of 50M first mortgage loans, "so that's a lot." And while he noted that the problems appear to have peaked, there are still over 600K properties in REO, which will only put more pressure on prices when they come to market.

Zandi called modification efforts "inadequate," despite the 1.5 to 2M modifications a year. "In the context of all the problems that we've got, it's still quite small," he noted. Zandi's biggest concern is that 14M homeowners, according to his calculations, are underwater, and 4M of those are underwater by more than 50%. "That's deeply underwater," he elaborated.

1. Chase announced yesterday that it has plans to add 25 new Chase Homeownership Centers in 19 states this year. "The best way to help borrowers find ways to stay in their homes is to sit down face-to-face and discuss their individual circumstances," writes Chase Home Lending CEO David Lowman in the press release.

2. Wells Fargo is holding 20 mediation events across the country this year, inviting more than 150,000 borrowers who are behind on payments. These will be held at hotels and convention centers, much like the non-profit Boston-based NACA has been doing for years.

3. Fannie Mae is expanding its loss mitigation efforts, trying to modify more borrowers, and if not, trying to find foreclosure alternatives, like short sales or deeds in lieu. They are also testing a program in Florida to negotiate modifications before going to court.

4. Earlier this week, the Hope Now coalition of servicers and investors reported it had done well more than twice the number of loan mods in 2010 than the government's Home Affordable Modification Program.

Bottom line: banks, Fannie, Freddie, etc, they really get it now. Foreclosures are ramping up again and are endangering today's fragile housing recovery. Rick Sharga at RealtyTrac claims we have yet to see the foreclosure peak. Regardless, even if 2011's number is slightly lower than the peak, it is more critical now than ever before to stem the tide because housing is struggling to recover on it's own without government intervention other than incredibly low mortgage rates, which don't appear to help much. Last year various government incentives helped mitigate the foreclosure losses to the overall market; the market doesn't have that benefit now.

Zandi says one answer is for Fannie and Freddie to stop charging higher refi rates for borrowers with low credit scores and higher LTV's (loan to value ratios) in order to facilitate more refinancing, even when borrowers are underwater. These are loans the GSE's likely already own or back. "It will cost Fannie and Freddie in interest income, but they will benefit in the form of fewer foreclosures," argues Zandi.

Here are some tidbits on foreclosures from my good friend Stuart Browne.
While the numbers are disturbingly high, they are not nearly as large as one would have expected given the surge in seriously delinquent loans and loans in the process of foreclosure. For the latter, here is a chart based on data from the MBA’s National Delinquency Survey, which covers “over 85%” of total 1-4 family first-lien mortgages.

On one side, the “completed foreclosure sales” understates the number of homes “lost,” given that many homeowners have “lost” their homes but been able to negotiate a short sale or (much less likely) done a deed in lieu of foreclosure. While there are no official estimates of either short sales or DILs, there is no doubt that the volume of short sales increased dramatically in 2009 and 2010.

Using CoreLogic’s estimates and grossing them up to reflect its incomplete geographic coverage, one would get short sales estimates of around 78,000 for 2007, 164,000 for 2008, 278,000 for 2009, and 331,000 for 2010. However, based on data reported by lenders on short sales in the OCC/OTS mortgage metrics reports, the CoreLogic estimates of short sales look way too high for 2007 and 2008 (the 2009 estimates look OK, but the 2010 estimates – which admittedly are not available for the full year – look a tad low). Using instead my own estimates for 2008 through 2010, here’s what completed foreclosure sales plus short sales might look like (I don’t have a DIL estimate, but it appears as if the volume of DILs was pretty low).

A “significant” % of completed foreclosure sales has been completed foreclosures on non owner occupied homes, though estimates vary as to what that % has been. In addition, not all short sales have involved homeowners involuntarily leaving their home, but who instead wanted to for economic or other reasons move and who were able to negotiate a short sale with their lender.

It is pretty clear, however, that overall foreclosure moratoria, foreclosure delays, modifications, and other workout activity continued to keep the number of homeowners who lost their homes to foreclosure massively lower than one would have expected given the delinquency/in foreclosure numbers.