Default notices sent to delinquent U.S. homeowners soared 33 percent in August when compared with July, evidence that lenders are accelerating the foreclosure process after almost one year of delays, according to RealtyTrac, Inc. First-time default notices were filed on 78,880 homes, the highest number in nine months. Total foreclosure filings, which also include auction and home-seizure notices, rose seven percent from a four-year low in July to 228,098. One in 570 homes received a notice during August. “The industry appears to be hitting the reset button and the logjam may finally be breaking up,” Rick Sharga, RealtyTrac senior vice president, said. Foreclosure filings in 2011 have been “artificially low.”
“This is really the first time we’ve seen a significant increase in the number of new foreclosure actions,” Sharga said. “It’s still possible this is a blip, but I think it’s much more likely we’re seeing the beginning of a trend here.” Foreclosure activity started declining last year after problems surfaced with the way many lenders were handling foreclosure paperwork, such as shoddy mortgage paperwork comprising several shortcuts known as robo-signing.
Additional factors have also stalled the pace of new foreclosures. In some cases, the process has been held delayed by courts in states where judges are involved in the foreclosure process, a possible settlement of government investigations into mortgage-lending practices, and lenders’ reluctance to take back properties because of slowing home sales. A rise in foreclosures also means a potentially faster turnaround for the U.S. housing market. Experts say that revival won’t occur as long as the glut of potential foreclosures remains on the market.
Foreclosures depress home values and create uncertainty among potential homebuyers who worry that prices may further decline as more foreclosures hit the market. There are approximately 3.7 million more homes in some phase of foreclosure at present than there would be in a normal housing market, according to Citi analyst Josh Levin. “This bloated foreclosure pipeline now presents the greatest obstacle to a housing market recovery,” he said.
Although negotiations between some banks and state attorneys general regarding foreclosure practices are still unresolved, several restarted foreclosure actions after an April settlement with federal regulators. JPMorgan Chase & Co., as of the end of June, had resumed foreclosure actions in nearly all of the 43 states where it had suspended its efforts. So-called “shadow inventory,” or the looming foreclosures that are still expected to hit the market, is a major threat for a housing sector that already has a glut of unsold homes. In spite of everything, default notices had fallen 18 percent when compared with August of 2010 and down 44 percent from the peak reached in April 2009 during the tail end of the recession.
Writing for The Consumerist website, Chris Morran says that “Last year, several of the country’s largest mortgage servicers — Bank of America, GMAC/Ally, JPMorgan Chase, among others — were forced to hit the pause button on foreclosure procedures after it was revealed that many foreclosure documents were being rubber stamped by untrained, ill-informed ‘robo-signers.’ This delay caused a bottleneck of foreclosure-worthy properties waiting to be reviewed. But now it looks like those homes are starting to trickle out into what could be a flood in early 2012. According to Bank of America, “We are on an ongoing path to return foreclosures to normal levels. Strong gains like that from July to August demonstrate our progress – primarily in judicial states — clearing more volume to advance to foreclosure once we pass the numerous quality controls we have in place and exhaust all options with homeowners. Our progress each month builds upon foreclosure levels lower than the market realities would dictate.”
A more optimistic view of the dismal report was offered by Gregory Tsujimoto, who performs market research for John Burns Real Estate Consulting in Irvine, CA, and views the data as reflecting more of a stall in an improving market than a new downtrend. Despite the sharp increase in monthly figures, Tsujimoto attaches more weight to an 18 percent decline in default notices on a yearly basis. Tsujimoto believes that the uptick in default notices is “a leading indicator for future foreclosures, which is not coming at a great time when measures of consumer confidence have declined.” But, he says that we must address the backlog of distressed inventory and “vacant homes in the marketplace before we get true improvement.” The other key, he says, is “creating jobs to spur demand.”
Among the states with the highest foreclosure rates, California led in new foreclosures with an increase of 55 percent over July, according to RealtyTrac. Cities in inland California posted big jumps, with Riverside and San Bernardino counties soaring 68 percent, Bakersfield 44 percent and Modesto 57 percent. “Scratch beneath the surface and there’s not a lot to cheer about this month. Home sales were up from a year earlier but remained far below average,” DataQuick President John Walsh said. “Many would-be buyers can’t find financing, and others who want to make a move now are stuck because they owe more than their homes are worth.”
The decision to move ahead is an important one since RealtyTrac has long maintained that property values won’t rise until a large number of distressed properties are purchased. “We don’t know yet if this is a beginning of a trend, but there is a good chance we might see a return to more realistic foreclosure numbers,” Sharga concluded.
