RealtyTrac released its May U.S. Foreclosure report, which emphasized the first year-over-year increase in foreclosure starts in 28 months. Does this mean that we’re about to see a return to higher levels of foreclosure activity? Or is this a one-month anomaly?
I believe that we will see a return to slightly higher levels of foreclosure activity for the duration of this cycle.
Whether or not May turns out to be the month that starts this trend remains to be seen—we’ve seen wild swings on a month-over-month basis before, so we should probably reserve judgment until we see a quarter or more with numbers at the same level.
There are a few things worth considering about the RealtyTrac numbers, though:
First, it’s important to keep the numbers in their proper context.
Even if we’re looking at a 16% year-over-year increase in foreclosure starts, we’re coming off a year (2011) where the number of foreclosure starts fell precipitously. Even with the increase, May 2012 numbers are well short of what we saw in May 2010. Current foreclosure activity levels are probably running at between four and five times the level we’d see in a “healthy” market; this is off from a level of more than six times normal back in 2010, which will probably wind up being the peak year in terms of overall foreclosure activity, but still too high to suggest that the market is primed to recover rapidly.
Second, given all the delays that have artificially limited foreclosures over the past two years, it’s very likely that we’re going to see foreclosure activity increase at least slightly and then plateau at that higher level until we work through the enormous backlog of seriously delinquent loans.
How long that takes will depend on things like the number of homes sold via short sale, the number of delinquent loans sold off in NPL pools and subsequently modified, the availability of credit for interested home buyers, and how well the underlying economy is performing—particularly in the area of job creation. But since it’s still taking, on average, well over a year to execute a foreclosure once the loan enters the process, it’s safe to assume that we’re not going to work through this backlog until at least late in 2014, and that REO inventories will still be quite large through 2015.
Third, the AG settlement is almost certainly having an effect on these numbers. It’s not surprising to see that most of the increased activity in terms of foreclosure starts is happening in judicial states. But there’s a physical limit to how rapidly that activity can accelerate, simply based on how quickly courts can process all of the filings.
Similarly, it’s interesting to note that Southwestern states (particularly California) saw activity levels decrease, suggesting that the drop-off in these states is due at least in part to the AG settlement, as the major servicers have targeted borrowers in those states for the principal balance reductions that the settlement requires.
If we’ve learned anything tracking foreclosure activity during this seemingly unending downturn, it’s that trying to predict future trends is at best difficult, and sometimes little more than an educated guess. But as delinquencies trend down and foreclosure starts appear to be trending higher, we may actually be seeing the beginning of the long-overdue process of clearing out the overhang of delinquent loans—a necessary step towards a housing market recovery.
Rick Sharga is EVP, Carrington Mortgage Holdings LLC.