Lead Story

Foreclosures Start to Decline in More Than Half of States

By Mark Fogarty

The foreclosures flood of the past two years has been well documented and is continuing. But the latest figures show that in August, more than half of the states posted drops, either from July or from August 2008. That includes Nevada, where Las Vegas has been the poster child for overdevelopment and risky lending.

Looking at the latest figures from RealtyTrac, thirty states had drops of one kind or another in August foreclosure filings. The majority were drops for July, rather than from a year ago. But five states (Kentucky, North Dakota, Wyoming, Oklahoma and Washington) and the District of Columbia registered drops both from prior month and prior year month. The fact that these six are spread out over the country and not clustered in any one area is a sign this may be a trend.

The biggest drops occurred in Washington and Wyoming, where each had 50% decreases compared to July and about 15% each from August of last year.

Overall, the country recorded a less than 1% drop in filings from July but was still up a hefty 18% from last August.

It is hard to say whether the drop in foreclosure activity is being caused by market conditions or the effects of the Administration's modification program. It is probably a combination of both, as the HAMP program is just kicking into higher gear now.

Data points from the Mortgage Bankers Association's latest quarterly delinquencies report show that some states are upside down in delinquency to foreclosure ratios, which is another sign that the flood may be cresting. In those areas, the number of foreclosures is greater than the number of delinquencies, indicating that more than half of possible foreclosures have been recorded.

The implications for the real estate and mortgage markets of a turning point in the crisis, or at least an end to the beginning, are important. Foreclosed properties are toxic, ruining neighborhood values and sending prices plummeting. A true mortgage recovery won't be safe until the market bottom has been reached and those waiting for the cheapest price will have to get in.

A moratorium on foreclosures would be very helpful in this regard — and the HAMP program is providing a de facto one. The trial modifications underway and the real ones to follow are helping tens of thousands of borrowers avoid foreclosure, and could help hundreds of thousands eventually.

If foreclosure trends continue in a healthy direction and mortgage interest rates stay low (and they have dropped to around 5% on the 30-year after bumping up earlier in the year and choking off the refinancing boomlet) then 2010 could be a much healthier year for the business than this year has been.

The MBA numbers also shed some light on another hot topic, whether Federal Housing Administration lending will turn out to be toxic lending.

Indeed, delinquency and foreclosure numbers are higher for FHA loans than for conventional mortgages in the latest MBA numbers. But then again, the FHA program was designed for first-time homebuyers and the underserved. So it is far more comparable to subprime lending (which it has totally supplanted currently). Compared to subprime, FHA mortgages are performing far better.

Let's go straight to the worst of the worst, adjustable-rate mortgages. FHA's ARM portfolio is showing a 17.33% delinquency on 144,215 loans. That's more than one in every six, for a total of 24,000 mortgages delinquent. On the foreclosure side, 5% of those have defaulted, or a little more than 7,000.

Now let's go to subprime ARMs made by the subprime lenders that went so terribly astray over the past few years. An astonishing more than one in every four subprime ARM is delinquent. And on two million mortgages serviced, that's a half million loans. Foreclosures are only marginally lower.

Twenty-four thousand overdue loans versus half a million. Of course, these numbers reflect books of business where FHA lending contracted due to the competition from the freewheeling subprime firms. But still, the round goes to FHA.

Looking at them historically, FHA loans have remained in a fairly steady pattern of overdues, ranging from 11.7% in the first quarter of 2005 to 13.84% in the first quarter of this year. (The second quarter a bump of more than 50 basis points.)

Compare that to subprime, where the wheels fell off the car during that same time frame. For subprime loans, delinquencies jumped from 10.62% past due in the first quarter of 2005 to more than 25% in the second quarter of this year.

It seems some semblance of underwriting remained in order for FHA loans to perform, not well, but less disastrously than subprime. That would argue for a federal agency to oversee subprime lending when it does resume (and it will, eventually). Perhaps a remnant of Freddie Mac and Fannie Mae could oversee it, or perhaps even FHA itself.

Just about anything would be preferable to the Rube Goldberg contraption that ruled subprime, with players taking the cash out at every level while passing the risk on at every level until the end investors needed to be bailed out to such spectacular effect, by the readers of this website and all other taxpayers.