It’s getting to that time of year when bears think about retreating to a cave and hibernating until spring. Unfortunately, it doesn’t seem as if the bears that inhabit this neck of the financial woods are in the mood to come in out of the cold.
The bears were out in force at the recent Best Practices in Short Sales and REO Conference we chaired in San Diego for SourceMedia Conferences, making it seem as if things will get worse in the foreclosure logjam before they get better, even before weighing the effects of the robo-signing scandal.
Take Rick Sharga, senior vice president of Realty Trac, which tracks foreclosures nationally. Their October numbers tell a dismal story—it is the 20th consecutive month more than 300,000 households have received a foreclosure notice.
Compare this to 2005, when just 550,000 received notices for the whole year. In all, there were 52 consecutive months between 2006 and 2010 where foreclosure activity increased on a year over year basis.
The first wave of foreclosures was driven by “unsustainable home prices and high-risk monetary and underwriting practices.” A second wave has been driven by unemployment (he estimates one foreclosure for every six to ten jobs lost.
Sharga says this year will be the all-time record year for REO actions, at 1.2 million, and a total of 3.2 million foreclosure notices. Just 30% of those REOs are actively listed for sale, he said, meaning there is a staggering amount of shadow inventory about. REO sales are not matching REO repossessions—251,000 REO actions happened in the second quarter, but only 150,000 sales.
Does this mean the worst has been reached? Well, Sharga thinks that there may be a “third wave” of foreclosures coming, to be triggered by adjustable-rate loans resetting. Though interest rates are favorable for resets, he thinks that the additional pressure of switching to an amortizing loan, paying principal as well as interest, could prove a tipping point for many mortgagees.
His conclusions? Foreclosures won’t peak until next year, monthly levels will stay high through 2012, and REO inventory will stay high through 2013. The resulting housing recovery will be “long, slow, and largely flat” as this immense clog slowly works its way through the system.
The news is so bad that while the foreclosure bears are roaming around the financial services arena, it is the lenders that are hoping they can take a long winter’s nap and wake up to a better day in the springtime.
