More Worries About the Foreclosure Overhang

The New York Times provides a workmanlike update on the impact of current and probable foreclosures on the housing market. The odd bit is that even though the article is downbeat, it manages to be relatively optimistic compared to industry sources.

For instance, consider this section of the article:

Over all, economists project that it would take about three years for lenders to sell their backlog of foreclosed homes. As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year. Regions that were hardest hit by the housing collapse and recession could take even longer to recover — dealing yet another blow to a still-struggling economy.

Contrast this view with the outlook from the industry cheerleader, the Mortgage Bankers Association:

A full housing recovery is three to four years off as the nation grapples with a shadow housing inventory of 4.5 million distressed properties, according to Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association.

The difference is that the MBA is considering not only foreclosures but people who really want or need to sell and are still holding on in hopes of a better market. This shadow inventory will hit many markets upon any sign of bottoming and recovery, thus leading to halting improvement.

Yes, the article dutifully recites recent statistics: that lenders now own nearly 900,000 homes, double the level at the outset of the crisis. And it describes badly clogged pipelines, with foreclosures in Chicago and Miami running twice the level of sales and eight times in Atlanta (which has one of the fastest foreclosures processes in the US, belying the notion that faster foreclosures lead to more rapid market clearing).

Some of the blame for the overhang is attributed to foreclosure investigations, but that’s spurious. Recall that it was the banks themselves that halted foreclosures when the robosigning scandal broke last fall, and the adverse press, and later investigative pile-on, has led them to try harder to comply with the law (what a concept!). For those who had been paying attention, a pile up in the courts was well underway due to increasing evidence of servicers and securitizers running roughshod over well understood requirements. The robosigning scandal brought it to national attention and led to a change in attitude among quite a few judges, who came to see that the banks were not necessarily to be taken at their word.

Moreover, since as we have pointed out, there have been no real investigations of foreclosure-related dubious behavior to date, mere regulatory theater designed to shield the banks can hardly be a cause of a slowdown in foreclosures.

And the article understates one issue: the failure of servicers to maintain foreclosed properties, which is contributing to an overshoot in housing prices on the downside. We do have one allusion:

Here in this working-class neighborhood of El Mirage, northwest of Phoenix, rows of small stucco homes sprouted up during the boom. Now block after block is pockmarked by properties with overgrown shrubs, weeds and foreclosure notices tacked to the doors.

Overgrown lawns are the least of the problems. It’s not uncommon for vacant homes to be stripped of copper and appliances. That’s why it isn’t nuts to keep homeowners in place even when they are severely delinquent if the local property market is so backed up that a home won’t be sold quickly (the Times says that average time to foreclosure is 400 days and another 176 days to sell it). The homeowner is still liable for property taxes if the home has not been seized by the lender and will maintain the property at a better level than the bank would.

But even this comparatively cheery take shows that the state of play in most local real estate markets is still plenty ugly and not likely to get better soon.

The post originally appeared at naked capitalism and is reproduced here with permission.

One Response to "More Worries About the Foreclosure Overhang"

  1. richie_d_holmie   October 22, 2012 at 9:51 am

    I bet a Long Island foreclosure lawyer would just thumb his nose to this kind of market mess. It seems the higher-ups who benefit from all the foreclosure craziness are just sitting around and barely lifting a finger to avert a possible major meltdown.