Experts: Beware a slow cascade of additional foreclosures in 2012

Economist Joel L. Naroff of Bucks says a growing foreclosure rate is likely to keep housing prices down.
Economist Joel L. Naroff of Bucks says a growing foreclosure rate is likely to keep housing prices down.
Posted: January 15, 2012

If the numbers were the only barometer, it would appear that the U.S. foreclosure crisis had eased considerably in 2011. But taken alone, those statistics don't tell the whole story of the pressures on homeowners and how they are affecting the nation's housing market.

Over the last 12 months, the foreclosure rate and the number of filings nationwide reached their lowest point since the current spiral intensified in 2007, RealtyTrac Inc. reported last week.

As 2011 began, RealtyTrac, of Irvine, Calif., which tracks foreclosure activity, was predicting there would be a 20 percent increase over 2010 in the number of houses repossessed by lenders after foreclosure. Instead, that number declined, to 804,423 last year from 1.2 million. Figures for 2011 also show a 34 percent decline from 2010 in the number of properties at some point in the foreclosure process.

The numbers are deceiving, however. Brandon Moore, RealtyTrac's chief executive officer, attributed the hefty decline primarily to the effects of the 2010 controversy over "robo-signing," in which a number of loan servicers were accused of signing thousands of foreclosure documents without reading them.

Delays due to state action and self-imposed moratoriums by lenders created a backlog in processing that did not begin easing until the second half of 2011.

The result, Moore said, is that "we are continuing to see a highly dysfunctional foreclosure process that is inefficiently dealing with delinquent mortgages - particularly in states with a judicial foreclosure process," such as New Jersey, Pennsylvania, and Florida, where robo-signing was equated with fraud by some officials.

What the legal wrangling and the millions of filings since the housing bubble burst have combined to accomplish is a lengthening of the timeline for processing foreclosures in most states, RealtyTrac reported.

Most states' foreclosure-processing systems were not equipped to handle the volume seen in the last five years.

RealtyTrac calculated that in a typical year - it chose 2005 - paperwork for 500,000 foreclosures would be filed nationally. In 2010, there were 2.9 million foreclosures. An additional 1.9 million households received filings in 2011 - fewer, but still almost four times more than what had been considered normal.

New Jersey is second only to New York for length of foreclosure timeline - 964 days - even though filings dropped 60 percent last year from 2010 levels. At the start of 2007, it took 297 days to complete the foreclosure process in New Jersey, RealtyTrac data show.

In Pennsylvania, the timeline increased from 250 days in 2007 to 554, the data show.

Observers have suggested that some lenders, cognizant of the current huge inventory of unsold houses, might actually be delaying the costly foreclosure process. For example, in its fourth-quarter statement issued Friday, JPMorgan Chase & Co. reported an expense of $374 million that it attributed to "foreclosure-related matters."

As 2012 begins, there are major concerns about a flood of new foreclosures washing over the real estate market, which has shown modest signs of recovery over the last few months.

Economist Joel L. Naroff, of Naroff Economic Advisors in Bucks County, expects financial institutions to increase foreclosure activity this year, "but barring a move to insulate them from having to declare the losses completely, they will not simply dump the units on the market."

Still, Naroff said, he believes a growing number of foreclosures are likely to maintain the downward pressure on housing prices, at least in those areas of the country where defaults are greatest - the Sun Belt and the Midwest.

It might not make matters worse, but it "would continue to act as a restraint on growth," Naroff said.

Economists at IHS Global Insight Inc., of Lexington, Mass., do not forecast foreclosures, because the judicial-review process in half the states makes it more like guesswork. But IHS's Patrick Newport noted that on Jan. 6, the Fed predicted that foreclosures could reach 1 million in both 2012 and 2013.

"The Fed's forecast - more big numbers - seems reasonable," Newport said. "This dragged-out process is one reason that housing starts in our forecast do not climb back to normal levels [1.5 million a year] until 2015."

In a white paper sent Jan. 4 by Fed Chairman Ben S. Bernanke to House and Senate committees, the Fed staff suggested that a way must be found for converting foreclosed-housing stock into rental properties or for "supporting a housing-finance regime that is less restrictive than today's, while steering clear of the lax standards that emerged in the last decade."

Some in Congress were not happy that the Fed made the white paper public.

Republican Orrin Hatch of Utah, ranking member of the Senate Finance Committee, told Bernanke in a letter that the Fed should "refrain from providing any hint of activism regarding what are clearly fiscal-policy choices."

Newport said, however, that it was better for foreclosed homes to become rental units than to remain vacant.

"Unless credit standards loosen - no reason to expect this to happen anytime soon - homeownership rates will fall," he said, "so we will need more rental units."

Turning the houses into rental units "is exactly what needs to be done," Naroff said: It takes them off the market, easing downward pressure on prices.

Economist Mark Zandi at Moody's Analytics Inc., of West Chester, said that "while the policy effort was worthwhile, I am skeptical that Fannie and Freddie will be able to gear up their REO [real-estate-owned] to rental efforts quickly enough to make a significant difference, at least in 2012."

Zandi expects prices to fall 5 percent this year, as a substantial amount of distressed housing finally hits the market.

Contact real estate writer Alan J. Heavens

at 215-854-2472,,

or @alheavens on Twitter.

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