Is There Still Reason to Fear the Foreclosure Overhang?
Foreclosure filings have been falling year-over-year nationally for the past several months. Home sales have been showing strength for many months and home prices have been climbing at an even faster rate. It's feeling like the U.S. has been able to avoid the second wave of foreclosures that was predicted after the robo-signing scandal broke. Is there any chance that a massive roll-out of foreclosures is still looming and dangerous?
Of course it's hard to say for sure, but there could yet be some fallout from mounting foreclosures. After some of the big banks were busted in the fall of 2010 for processing foreclosures without proper documentation, many lenders had to halt proceedings until the mess could be sorted out. That created a fear that a large overhang of foreclosure inventory was being created and that it would burst onto the market in another wave that would smash up the housing scene again.
Since then, however, banks have done a better job - spurred partly by the $25 billion robo-signing settlement - of modifying troubled mortgages and allowing short sales, helping thousands of borrowers to avoid foreclosure. And foreclosures are down. They fell 24 percent in 2011 from the year before to 830,000 homes, according to data firm CoreLogic. In October specifically, foreclosure filings fell 19 percent from the previous year, according to foreclosure tracking firm RealtyTrac.
Yet that decrease does suggest that there is a "shadow inventory" of distressed properties still waiting to be processed. Many states are currently experiencing a "second wave" of foreclosures hitting the market now that robo-signing scandal dust has settled, even though the national figures are down.
"There's been a pronounced shift in foreclosures from the Sand States to the East Coast, in particular the judicial foreclosure law states with the longest time lines like Florida, New York and New Jersey," says Mark Fleming, chief economist for CoreLogic. Judicial states are those where foreclosures must be reviewed by a judge, which has bottle-necked a whole lot of distressed properties in the system.
Florida had the highest foreclosure rate in the nation in October with 11 percent, according to CoreLogic. New Jersey was second with 8 percent and New York was third with 5 percent. All three are judicial review states. And as a better indication of the second foreclosure wave going on in those states, New Jersey saw a 140 percent increase in foreclosure filings in October from the previous year, according to RealtyTrac, while New York's filings rose by 123 percent.
"There are a set of states that are not improving year-over-year like the others," adds Tim Martin, group vice president of U.S. housing at TransUnion as quoted in a Forbes.com article. There are nine states/areas in all that posted worse foreclosure numbers this year, which included New Jersey, Arkansas, Washington, NewYork, New Mexico, Connecticut, Maine, Maryland and Washington D.C. And home prices fell most dramatically in many of these states where distressed properties had flooded the market.
So, perhaps the national foreclosure crisis has been averted but several states are certainly still reeling from the effects and won't feel the recovery for many months to come.
"The housing market is like a large ocean vessel that when heading one direction, takes a while to turn around," said Fleming as quoted in that same Forbes article. "So it will take time in terms of clearing out all of these foreclosures."