Impending Foreclosures Cast Shadow Over Housing Recovery
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Dozens of postings have hit the Internet within the last week about a shadow inventory of potential foreclosures that could delay any meaningful housing recovery. The more tantalizing of the reports include assertions that banks are deliberately holding back on foreclosures so that they don't flood the market with low-priced resales, which would only lower the prices of homes they are trying to sell.
Adding fuel to the fire, the Amherst Securities Group released a report estimating that there's a shadow inventory of 7 million homes that are either in foreclosure or destined to default. Amherst analyzed how often borrowers who miss one, two, or three payments on their mortgage are likely to recover, or eventually lose possession of their home. More often than not, borrowers who miss a payment on their home wind up losing it.
The "cure rate" for borrowers who are 90 or more days delinquent, for instance, is less than 1 percent. For borrowers who have missed two payments, it's only 4.4 percent. And only 26.5 percent of borrowers who miss a single monthly payment eventually recover. The 7 million homes likely to reach foreclosure based on this analysis represent an additional 16 months of existing-home supply at current sales rates.
Reports that mounting foreclosures may send the industry into another tailspin seem misguided when you consider some other recent news. The Case-Shiller Index released Tuesday, for instance, showed that existing-home prices rose in July in all 20 major metro markets tracked. Also, sales of new and existing homes appear to be on an upward trajectory, though a far slower one than during previous housing recoveries.
Moreover, the most recent data from RealtyTrac shows that foreclosure filings declined in August, though they remain 18 percent above year-ago levels. The declines stem in part from government efforts to rescue families before they lose their homes. But they may also be due to staffing shortages at banks, which may also be deliberately holding onto foreclosures longer, hoping that prices will rise and they can get more for properties.
Whatever the cause for delays, the Amherst report concludes that banks are only delaying an inevitable impact on home prices. "We are concerned that, in light of this housing overhang, the stabilization that we have seen in home prices in the last few months is temporary," wrote analyst Laurie Goodman. You can see her interviewed here.
The Amherst report also speculates that the Obama administration's program to modify mortgages will disappoint in the long term, though efforts are underway to improve the program. Under the Making Home Affordable Modification Program, mortgage servicers receive incentives to modify mortgages. The historic default rate on these modified loans still runs about 70 percent, the report says.
Not everyone is buying the notion that foreclosures will inevitably rise. After all, the overall economy is improving, and many homeowners may find themselves in improved financial footing in the months ahead. Glen Boyd, head of U.S. asset-backed securities research at Barclays Capital, recently dramatically scaled back his estimate of the high-water mark for foreclosures, which he believes will crest at 900,000, not 1.15 million, in next year's second quarter.
Whether banks are holding back on foreclosures deliberately or not, foreclosure sales are likely to be a significant drag on a housing recovery, maybe for a long time to come. Not only will they prevent builders from raising prices and recovering margins to generate cash to fund future operations, but they will weigh down bank portfolios and make banks less willing to make construction loans.