Analysts at Citigroup are forecasting approximately 6.5 million to 8 million foreclosures will occur within the next few years.
Citi's head of Mortgage Backed Securities and Real Estate Asset Backed Securities research team, Rahul Parulekar, was joined Monday by Citi research analyst Robert Young on a conference call during which they forecast 50% of the 6.5 million, or 3.8 million, foreclosures will occur by 2010 in a base case scenario and 4.6 million of the total 8 million foreclosures in a stress case scenario. The base case scenario is based on a 15-percent drop in home prices with a concurrent 7.1% unemployment rate. The stress case is based on a 20-percent drop in home prices concurrent with a 9% unemployment rate.
Parulekar said current foreclosure percentages are at 2.5% to 3%, and if his projections are correct, foreclosures will peak at 4% to 4.5%. Normal foreclosure rates are 1% or lower.
Young added that the majority of these foreclosures--making up 50% of current foreclosures nationwide--will be seen in the big bubble markets such as California, Florida, Nevada, Indiana, Michigan and Ohio.
Both also spoke of the past and present proposals put forth to quell foreclosures, agreeing that they did not have much faith in the government's FHA Secure Program, Modernization Act of 2006, or FHA's streamlined loan modification plan because Citi's estimates showed that the impact of these changes would cause a 100 basis point drop in rates and a limited number of foreclosures that would be halted as a result.
However, Paruleka said he was hopeful when Rep. Barney Frank and Sen. Chris Dodd's proposal made it into the Housing and Economic Recovery Act of 2008, which established the HOPE for Homeowners Act; foreclosure counseling for homeowners as well as $3.92 billion to communities to mitigate effects of foreclosures.
Paruleka said this plan was good, "If it could actually be executed" but the problem with it was that second lien holders were left out of the equation when it came to providing relief, which didn't give them an incentive to participate in the plan, getting more benefit from allowing a property to go into foreclosure.
Getting into plans that are currently proposed, Young cited the FDIC's loan modification program---calling for modifications on loans to a 31% to 38% housing cost-to-income ratio--as one of the more aggressive plans being proposed. He did note that analysts are questioning the plan's success rate.
Young also spoke about foreclosure moratoriums that are being implemented by the government through Freddie Mae and Fannie Mac as well as programs enacted by some states as being a practical approach to dealing with the foreclosure issue. But Paruleka added that the only way moratoriums will work is if modifications are done during the moratorium period. "As a blanket [approach], I don't see how [moratoriums] help [avoid future foreclosures]."
Lowering mortgage rates is what both see as helping the market because it is "a natural response that helps a lot of people that are left out from the distressed borrower situations," Young said, adding that it is the most "politically acceptable process out there" in combination with the foreclosure mitigation.
If something isn't done soon, Young pointed out that principal reducton proposals--laws that allow judges to modify the terms of distressed mortgages on primary residences in bankruptcy cases--may come to pass if the industry doesn't get together to get something done on loans.
"[Rep. Barney] Frank is threatening to do something like that if the industry on its own doesn't get its act together, so I think it is real," Young said.
Paruleka added that he wouldn't be surprised to see some principal forgiveness elements coming in the future to loan modification programs.