Home Repossessions Rising As Banks Convert Shadow Inventory to Real Inventory

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According to Realty Trac's U.S. Foreclosure Market ReportTM for May, a total of 322,920 properties nationwide were the subject of a foreclosure filing during the month compared to 333,837 in April.  This is one in every 400 U.S. housing units. The new figure represents a 3 percent decrease in foreclosure filings vs. April and a 1 percent increase over the filings reported in May 2009.   

RealtyTrac’s report incorporates documents filed in all three phases of foreclosure:

  1. Notice of Default (NOD) and Lis Pendens (LIS). This is the first legal notification from a lender that the borrower on a mortgage loan has defaulted under the terms of their mortgage and the lender intends to foreclose unless the loan is brought current.
  2. Auction — Notice of Trustee Sale and Notice of Foreclosure Sale (NTS and NFS); If the borrower does not catch up on their payments the lender will file a notice of sale (the lender intends to sell the property). This notice is published in local paper and contains information pertaining to the date, time and subject property address.
  3. Real Estate Owned or REO properties : "REO" stands for "real estate owned" and typically refers to the inventory of real estate that banks and mortgage companies have foreclosed on and subsequently purchased through the foreclosure auction if there was no offer higher than the minimum bid.

Notices of Default and Lis Pendens were received on 96,462 properties, a decrease of 7 percent from April and a 22 percent decline vs. May 2009. This is good news as it implies less borrowers are falling behind on their payments.

New Foreclosure auctions were scheduled on 132,681 properties. This represents a 4 percent decrease from April, a 1 percent decline vs. May 2009, and a 16 percent improvement from the peak of 158,105 seen in March 2010. This is also good news but possibly a factor of the expiration of the homebuyer tax credit.

Bank repossessions (REOs) were carried out on 93,777 properties in May. This is 1 percent worse than April and a 44 percent increase vs. May 2009. This is the second month in a row where bank reposessions hit a new record high.  All 50 states reported year-over-year increases in bank repossessions. This is bad new as it implies more homeowners are being forced out of their home and bank balance sheets are filling with distressed housing inventory. This is shadow inventory being converted to actual inventory!

James J. Saccacio, chief executive officer of RealtyTrac said, "The numbers in May continued and confirmed the trends we noticed in April: overall foreclosure activity leveling off while lenders work through the backlog of distressed properties that have built up over the past 20 months.  Defaults and scheduled auctions combined increased by 28 percent from 2007 to 2008 and another 32 percent from 2008 to 2009 - creating a build-up of delayed bank repossessions. Lenders appear to be ramping up the pace of completing those forestalled foreclosures even while the inflow of delinquencies into the foreclosure process has slowed."

As has become the norm, Nevada, Arizona, and Florida topped the list of states in per capita foreclosure activity.  In Nevada one in every 79 housing unit received a foreclosure filing in May, nearly twice the ratio of Arizona the second ranked state.  Still, things are improving in Nevada as well.  May numbers were down 12 percent from April and 16 percent from one year earlier.  In Arizona, where one of every 169 properties saw a filing, the rate was up less than one percent during the month and down 5 percent from May 2009.

Also in the top five were Florida where one in every 174 Florida properties received a notice; California, one in 186; and Michigan which was up nearly 6 percent in the month and where one in every 223 properties received a foreclosure filing

In terms of actual numbers, ten states accounted for over 70 percent of all filings in the nation.  California alone accounted for 22 percent with 72,030 filings, up 3 percent for the month but down 22 percent year-over-year.  Florida had 16 percent of the nation's filings, a 5 percent increase from April; Michigan was third with 20,322 properties, 6 percent of the nation's total.  The remaining states were Illinois with 15,061 filings; Nevada (14,346), Georgia (13,778), Texas (11,137), Ohio (10,379), and New Jersey (7993)

Among metropolitan areas, Las Vegas had the highest rate of filings followed by Merced, Modesto, and Vallejo-Fairfield, California, and Cape Coral-Fort Myers, Florida.  All but one of the metropolitan areas in the top ten (Vallejo-Fairfield) had a lower rate of filings than one year earlier.

Plain and Simple: The good news is it seems like the worst is behind us in terms of new defaults. Plus the modest decline in newly scheduled auctions helps out housing on the excess supply front as banks are choosing to hold onto their inventory instead of flood the market with distressed supply (which would drive prices even lower). Perhaps this is a factor of the expiration of the homebuyer tax credit? Now for the bad news. Over the past year, to give HAMP a chance to "work its magic" (which servicers have little incentive to do ) and to reduce the cost of maintaining the condition of foreclosed properties, banks were delaying the foreclosed home liquidation process. This allowed delinquent borrowers to stay in their houses and also allowed banks to avoid asset value write-downs. Unfortunately, with HAMP running out of qualified borrowers, that trend is starting to reverse course. Bank balance sheets are beginning to balloon with REO, shadow inventory is being converted to actual inventory!

This is a negative for two reasons. First it implies more people are being put out of their home and onto the street and second, at some point, the distressed homes banks are adding to their balance sheets will need to be put back up for sale. Once the housing market starts to pick up recovery momentum, banks will begin to slowly liquidate their inventory of foreclosed properties. Hopefully they will do so in a manner that does not greatly disrupt local supply/demand and push prices even lower (which would hurt their own cause). Growing "shadow inventory" is one of two reasons why the housing recovery will likely be a very long process (the other being long term unemployment).

THE BIG QUESTION: Will the housing recovery only be slow in the hardest hit states? Real estate is after all...."all about location location location"

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WHAT ARE THE HARDEST HIT STATES

READ MORE ABOUT HOMELESSNESS AND THE NEED FOR LOW INCOME RENTAL HOUSING