Foreclosure Pipeline Clogged on Both Ends
RealtyTrac released its Midyear 2011 Metro Foreclosure Market Report last week, and it shows that 178 out of the 211 metro areas tracked in the report, or 84 percent, saw decreasing foreclosure activity in the first half of the year.
That sounds like good news until our CEO James J. Saccacio starts using the analogy of a clogged pipeline, which conjures up images (at least in my mind) of toilets and the type of stuff that gets clogged in toilets.
"These dramatic decreases indicate the foreclosure pipeline continues to be clogged in many local markets across the country, sometimes by a glut of already-foreclosed properties that are not selling quickly, sometimes by a mountain of improperly filed foreclosures that are blocking the inflow of new foreclosure filings — and sometimes by both.”
RealtyTrac has data to support the backend of the foreclosure process being clogged. We show that as of the end of June there were 817,567 unsold bank-owned properties (REOs) nationwide, representing a 23-month supply at the sluggish current sales pace of REOs. That is actually down from an inventory peak of more than 1 million unsold REOs in January (see chart below), but still represents about two years to clear the inventory of foreclosures that have already been created -- even if no new foreclosures are added going forward.
The months' supply of unsold REO inventory is even more massive in certain local markets, particularly those where court cases have thrown into doubt the sales of foreclosures when those foreclosures were done improperly by the lender. For instance, in Boston -- where a watershed court case concerning the ownership rights of a real estate investor who purchase an improperly foreclosed property, Bevilacqua vs. Rodriguez, is still awaiting a decision from the Massachusetts Supreme Judicial Court -- RealtyTrac shows an almost absurd 184-month supply of unsold REO inventory because of nearly non-existent sales of REO properties there while the case is pending.
On the front end of the foreclosure pipeline, the data is a little tougher to come by, but there certainly is evidence that lenders are waiting longer after a homeowner defaults to start the foreclosure process. This is based on an analysis of average default amounts (the amount a homeowner is in arrears on monthly mortgage payments) at the time the first public foreclosure notice was filed in California, Nevada, Idaho and Oregon -- some of the states where the default amount is part of the public foreclosure notice. This shows that average default amounts have jumped over the past couple years. In California, for instance, the average default amount in 2009 on loan amounts in the $400,000 to $600,000 range was $19,048. That average default amount increased to $28,971 for foreclosures started in 2010 and to $33,459 for foreclosures started so far in 2011.
I suppose it makes sense to not cram an already-clogged pipeline with more foreclosures. But you can only prairie-dog it for so long. At some point the crap is going to come out, and things could get messy when it does.