Maybe there aren't as many foreclosures as we think : Rooftop Views

Rooftop Views

Maybe there aren't as many foreclosures as we think

Hundreds of thousands of homeowners across the country dealt with losing their homes to foreclosure in the first five months of the year.

“But don’t be fooled by the numbers. The overall economy is sound, and markets will turn around,” says Alexis McGee, president of ForeclosureS.com and author of the upcoming book, “The Foreclosures.com Guide to Investing: Making Huge Profits Investing in Pre-Foreclosures Without Selling Your Soul” (John Wiley, September 2007). “Even the Mortgage Bankers Association’s just-released Mortgage Delinquency Survey reported that except for several key states, overall mortgage delinquency rates dropped in first quarter 2007 over fourth quarter 2006 numbers,” says McGee.

“In fact, MBA’s chief economist Doug Duncan, in releasing the survey, pointed out that â€˜the percentage of loans in foreclosure would be well below the average of the last ten years were it not for Ohio, Michigan, and Indiana, and the rate of foreclosures started nationwide would have fallen were it not for the big jumps in California, Florida, Nevada, and Arizona,” adds McGee, also president of ForeclosureS.com the California-based real estate investment advisory firm and publisher of foreclosure and property information. On a per capita basis, Nevada has been hardest hit state so far this year for all stages in the foreclosure process, according to ForeclosureS.com.

The stages of the foreclosure process include:

- Stage 1 Pre-foreclosure filing: The initial notice that the property is now in foreclosure for an unpaid secured lien or loan.
- Stage 2 Auction filing: The notice that the public court house auction sale date has been set because the unpaid secured lien or loan remains unpaid. Some states, like Arizona, combine Stage 1 & 2 into one notice, and are reported Stage 2 only.
- Stage 3 REO (real-estate/bank owned) filing: The notice that the foreclosure has gone to auction and the property has transferred to the winning bidder or reverted to the lender. The home owner has lost their house to foreclosure.

Other states feeling the worst of the foreclosure pinch include Florida, Michigan, Ohio, Colorado, Texas, Georgia, Arkansas, and much of the rest of nation’s Southwest region, according to the numbers and analysis of the more than 2.5 million property listings available at ForeclosureS.com.

“Looking at just pre-foreclosures, before a homeowner actually loses his or her home, nationally 4.2 homeowners out of every 1,000 households faced a pre-foreclosure filing so far this year. That’s double the number last year at this time,” says McGee. “And those numbers will go even higher before they come down.”

Among the reasons, approximately $567 billion of subprime adjustable rate mortgages (ARMs) are scheduled for rate reset this year. That’s according to John M. Reich, head of the U.S. Office of Thrift Supervision (statement to the U.S. House Subcommittee on Financial Institutions and Consumer Credit of the Committee on Financial Services, March 27, 2007). Those rate resets mean significantly higher monthly mortgage payments for those homeowners, too.

“The end result will be less mortgage affordability for many and more foreclosures,” adds McGee.

The MBA’s recent survey also reported that new foreclosures hit a new record in first quarter 2007. But Duncan, also tempered those numbers.

“…Most of the increase was due to only four states, California, Florida, Nevada, and Arizona. Without these four states, foreclosure stats would have declined. Twenty-four states saw a decline in foreclosure starts while the rest of the states saw negligible increases…” added Duncan.

“As I’ve said many times,” adds McGee, “it’s about people buying homes they really can’t afford with creative financing and banking on rapid price appreciation. Now that prices have deflated and interest rates reset, those homeowners are left with little alternative but foreclosure.”

Looking at actual filing numbers from ForeclosureS.com, year-to-date, there have been a total of 343,745 pre-foreclosure and auction filings (both prior to a homeowner actually losing his or her home), and 185,369 REO filings (indicative of a property lost to foreclosure). That compares with 178,492 pre-foreclosure and auction filings, and 126,889 REO filings for the same period a year ago. Those raw foreclosure filing numbers combined are up 92.6% and 46% respectively year over year. However, keep in mind when analyzing the number of filings only, that the same property can account for multiple filings-one at each stage in the foreclosure process. That is why our per-capita analysis is so much more accurate.

“I truly feel for these homeowners facing foreclosure,” says McGee. “Their numbers are a cause for concern, but not the hysteria some would have us believe amid the recent financial markets shakeout. Our nation’s housing market has not and will not collapse long term because of this increase in foreclosures, just like it did not collapse in the mid-1990’s during our last real estate correction. Literally millions of other homeowners in the United States still meet their mortgage obligations every month. Approximately 75.6 million people in the United States-69% of the population–own the home they live in, according to Census data.

“The reality is that foreclosures account for a small portion of the $10 trillion in total U.S. mortgage debt, and not everyone with a subprime mortgage (those issued to people with poor or no credit) defaults on their loan,” says McGee.

Fed Chairman Ben Bernanke agrees. In a speech last month at a conference by the Federal Reserve Bank of Chicago (Annual Conference on Bank Structure and Competition, Chicago, Illinois, May 17) Bernanke also cautioned of further increases in delinquencies and foreclosures this year and next as ARM interest rates and payments reset.

But, Bernanke added, “…we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.”

The lesson in all the numbers and hype around foreclosure numbers is that consumers must learn to make more informed mortgage decisions, says McGee. “That goes for before a home purchase–if you can’t afford the full monthly payment after a rate reset, don’t buy the home. And after you buy, too, if for some reason you run into financial difficulty that puts your mortgage obligation at risk, no matter what anyone says contact your lender immediately. Too often, too many homeowners don’t contact their lender until it’s too late and ultimately are forced into foreclosure. Remember, it’s usually in the lender’s best interests to help a homeowner work out their mortgage difficulty. It’s lots cheaper for them than foreclosure.”

2007 year-to-date foreclosure filing numbers, according to ForeclosureS.com data:

- In pre-foreclosure filings, Nevada led the nation per capita with 17 out of every 1,000 of its homeowners in the first stage of the foreclosure process. A year ago that state had just 7.2 filings for every 1,000 of its households.
- The rest of the top five states per capita so far this year include Colorado (10.8 filings per 1,000 households), Florida (9.4 per 1,000 households), California (7.7 per 1,000 households), and Utah (6.4 per 1,000).
- Texas topped the nation by per capita in filings of notices of foreclosure auction, stage 2 in the foreclosure process, with more than 9 of every 1,000 households facing difficulties to date this year. That’s up more than 33% from the same time period last year. The state also leads the nation in total number of auction filings so far this year-32,011.
- Rounding out the other states in the top five auction notices: Nevada (7.7 filings per 1,000 households); Arizona (5.8 filings per 1,000 households), Arkansas (4.5 filings per 1,000 households), and Oregon, 4.4 filings per 1,000).
- Colorado led the nation per capita in REO filings, stage 3 bank foreclosed homes, with just over 9 homeowners out of every 1,000 losing their property as a result of foreclosure.
- The rest of the top five per capita in REO filings, bank owned homes include Michigan (6.3 properties lost out of every 1,000 households); Nevada and Georgia tie (5.4 filings of every 1,000 households), and Indiana ties with Ohio (4.8 filings out of every 1,000 households.
- Even though Indiana’s per capita REO filings ranked high nationally, they’re actually down 3% per capita year to date over 2006 numbers, according to ForeclosureS.com.
- Indiana joins 7 other states of the 45 (including the District of Columbia) reporting REO filings that also dropped year to date 2007 over the same period last year.
- Those other states with reduced REO filings include Massachusetts (off 97%), Oklahoma (off 16%), South Carolina (down 31%), Utah (down 55%), New Mexico (down 25%), Oregon (off 23%), and Hawaii (down 10%).