Recall when yours truly attended Americatalyst, a real housing/mortgage nerd conference last November, and the panel that was asked to forecast housing had no one predicting more than a 2-3% decline? I was gobsmacked because no one seemed to be acknowledging the huge number of foreclosures in process plus those likely to happen (“shadow inventory”).
Sales of repossessed properties probably will rise 25 percent this year from 1 million in 2011, according to Moody’s Analytics Inc. Prices for the homes could drop as much as 10 percent because they deteriorated as they were held in reserve during investigations by state officials resolved in February, according to RealtyTrac Inc. That month, 43 percent of foreclosures were delinquent for two or more years, from a 21 percent share in 2010, according to Lender Processing Services Inc. in Jacksonville, Florida.
Prices for repossessed properties could drop as much as 10 percent because they deteriorated as they were held in reserve during investigations by state officials resolved in February, according to RealtyTrac Inc.
“The longer a foreclosed home is in the mill, the bigger the losses,” said Todd Sherer, who manages distressed mortgage investments for Dalton Investments LLC, a Los Angeles-based hedge fund that oversees $1.5 billion. “We have a bulge of these properties coming through the system.”
Homes stockpiled less than a year sell for about 35 percent below the value set by lenders, according to a March 15 report by the Federal Reserve Bank of Cleveland. At two years, the loss is close to 60 percent. A surge of cheap foreclosures may erode prices in the broader real estate market, even as the economy expands and residential building increases, said Karl Case, one of the creators of the S&P/Case-Shiller home-price index.
Yves here. Note this view is based simply on the notion that foreclosures were attenuated on 1.25 million houses, allegedly due to banks keeping them off the market due to the robosiging crisis. By contrast, top housing analyst Laurie Goodman estimates the amount of shadow inventory at between 8 and 10 million homes, and our Michael Olenick, using a different methodology, comes in at just under 9 million homes.
Moreover, evidence on the ground suggests that the banks had reasons other than the robosigning scandal for drawing out foreclosures. While NEW foreclosure actions slowed down markedly, and have ramped up again in the wake of the settlement, it looked far more likely that banks were attenuating foreclosures to maximize income . The longer a house in delinquent and then in the foreclosure process, the more the bank can collect in late fees and servicing fees. And there is considerable evidence that banks pile junk fees on top of that, for instance, double charging the borrower and the trust for fees like broker price opinions.
In Florida and other states, there are numerous cases where the bank has completed all the steps in the foreclosure but has not take possession of the house to sell it. That sort of behavior has nothing to do with robosigning and presumably has to do with bank economics (as in it has a second lien it would have to write off when the home is liquidated).
In other words, there is good reason to believe the Moody’s estimate of homes that will hit the market over time is considerably understated, unless the banks plan to keep a lot of houses zombified. Stay tuned.