Foreclosure Numbers: A Guide for the Perplexed

If you follow any sports team you know at the end of the game who won and by how much. But when it comes to foreclosures, there’s no single scorecard that measures how many people nationwide are losing their homes.

 

For instance, on June 14 various news outlets offered an array of foreclosure numbers after the release of quarterly figures from the Mortgage Bankers Association:

 

“At the end of March,” said the New York Times, “the percentage of all loans that were delinquent or in foreclosure, 6.12 percent, was little changed from the end of last year and up from 5.39 percent from March 2006. (See: Home Foreclosures and Delinquencies Higher)

 

“The share of all mortgages entering foreclosure,” Bloomberg reported, “rose to 0.58 percent from 0.54 percent in the fourth quarter, the Mortgage Bankers Association said in a report today.” (See U.S. Mortgages Enter Foreclosure at Record Pace (Update5) )

 

“Nationwide,” said ABC News, the foreclosure rate “increased to 1.28 percent from 1.19 percent in the last quarter of 2006.” (See: Subprime Borrowers Fall Behind on Mortgage Payments)

 

Since everyone got the same release how come the numbers are so different?

 

Welcome to the strange, weird and complex world of foreclosures, a world which hardly sounds interesting except for the fact that hundreds of billions of dollars are at stake, including perhaps the value of your home and the size of your monthly mortgage payment.

 

We could solve the numbers problem by agreeing that the term “foreclosure” only includes those homes which have been sold at auction for failure to pay the mortgage, taxes or other liens. Such homes, in fact, have literally been foreclosed.

 

The problem is that homes sold at foreclosure auctions represent only one part of the puzzle.

 

Imagine a townhouse community with 1,000 units. If we say that 13 homes have been foreclosed — about 1.28 percent, the current national foreclosure rate according to the Mortgage Bankers Association — do we have the information we need to buy or sell real estate, or to value it for insurance and tax purposes? Would you offer more or less if you knew that a large number of additional foreclosures were likely to follow the first batch of 13 units?

 

In other words, we want to know not only what’s happening now, we also want to get some sense of what may happen in the future. We’re looking for what analysts on Wall Street might call leading indicators.

 

As one example, the National Association of Realtors reports both existing home sales and pending sale contracts. Pending contracts, of course, do not always close but they give some sense of where the marketplace is headed. If the number of pending contracts drops you can be fairly certain that existing home sales will follow in the same direction. More pending agreements typically means an increase in existing home sales in the next month or two.

 

As another example, the National Association of Home Builders reports both new home sales and permit activity. When permit activity increases it’s a sign that more new homes are likely to be built. If permit activity declines you can expect less construction.

 

In a similar sense we want to identify leading foreclosure indicators because such data gives us a more-realistic picture of the marketplace.

 

What are those leading indicators? Before a home can be foreclosed, lenders must first take a series of steps. The precise steps vary according to the jurisdiction where the property is located and whether the foreclosure is a judicial action requiring a court hearing or a non-judicial action where no hearing is necessary.

 

To compute our leading indicators we want to look at such formal indicators as:

 

A Notice of Default — a public notice that loan payments have been missed.

 

A Lis Penden — a notice of a suit against a property owner.

 

A Notice of Sale — essentially an announcement giving the time and date of a planned foreclosure sale.

 

Unfortunately, it’s terribly difficult to capture foreclosure figures at any particular time because state practices vary. Figures from RealtyTrac show that processing foreclosures can take as little as 37 days in Georgia — and as many as 445 days in New York state.

 

With so much time built into the foreclosure process in many states, delinquent borrowers who have received one or more formal notices can still bring loans current, they may be able to modify or refinance mortgages or they might opt for a quick sale in the open market. The result is that some portion of all properties in the “process of foreclosure” are not actually sold on the courthouse steps.

 

How many delinquent homes avoid foreclosure? The percentages are conflicting. For instance, a “fact sheet” from the Mortgage Bankers Association says that “three out of every four loans that enter the foreclosure process do not wind up as a foreclosure sale.” Alternatively, speaking at the National Press Club on May 22nd, MBA President John Robbins told reporters that among subprime borrowers “50% of foreclosures are worked out.”

 

Even though foreclosure can often be avoided, delinquent home information is important because distressed owners may be interested in a speedy sale while buyers are always in the market for homes that may be available at discount. No less important, you can’t get a complete picture of the marketplace without some sense of looming foreclosure trends.

 

The need to measure delinquent loans is a common industry practice. As an example, the Mortgage Bankers Association reported that 4.84 percent of all loans outstanding in the first quarter of 2007 were delinquent, up from 4.41 percent a year earlier. In our model community with 1,000 townhouses, the MBA delinquency figures mean that another 48 houses are distressed, if not formally in the process of foreclosure. 

 

Of 1,000 townhouses in our model community, 61 properties — 13 units that will be foreclosed and 48 townhouses that are delinquent — face foreclosure, late fees, legal costs and perhaps an urgent need to refinance or sell. Since most homes are not for sale at any given time, does anyone doubt or deny the marketplace impact caused by such steep delinquency and foreclosure numbers? No less important, if 25 to 50 percent of all delinquent homes in the community — another 12 to 24 properties — are ultimately foreclosed will that not also influence community home values?

 

“It’s not enough to look at foreclosure sales alone,” said Jim Saccacio, Chairman and CEO at RealtyTrac.com, the nation’s leading foreclosure marketplace. “You have to look at the broader picture, to see where the marketplace is headed. This means some delinquent homes will show up in the foreclosure process that will never actually reach the auction block — but these distressed homes are still part of the foreclosure process because they may need to be quickly sold or refinanced. The end result is that by showing all the numbers — without fear or favor to any group or industry — we’re able to present a fair and reasoned picture of the marketplace, something that will help buyers, sellers and government officials.”

 

The marketplace has proven the validity of the RealtyTrac approach. In state after state legislation and programs have been established to aid growing numbers of homeowners who face foreclosure while at the federal level regulators are busily seeking to refine mortgage standards in an effort to stem toxic loan fallout.

 

“There’s been a manufactured debate regarding foreclosure numbers,” said Sacaccio. “It’s an effort to distract the public and the media, regulators and lawmakers, from the central reasons why so many homes are being lost. But the foreclosure problem has become so acute that the underlying causes can no longer be hidden. The RealtyTrac numbers are right and reasonable; if they weren’t then we would see far fewer foreclosures nationwide.”

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Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 100 newspapers.

 

 

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