8-14 The “Foreclosure Wave” – Now, a Tsunami of Sorts

The Foreclosure Wave” — Now a Tsunami of Sorts

Over the past two days, the popular foreclosure reporting firms released their monthly numbers and the takeaway was that the foreclosure crisis is getting worse. Indeed, the foreclosure crisis is worsening, but July’s actual foreclosure numbers do not pose much additional risk to the housing market because most of the worsening was seen in the pre-foreclosure pipeline (notice-of-default & notice-of-trustee sale). Based upon July’s results, the players that will feel most of the additional reported foreclosure pressure are the banks, mbs holders, insurers, and servicers.

On April 7th, I made the call for a “foreclosure-wave” to hit CA and other bubble states based upon our proprietary data — the trend was obvious. A CA wave did build from April to June with foreclosures going from less than 10k to over 22k. But in July it aborted because of gov’t interference through HAMP and the July 28th servicer cattle call — no servicer wanted to go DC with record foreclosures in their books for July.

The only caveat in my 4-7 foreclosure wave report was “there is a massive wave of actual foreclosures that will hit beginning in April that can’t be stopped without a national moratorium — this wave is so big I would not put it past them trying it?” Well, there ya go.

But despite CA foreclosures dropping m-o-m, the national foreclosure wave (red) that began a month later in May is still building with foreclosures up m-o-m. As other states start to feel the default and foreclosure heat, CA is not the swing state any longer.

Housing Supply at Multi-Year Lows at the Low-End Housing Supply at Multi-Year Highs at the Mid-to-High End Forecosure Reservoir Continues to Fill Extreme Negative Equity

Because of the record number of properties in the foreclosure pipeline — and on a national level the actual foreclosures rising month-over-month — the housing market sits in a precarious position.

During the past Spring/Summer selling season we saw serious demand from first-timers and investors for low priced houses and now supply sits at multi-year lows. Organic supply is not coming onto the market the way it should because too many homeowners are too far upside down on their mortgage and short sales remain an arduous process.

In the mid-to-upper price bands, conditions are bad with a fraction of the buyers and mountains of supply. In addition, unlike the bubble year’s affordability through exotic loan leverage, most lower-end buyers can’t reach out of their affordability band into the higher priced markets. Instead they do without further isolating this market.

Yes, the servicers can continue to let these properties drip out while homeowners continue to default at a record pace each month. But that will only keep filling the reservoir until one day the dam breaks — it is already at critical levels. It is more likely that as the massive supply of pre-foreclosures in the reservoir continues to build, the number of properties that fall into the spillway increase naturally pushing foreclosures higher in tandem.

And a massive amount of foreclosure-ready supply is on tap as the first group of modifyees exit the HAMP trial-mod period within 30 to 60-days and monthly from then on out. At this point — before year end — either foreclosures will begin to flow hard again or the gov’t will come back in and change around the HAMP to prevent it. But the more they change the rules to allow people to stay in homes that they have no business being in, the more they will brand loan defaults and mortgage mods as mainstream turning good borrowers into bad borrowers who default on purpose.

The bottom line for July was that gov’t meddling did push down actual foreclosures in CA but pre-foreclosures (Notice-of-Defaults and Notice-of-Trustee Sales) remained above 2008 crisis levels. On a national basis, the foreclosure activity is so strong that actual foreclosures rose in spite of CA. The foreclosure reservoir is filling quickly, contains hundreds of thousands of foreclosure-ready properties, but the spillway is has a blockage for now.

With the tax credit still in place, mortgage rates still attractive, and first timers and investors slugging it out for a $150k house, there could not be a better time to foreclose and get houses onto the market. But don’t get too excited — ForeclosureRadar.com reported that in CA the average foreclosure was nearly $200k upside down on the mortgage.

It is important to always remember that when one person gets a ‘good deal’ on a house, orders of magnitude more are thrown into a negative-equity (or deeper negative equity) position exponentially increasing their likelihood of loan default. Loan default leads to foreclosure and another ‘good deal’ on a house and so on and so on.

CA & National Foreclosure Stats

Despite foreclosures falling, CA pre-foreclosures remained very strong. As a matter of fact, the number of foreclosure-eligible properties stuck in the pipeline has never been greater. Notice-of-Defaults at 45k in July remain above July 2008 crisis levels.

CA Notice-of-Trustee Sales also remain above 2008 crisis levels at near 40k. When you back out actual foreclosures from the counts below, there are a record number of foreclosure-ready properties in the pipe at this very moment in time.

Below is a chart of all three phases of the CA foreclosure market plus total activity (red). Other than actual foreclosures (yellow), all three charts show counts at or above peak 2008 crisis levels.

Below is the same chart but of national foreclosure activity. The same applies here — default and pre-foreclosure activity is remaining highly elevated at crisis levels, while foreclosures are sloshing around due to market meddling.

astly, this chart looks at CA foreclosure activity relative to total monthly house sales (green).

Foreclosure supply (yellow) has been artificially held back, which has allowed the low end of the real estate market to perform very well over the past several months. But the reservoir of foreclosures (blue + pink) is getting full and at some point the dam will crack and break.

With monthly new foreclosure pipeline supply greater than total sales — when the dam breaks — where does that leave Ma and Pa Organic seller and the builders…they can’t compete with foreclosure resales as it is now let alone when more supply hits.

With monthly Notices-of-Default averaging over 45k per month in CA, sales have to remain near their peak 2009 levels even through the slow months just to tread water – and this does not include organic supply (me selling a house to you and short sales).

As long as foreclosure and foreclosure pipeline housing supply makes up such a large percentage of total sales the housing market will never be on the mend because supply is effectively infinite.