By Tim H. Davis, March 3, 2010
Despite reports that the real estate market is rebounding, local and national real estate watchers worry that bank-owned homes and homes on the brink of foreclosure will flood the market, slowing the recovery. Mortgage researcher First American CoreLogic estimates that this so-called "shadow inventory" has risen nationally to 1.7 million as of September, 2009, up from 1.1 million the year before.
This month's Foreclosure Monitor attempts to estimate the potential impact on Massachusetts by analyzing properties that comprise this shadow inventory:
Delinquencies: the owner is late on the mortgage, but not in foreclosure
Petitions: one has been filed but the foreclosure has not been resolved
Bank-owned: A real-estate owned property (REO) that's not on the market.
By using information from publicly-available sources and data purchased from The Warren Group for foreclosure policy research, one can get a handle on how big our problem could be and which communities are at risk of a second foreclosure wave.
Delinquencies up in every county
Late payments due to loan type have delivered a one-two punch to the chin of the real estate market. At the beginning, delinquencies were driven by sub-prime and Alt-A mortgage products but with unemployment rising above 9 percent, more delinquencies and foreclosures are tied to economic stress.
Two reports illustrate this. According to the Federal Reserve Bank of Boston, prime fixed-rate and adjustable mortgages represented 64 percent of foreclosure initiations in the third quarter of 2009 in Massachusetts, up from 42 percent in Q3 2008. In Nov. 2009, the Federal Reserve Bank of New York identified 19,652 prime, 10,719 sub-prime and 2,951 Alt-A loans, for a total of 33,322 mortgage that were 90+ days past due/delinquent. It is important to note that the New York Fed data does not cover all mortgages. Projecting their totals across all mortgages, there could be approximately 54,000 to 65,000 delinquent mortgages in Massachusetts.
Whatever NY Fed figure you use - the hard number or the estimate - either is larger than the number of Massachusetts properties in some stage of foreclosure right now (30,622 properties as of Jan. 1, 2010), meaning that if a portion of these delinquencies go into foreclosure, the Massachusetts real estate recovery will be slower.
Data compiled by the New York Fed allows us to see delinquency increases by county. For Q3 2009, this ranged from 2.2 percent in Berkshire County (up from 1.5 percent in Q3 2008) to 6 percent in Suffolk County (up from 4 percent in Q3 2008). Plymouth County had the second highest delinquency rate, at 5.2 percent.
Loan modifications may reduce the number of delinquencies that become foreclosures. The Making Home Affordable Program recently released data reporting that as of January 2010, there were 18,647 active trial modifications as part of the Home Affordable Modification Program (HAMP) in Massachusetts, and 2,788 permanent loan modifications had been approved or completed.
Petitions: 26,000 properties at beginning of process
The second type that contributes to a shadow inventory is properties where foreclosure proceedings have begun, but have not been completed. As of Jan. 1, 2010, there were 26,545 1-3 unit properties (34,068 units) in Massachusetts that have had a foreclosure petition filed, but had not been foreclosed or sold, according toThe Warren Group.
Among communities with more than 1,000 units, Brockton, Lawrence, Lynn and Fitchburg had higher percentages of units in the foreclosure process and thus are most at risk of having a slower real estate recovery.
Foreclosure deeds down, but petitions are up
Although there are over 34,000 units in properties that are in the foreclosure process, the rate which they hit the market depends on the time lenders take to complete the process. Massachusetts foreclosure deeds (the completion of the foreclosure process) decreased 12 percent from the 4th Quarter of 2008 to the 4th Quarter of 2009. Over the same period, foreclosure petitions (initiation of a foreclosure proceeding) increased 25 percent. This divergence could be caused by:
Foreclosure proceedings are initiated, but the homeowner is able to secure a loan modification, refinance with another lender or sell the property.
Foreclosures are drawn out due to loan modification attempts, service back-logs, legalities, and/or lender reticence to add properties to their portfolio.
Nationally, the Center for Community Capital at University of North Carolina reported in January that the number of completed foreclosures declined 31 percent from Oct. 2008 to Oct. 2009. This report concluded that much of this decline was due to drawn out processes, not resolutions.
Distressed property data from The Warren Group indicates that the timeline from petition to resolution (the property was sold, refinanced or foreclosed) has grown longer. For properties resolved in Q4 2008, the median time between petition filing and resolution was 9.2 months. For properties resolved in Q4 2009, the median time was 10.4 months. This increase creates a back-log and slows down when properties reach the market.
Legal Ruling to Slow Foreclosure Completions
In October 2009, Judge Keith Long upheld a lower court ruling invalidating foreclosures where lenders/servicers had not properly filed transfer of mortgage ownership at the Registry of Deeds. The Massachusetts Real Estate Law Blog has a description of this process. Among the effects of this ruling are:
Families that have lost their homes may be able to challenge the foreclosure
Foreclosures may be stalled by the lender in order to file additional paperwork at the Registry of Deeds. This may include re-filing a foreclosure petition
Lenders will begin to file the proper paper-work on all properties which in the short term may delay foreclosure proceedings on delinquent mortgages.
The Long ruling will increase the number of distressed properties that are not on the market. In all likelihood, these properties will reach the market slowly, limiting the downward push on prices. Instead, the market will likely be more "bowl" shaped, with a slow decline in prices, but also a slow increase in prices.
The December S&P/Case-Shiller Home Price Index illustrates this. In the 20 metros measured, Greater Boston's decline in prices from historical highs (-18 percent) is lower than all but three metros - Dallas (-9 percent), Denver (-12 percent) and Charlotte (-12 percent). In terms of year-over-year price increases, recovery is being seen in Dallas (3.0 percent), Denver (1.2 percent), San Diego (2.7 percent), San Francisco (4.8 percent) and Washington, DC (1.9 percent). Meanwhile Greater Boston's recovery is weaker, with a smaller increase of 0.5 percent.
Bank owned: 4,077 REO properties
The last type of property that contributes to a shadow inventory is bank-owned (REO) properties that are not already on the market. The other two types represent future inventory, while REO properties could be released at any time, dragging down a local market. As of January 1, 2010, 4,077 Massachusetts properties were bank-owned, a 15 percent decline from 4,793 on January 1, 2009, according to The Warren Group. Even if all these properties were on the market, this would represent less than one month supply of homes.
The table at left shows cities and towns with the highest proportion of bank-owned units per thousand. While North Brookfield had the highest rate, Lawrence and Lynn are close behind, followed by Springfield. Whereas Brockton had the second highest proportion of housing currently in the foreclosure process, it ranked sixth in terms of bank-owned properties.
What's the bottom line?
If you take the number of delinquencies reported by the New York Fed (33,322) and add in the number of bank-owned properties (4,077) and properties where foreclosure proceedings have begun (26,545), you have a shadow inventory of almost 64,000 properties, and that's probably conservative since the NY Fed data does not cover all mortgages.
So despite signs that the real estate market is recovering in Massachusetts, the overall perspective should be caution because a large number of homeowners remain at risk and there are still a lot of troubled properties that need to work their way through the market.
One could say that real estate market will behave a lot like the jobs sector. There will be fewer layoffs, but it's going to take some time to get everyone back to work. Similarly, the real estate market appears to be recovering, but it's going to take awhile. Let us not forget the last housing recession: Foreclosures declined significantly after 1994, but the market in many hard hit neighborhoods didn't recover until 1997.