Foreclosure Monitor is an effort by MHP to help public officials determine how best to use their resources to help homeowners and neighborhoods hard-hit by foreclosure.
By Tim H. Davis
BOSTON, June 13, 2011 --- Despite occasional dips in foreclosure activity like we had in February, Foreclosure Monitor's assessment of real estate data and economic trends indicates that foreclosures in Massachusetts will increase during 2011, there are still thousands of properties in the foreclosure pipeline and that we will not likely be in a full real estate recovery until 2014.
Overall conditions in the real estate and job markets are not yet conducive to a sustained foreclosure slowdown, and monthly data showing that foreclosures are slowing down in Massachusetts have largely been driven by one-time events.
Foreclosure Monitor's quarterly look at foreclosures by community, zip code and census tract also indicates that the overall foreclosure picture has not changed. The rate of distress continues to shift slowly away from urban areas into the suburbs and rural areas, especially in Worcester County. For more information, click here.
February slowdown temporary
Hopes that the foreclosure problem was slowing were raised once again earlier this year when foreclosure petitions slowed to 694 in February 2011. This was down 77 percent from August, 2010, when foreclosure petitions filed reached a two-year high of 2,961. These seemingly positive numbers were just an anomaly that are not supported by economic fundamentals.
Usually, foreclosures fall when employment conditions improve or when home price increases allow families to sell instead of going through foreclosure. Neither condition was in place. Home sales volumes and median sales prices for the first four months of 2011 were down from last year and Massachusetts unemployment was at 7.8 percent. The March and April foreclosure petition numbers confirmed that the February drop was a short-term blip. Petitions increased72 percent from 694 petitions in February to 1,192 in April.
Changes in the law, lender practices have slowed foreclosure activity
The slowdown in February 2011 was similar to what happened in 2008, when Gov. Deval Patrick signed legislation giving Massachusetts homeowners who were delinquent on their mortgages more time to work with their lenders to avoid foreclosure. With the implementation of this 90-day "right to cure" period, foreclosure petitions declined by 88 percent from April to May 2008. But by September 2008, the number of foreclosure petitions filed has recovered to 68 percent of the high set in April 2008. A similar drop occurred when this right-to-cure period was extended to 150 days in August, 2010. Petitions declined 62 percent from August 2010 to October 2010, only to rise once the right-to-cure period had become the norm.
Another instance of a one-time foreclosure slowdown occurred in response to a March 2009 Land Court decision, known as the Ibanez case. In this case, a lender's ability to foreclose on a property was called into question, given that certain mortgage assignments could not be produced and had not been filed at the Registry of Deeds. This decision caused a 39 percent slowdown in foreclosure deeds from March to May 2009. This case did not attract widespread public attention until Jan. 2011, when the Supreme Judicial Court upheld the Land Court's 2009 ruling. By that time, lenders had already adjusted their foreclosure procedures so the impact had already been felt.
So what caused the February 2011 slowdown? Back in October 2010, it was revealed that lenders and servicers had signed thousands of legal documents with little attention to legal requirements. In response to this "robo-signing" scandal, all 50 state attorneys general opened a coordinated investigation and lenders slowed foreclosure activity. The chart above illustrates how right to cure periods, the Ibanez decision and the robo-signing scandal each resulted in a temporary slowdown of foreclosures.
Looking for the light at the end of the tunnel
Public officials dealing with the foreclosure crisis are still struggling to understand the dimensions of the problem and how long it will last. That requires an assessment of how many foreclosures may be in the pipeline and some assumptions about when we are likely to see recovery in the employment and housing markets.
To determine how many more foreclosures are likely to work through the system, one needs to first estimate the number of foreclosures pending. According to The Warren Group data, from January 2005 to April 2011, there were 137,228 foreclosure petitions and 47,992 foreclosure deeds filed in Massachusetts. According to our research of the data, this includes 21,000 properties that have had a foreclosure petition filed or an auction scheduled over the last year that have not yet been foreclosed or sold.
There is also a potential pipeline (also known as the "shadow inventory") above and beyond the number of properties for which the foreclosure process has already been initiated. Based on the most recent data from the Federal Reserve Bank of New York (November 2010), an estimated 47,000 to 56,000 Massachusetts homeowners are seriously delinquent on their mortgages (90+ days) but not yet in the foreclosure process. This is a decline from an estimated 54,000 to 65,000 in November, 2009.
While some of these homeowners will be able to resolve the delinquency through a loan modification, refinance, or property sale, these seriously delinquent mortgages plus 21,000 properties that have not been foreclosed or sold adds up to 68,000 to 77,000 properties that still need to work through the system.
What is the economy saying?
Besides having an idea of how many properties are still at risk of foreclosure, understanding the economy, the real estate market and the track of previous recessions is essential to understanding the foreclosure crises.
In a 2009 Federal Reserve Bank of Boston report, Christopher Foote, Kristopher Garardi, Lorenz Goette and Paul Willen found that a homeowner's decision to default is caused by a shock to household income and declining home prices. In appreciating housing markets, families experiencing divorce or a loss of a job are able to sell their home before a foreclosure can occur. But foreclosures increase when prices decline, both for those who bought with unaffordable sub-prime loans and for those who experienced a job loss.
For example, in Boston, during 2004, median sales prices increased 12 percent and there were only 25 foreclosures. Once prices began to decline in late 2005 and early 2006 the foreclosures escalated, and during 2008, Boston median sales prices declined six percent and there were 1,215 foreclosures (see the City of Boston's 2010 Foreclosure Trends).
Given the slow economic recovery, the outlook for foreclosures is not hopeful. In the first quarter of 2011, the national economy grew at a weak annual rate of 1.8 percent, though, according to Mass Benchmarks, the Massachusetts economy grew at a faster pace, 4.2 percent, during this quarter.
And while the number of jobs and the number of unemployed in Massachusetts have improved, full recovery remains on the distant horizon. According to the U.S. Bureau of Labor Statistics, Massachusetts employment peaked in February 2001, at 3.38 million jobs. After the 2001 recession, Massachusetts never recovered all the jobs lost, but by March 2008, employment had increased to 3.30 million jobs. From March 2008 to August 2009, Massachusetts lost 143,000 jobs. As of April 2011, Massachusetts had only recovered 66,900 of those jobs.
Unemployment has declined, but remains high. From November 2004 to May 2008, the Massachusetts unemployment rate was less than five percent. The unemployment rate peaked at 8.8 percent, from October 2009 to February 2010, and has declined slowly, to 7.8 percent in April 2011. During the recession, the number of unemployed increased 155,200, to a peak of 306,500. In the recovery, the number of unemployed has only declined 34,200, to 272,300 in April 2011.
The real estate market appeared to be recovering, but has shown renewed signs of weakness in recent months. According to The Warren Group and the Massachusetts Association of Realtors, median sales prices and sales volumes of single family homes and condominiums declined in January and February 2011. Sales prices increased on a month-to-month basis in both March and April but it s too soon to predict the short-term direction of the market.
Seasonally adjusted data for Greater Boston from the S&P/Case-Shiller Home Price Index illustrates the turning points in the real estate bust and recovery. The chart above shows how this recession compares to the last New England housing recession of the late 1980s and early 1990s. If the current recovery continues to follow the track of the early 1990s, Greater Boston housing prices would return to their previous peak values in mid- to late-2014.However, recently-released March 2011 Case-Shiller data shows renewed declines in house prices (-1.5 percent from Feb.), throwing some doubt on a recovery even by late 2014.
Important differences in comparing recessions
Keep in mind that there are several important differences between the two recessions that could significantly affect the pace of recovery in Massachusetts, both positively and negatively.
Our unemployment rate has been trending consistently below the national average. A faster job recovery in Massachusetts could accelerate recovery of local real estate values. In the early 1990s we suffered from a regional recession where unemployment in Massachusetts was significantly higher than the country as a whole. This time around, we have one of the strongest state economies and unemployment has been consistently lower in Massachusetts than the rest of the U.S. The key question is how much weak national growth is holding back what might otherwise have been a healthier and more rapid recovery of local housing values.
Unemployment is more a cause than an effect of our weak housing market. During the housing recession in the late 1980s, unemployment in Massachusetts spiked rapidly and then rapidly declined just as housing was starting to recover its value. This time around, the housing and job cycles in Massachusetts are not in sync. Home values in Massachusetts started to decline nearly 2-1/2 years before the spike in unemployment and values had already started to come back more than a year before the statewide unemployment rate peaked at 8.8 percent.
We entered this recession in Massachusetts with very little inventory of newly built and unsold homes, without the building boom that preceded the last housing recession. In the five years before home prices peaked in 2005, we had built barely half of the new housing units in Massachusetts that we had built leading up to the previous housing crash in 1988. That difference represents about 82,000 fewer new housing units that need to be absorbed before home values recover.
Negative equity also a factor
Until home prices recover, a percentage of homeowners will continue to have negative equity, also known as being "under water", and will continue to be at risk for default. In June, CoreLogic estimated that in first quarter of 2011,15.4 percent of Massachusetts homeowners with a mortgage had negative equity, up from 15.3 percent in fourth quarter of 2010.
CoreLogic estimates that over 230,000 Massachusetts homeowners had negative equity in the first quarter of 2011. While most homeowners with a steady income remain in their homes until they have equity, a slow economic and housing market recovery could push more of these families into default.