(Foreclosure Monitor has been a five-year 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 Davis
BOSTON, Sept. 3, 2014 --- While the recent uptick in foreclosure petitions is an indication that banks are still chewing through a backlog of foreclosures, the overall picture is one of recovery, which is a far cry from what the housing market looked like when the Foreclosure Monitor posted its first article back in May, 2009.
Five years, 25 editions of the Foreclosure Monitor, and a recovering housing market are milestones that provide an excellent opportunity to review what has happened, what we’ve learned and what areas and trends still need the attention of policy makers.
This Foreclosure Monitor — the last regular Foreclosure Monitor — will attempt to do this, and combined with the data released two weeks ago, provides one final picture of what’s going on in Boston, the state’s gateway communities, and its suburban/rural communities.
Foreclosure crises review
The foreclosure crises, both nationally and in Massachusetts, was tied directly to the sub-prime lending bubble of the early 2000s. As long as real estate values continued to climb, homeowners could continue to refinance, usually for ever increasing amounts. When real estate values started to fall - late 2005 in Massachusetts and 2006 in many other places -homeowners could no longer refinance or sell their homes. This led to a rapid increase in foreclosures: 187 percent from 2005 to 2006, and an additional 145 percent from 2006 to 2007 (see Chart 1, below). With increasing loan delinquencies, sub-prime lenders began to fold, and in August/September of 2007, the sub-prime lending market collapsed, followed by the system-wide banking crises exactly one year later.
From 2008 to 2013, a number of circumstances led to slow-downs in the number and processing of foreclosures. In 2008, new state legislation gave homeowners a 90-day “right to cure” period to work with lenders to avoid foreclosure before the foreclosure petition was filed. The May 2008 implementation of this law led to a decline in foreclosures over the summer and fall of 2008. During 2009, foreclosure deeds climbed back into record territory, even with a temporary slowdown in the spring, caused by the March 2009 “Ibanez” case, which called into question a number of foreclosures due to lenders’ poor paperwork and foreclosure processes.
In the fall of 2010, two situations led to a substantial decline in foreclosures. First, the state extended this right-to-cure period to 150 days. Secondly, the so-called “robo-signing” scandal broke on the national stage, leading to a law suit by 49 of the 50 states’ attorney generals against lenders for poor foreclosure processes. A number of lenders suspended their foreclosure activities while they worked to improve their internal processes. Since that time, lenders have resumed their foreclosure activities, but they have been more cautious, and foreclosures were increasingly resolved through short sales. This fact, tied with the real estate recovery that began in 2009 for most of the state, contributed to the overall decline in foreclosures.
Changing patterns of distress
Very early in the foreclosure crises, clear patterns emerged in terms of the geographic concentration. The series of maps below portray the foreclosure distress rate in Massachusetts municipalities, from July 2009 to July 2014, with the July 2010 map representing the peak in distress.
In July 2009, foreclosure distress was already evident in many of the gateway communities, Boston, as well as in central Massachusetts (largely Worcester County) and southeastern Massachusetts (Plymouth and Bristol Counties). As the crises peaked in 2010, more communities, including a number of suburban communities, began to see high levels of distress, though the original areas of concentration continued to have the highest foreclosure activity.
The maps for 2011 to 2014 show the decline in distress, with more marked improvement in Boston, its western suburbs, and among a number of communities in western Massachusetts (with the exception of the Springfield and Pittsfield areas). While Brockton, Fitchburg, and several small Worcester County towns continue to be hot spots, there has been improvement across the state.
MHP has prioritized the 26 gateway communities for a number of foreclosure interventions and technical assistance, and given the overall higher level of distress in these communities, it makes sense to look at how distress has changed for the gateway communities, compared to Boston and suburban and rural communities.
While the distress rate for gateway communities remains higher than for the state as a whole (5.9 distressed units per 1,000 housing units, compared to 4.0 for the state as a whole) as of July 1, 2014, this gap has narrowed since the 2010 peak, when the distress rate was 22.9 for gateway communities, compared to 14.3 for the state (see Chart 2, below).
Suburban and rural communities have had lower rates of distress, but decline in distress has not been as steep as for gateway communities. Boston has shown remarkable progress, as the distress rate has declined 85 percent, from 15.3 units per 1,000 housing units in 2009, to 2.3 in 2014, and has performed better than the state since 2011.Given that each of these areas had different rates of improvement in foreclosure distress, the proportion of the states’ distress in each type of community has changed (see Chart 3). In 2009, 42.4 percent of the states’ distressed housing units were located in suburban and rural areas, even
though these areas contain 64 percent of the states’ housing units. By July 2011, just over 50 percent of these units were now located in suburban and rural areas.
During 2012 and 2013, the proportion was fairly stable, at around 52 percent, but jumped to 54.8 percent for July 2014. The relative improvement in Boston and the gateway communities contributed to this outcome. As of July 2014, only 5.7 percent of distressed units were located in Boston, and gateway communities now contained 39.5 percent.
The types of properties in distress goes hand in hand with the geographic concentrations, as Boston and gateway communities are more likely to have two- and three-family properties. As suburban areas
became more affected by foreclosures, single-family homes became an increasingly higher percentage of homes in foreclosure, increasing from 60 percent in 2009 to 71 percent in 2014 (see Chart 4).
Foreclosure resolutions
In the July 2012 edition, the Foreclosure Monitor took a closer look at investor interest in foreclosed properties. Looking at two years’ worth of sales of distressed properties, the monitor found that buyers of multiple properties constituted 23 percent of transactions of properties in foreclosure distress. In addition, it was clear that investors were largely small in scale, and the large, corporate investors that have been seen in markets such as Arizona are largely inactive in Massachusetts. In revisiting this question, the Monitor looked at transactions over the last year on properties that were distressed as of July 1, 2013, and found that only 12 percent of purchases were made by individuals/entities that had purchased more than one property. Some of the other transactions were likely investors, but data does not provide residency information, and some investors operate under multiple, distinct names. The top two purchasers were REEM Properties LLC (30 properties), a Northborough company with purchases in a range of communities, and NSP Residential LLC (10 properties). NSP Residential LLC is an arm of Boston Community Capital’s SUN (Stabilizing Urban Neighborhoods) program, which works closely with homeowners in foreclosure. Under this program, Boston Community Capital purchases the foreclosure, and then sells the property back to the homeowner at a value that the homeowner can afford, and is in-line with current values (lower than the original, inflated purchase price). As a result, this “investor” is by no means traditional.
While activity by large investors has not picked up, the way in which foreclosures have been resolved has changed. The Jan. 2012 Foreclosure Monitor took a look at foreclosure resolutions, and found that in Q3 2011, the most common foreclosure resolution (53 percent) was a bank foreclosure where the bank then took ownership of the property (known as “REO”, or real estate owned). By Q2 2014, the situation had changed rapidly, as only 14 percent of resolutions were REO, and the number of sales completed before a foreclosure was completed increased from 33 percent of resolutions to 65 percent. Most of these resolutions are likely “short sales”, where the lender agrees to let the owner sell the property to a third party at a value that is less than the original mortgage amount before the foreclosure is complete, but with values rising, some of these sales may have been by owners in financial distress who did have equity (see Chart 5). This outcome is expected given the overall recovery in the Massachusetts housing market. Other resolution outcomes are still relatively rare, with only 13 percent resolved through a refinance (although up from three percent in Q3 2011), and eight percent were sold at the foreclosure auction to a third party (down from 11 percent).
(Tim Davis is an independent research consultant commissioned by MHP to do foreclosure analysis and the Foreclosure Monitor).