The Foreclosure Phantom nevertheless Lurks

The Foreclosure Phantom nevertheless Lurks

A decline in foreclosures over the past year has convinced some people that the crisis is over.

Not quite.

When the robo-signing scandals of 2010 came to light, foreclosures across the country slowed, and in some states halted altogether. Bank of America made big news by pausing foreclosures nationwide. Politicians, always eager to appear on the side of “the people”, applauded–and redoubled their efforts to punish the big mortgage servicers and stop foreclosures for good. Distressed homeowners breathed a sigh of relief, as the axe of foreclosure was held back for a time.

It might seem implausible that the lenders themselves were also relieved, but they have reasons to fear foreclosures as much as homeowners.

Contrary to popular myth, loan servicers aren’t itching to “steal your house”. They’re in the loan business, not the real estate business. If a particular loan goes bad to the point that they have to terminate it and retrieve the collateral, they’ve already lost money. They have incentives to use all the tools at their disposal to avoid that.

But when those efforts fail and foreclosure appears to be the only cure, the servicers have an obligation to their investors to proceed. In fact, Fannie Mae, the world’s largest mortgage investor, recently chastised its loan servicers for delaying foreclosures that it considered unavoidable.

An threatening observe

With that in mind, the recent surge in foreclosure activity nationwide sounds an threatening observe. Six Western states saw emotional jumps in foreclosure filings between July and August 2011. Bank of America led the way with a 116 percent increase. This trend indicates that the foreclosure pause was just that–a momentary respite that is ending as servicers regain confidence in their procedures.

The Zillow Real Estate Market Report for August 2011 proves this view. Its examination of recent nationwide sale data concludes that “re-sales and foreclosure liquidation rates are suppressed currently.” Suppressed method there’s something holding them back–implying that they’ll ultimately burst forth again.

The report cites the fallout from the robo-signing scandals as a dominant reason for the artificial downturn in foreclosures. The slowdown has eased the pressure on home prices–but only temporarily. “The speed of foreclosure liquidations will pick up again,” the report warns, “ultimately putting more REO’s into local markets and putting more downward pressure on prices.”

The Next Foreclosure Wave

Beyond the backlog of homes now stuck somewhere in the foreclosure pipeline, some analysts predict a wave of new defaults that will add to the foreclosure debacle. One of those prophets of gloom is Laurie Goodman, Senior Managing Director at Amherst Securities Group. In her recent testimony before the Senate Subcommittee on Housing, Transportation and Community Development, Goodman warned of 10 million new defaults in the coming years.

Some of those defaults will resolve themselves, as homeowners regain financial stability. Unfortunately, most won’t, according to predictions. Some will proceed to one of the foreclosure alternatives: alteration, short sale, or deed in lieu of foreclosure. And an as-however unknown number will be additional to the completed foreclosure statistics.

The foreclosure phantom, it seems, will be stalking the country for the foreseeable future.

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