Do Declines in Foreclosures Necessarily Show An Improving Housing Market?

In April 2012 five of the largest lenders in the country reached a court settlement with the attorney generals of 49 states and the District of Columbia. The agreement concluded the lawsuit brought by the attorney generals against those banks – Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial- who had been accused of various illegalities and abuses regarding the way they handled the foreclosure process of homes whose mortgages they held. The settlement totaled $25 billion, and under the terms of the deal at least $17 billion of that total would be committed towards modifying mortgages for delinquent borrowers, including principal reductions for some of the roughly 1 million homeowners currently underwater on their mortgages.[1]

To date nearly $10.6 billion in mortgage relief has made its way to homeowners, according to the Office of Mortgage Settlement Oversight. Per the stipulations of the settlement, at least 60% of the borrower relief was to be spent on principal reductions; thus far less 10% of the money has been allocated to that end. Virtually all of the remaining money, more than 85%, has gone towards pre-foreclosure short sales, a practice whose employment is growing rapidly amongst housing lenders. A short sale involves the bank agreeing to accept less than the full mortgage balance when the home is sold. By focusing on short sales, banks skip the arduous foreclosure process and they no longer have to manage, maintain and market homes upon the conclusion of that process. When the court settlement in April was reached there was hope that it would lead to more lenders approving the modification of loans and write downs of principal in order to assist homeowners struggling to pay their mortgages. Instead it appears that homeowners are simply losing their homes in another fashion, one that does not impact foreclosure statistics, since no foreclosure takes place.[2]

This new trend in the housing market makes it difficult to analyze the lower foreclosure totals showing up in various industry surveys over the past few months. In August, 99,405 homes entered the foreclosure process, down 13% from August of the previous year, and down dramatically from the foreclosure peak of April 2009, which recorded an astounding 203,000 foreclosure filings. Still, the latest foreclosure figures remain far in excess of the monthly totals seen prior to the housing bubble’s collapse, as the 34,000 foreclosure filings of May 2005 attests. Short of another severe economic shock, experts expect this trend to continue, with several citing the dramatic drop in foreclosure starts, the initiation of foreclosure proceedings, down 19% last month from the previous August, to a total of 52,380. With the country on pace to have 678,000 foreclosures by the end of the year, a noteworthy decrease from the 800,000 foreclosures of last year can be reasonably expected.[3] Additional good news includes a reduction in the number of homeowners underwater, from 11.4 million at the end of the first quarter of this year to 10.8 million at the end of the second quarter, with this improvement being attributed primarily to the ongoing stabilization of housing prices.[4] Still, there is cause for concern given the banks ongoing intransigence as they seem more interested in adhering to the letter of the deal than to the spirit. It remains an open question whether the drop in foreclosures is truly reflective of an improving housing market, or whether people are simply losing their homes in ways not reflected in the data of the various industry surveys most market watchers use.

This concern has led to some to call for a more sweeping approach to solving the housing crisis. Austin Goolsbee, a former top Obama Administration official who held the chairmanship of the Council of Economic Advisors, says, “I think there's a lot wrong in the housing market” and recommends a broad expansion of an existing program to rent out the homes foreclosed upon by Fannie Mae and Freddie Mac that are currently owned by the government. Instead of these houses sitting empty, they could become rental properties thus reducing the supply of homes for sale on the market, a development that could only help what appears to be the glimmerings of a housing market recovery.[5] It is worth noting that houses with mortgages held by Fannie Mae and Freddie Mac were not included in the court settlement of last April, knowledge that would seem indicative of the need for the implementation of solutions to address the issue particularly given the fact that various government related entities, such as Fannie Mae and Freddie Mac, currently have about 200,000 homes in their possession.[6]

Despite the uncertainty as to whether the marked drop in foreclosures can be cited as an indication of an improving housing market or not, there are a number of other clear indications that the market is slowly on the way towards recovery. Home prices have increased year over year across the country and in virtually every major metro area, per the S&P Case Shiller Indexes.[7] Sales volumes have increased and home inventory levels have hit record lows, all of which can only be viewed as encouraging.[8] The housing market is on the way up, but there remain hardships to endure. A more clear indication on the part of the banks that they wish to be part of the solution, and not part of the problem, would do much to help dispel the greatest impediment to a return to a healthy housing market; the lack of confidence on the part of the average citizen in the institutions that comprise that market.