Where Are the Foreclosures?

Bloomberg has a story Foreclosure Wave Averted as Doomsayers Defied. I think it's a great example of defining deviancy downward. There's no question that we haven't seen a foreclosure tsunami in the wake of the federal-state servicing fraud settlement. But there was little reason to expect one and let's not lose sight of the big picture--foreclosure levels are still incredibly high. 

Here's why it didn't make a lot of sense to expect a huge pick up in foreclosures: there simply isn't the system bandwidth to handle them. Servicers really can't move significantly more foreclosures through the courts/trustee systems if they wanted. States have adopted all kinds of approaches that have significantly slowed down the foreclosure process. If I started a foreclosure in New York state today, I probably wouldn't have title and possession until early 2015. To the extent they could, it would risk pushing down housing prices and triggering more defaults. Moreover, the banks' plan for several years has been to slowly recognize losses against earnings. If all defaults had been foreclosed at once, the banking system would look a lot less solvent. The game plan has always been to run the clock.  Hence all the "kick the can down the road" mods. As a result, what we're likely to see is not a foreclosure tsunami, but rather an extended foreclosure high-tide.  

Assuming no major hiccups (e.g., interest rates rising), it will still take a few years before foreclosure levels return to historic averages. Unfortunately, that's when a lot of 2009-2011 HAMP mods will start to have their interest rates rise. Probably not a crisis from that, but certainly not good. 

The article also buys into the belief that there's a meaningful distinction between a foreclosure and a short sale. They are different, but in terms of the social displacement from foreclosures, they look pretty similar.  Maybe there's a negotiated exit time frame with the short sale, etc., making it a softer landing, but let's not see short sales as Mission Accomplished. The chart below shows HOPE Now data on foreclosure starts, foreclosure sales, short sales, and foreclosure & short sales.  While there's been a 48% increase in short sales since Q1-2010, the number is still small in absolute terms. Viewed as a whole, there hasn't been any real change in total foreclosure or short sale activity since the end of 2010. Foreclosure starts have been coming down, but they're still perhaps 4x what they usually are. So yes, we haven't had a an increase in foreclosures, but the situation already was a disaster. This is hardly success. So no storm surge, but extended high tide.