Falling Foreclosure Rates Hurt Investors, Says Report

A report from Foreclosure Radar makes the case that government intervention and the prevention of foreclosures from occurring is hurting investors by keeping people in homes with negative …

A report from Foreclosure Radar makes the case that government intervention and the prevention of foreclosures from occurring is hurting investors by keeping people in homes with negative equity that they will never be able to afford, therefore preventing the improved use of the home and stifling recovery progress. Moreover, large banks are suspending foreclosures in an effort to pay down the $25 billion settlement for fraudulent foreclosure practices, and the diminishing inventory of foreclosed homes is hurting the rental market by preventing the homes from being converted, say analysts responsible for the report. For more on this continue reading the following article from TheStreet.

A new report came out this week with a curious headline: “Foreclosure Activity Declines, Hurting Investors.” I read it twice. You would think declines in foreclosure activity would be a good thing, that is, would help, not hurt. Not in this bizarre housing market. The report is from Foreclosure Radar, a foreclosure sales and analytics website.

Foreclosure starts, the first stage in the foreclosure process, fell in April in the hardest hit states of California, Arizona and Nevada, according to Foreclosure Radar. California saw the steepest slide, with Notice of Default filings down nearly 16% from a year ago and nearly 70% from the peak in March of 2009.

Foreclosure sales (sales of these properties at the courthouse steps, not sales of already bank-owned, or REO, properties) also declined, as the investor share of these purchases soared to a record high. “Nevada investors purchased more than 50% of foreclosure sales for the first time at 50.7%,” according to the Foreclosure Radar report. “The low number of sales, combined with a record percent purchased on the courthouse steps, left very little to become Bank Owned (REO). This further depletes the inventory of Bank Owned homes, as REO sales continue to outpace the addition of new inventory.”

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Why all the declines? Unfortunately it’s not an overall improvement in the housing market, nor an increasing ability of borrowers to stay current on their mortgage payments.

“Instead we are seeing unprecedented government intervention into the foreclosure process, leaving underwater homeowners in limbo, while stealing opportunity from investors and first-time buyers,” says Foreclosure Radar CEO Sean O’Toole, who cites new legislation in Nevada which brought foreclosure activity to a near halt, and similar pending legislation in California. “The reality is that these laws don’t solve anything, as they fail to address the real problem — negative equity — while instead they punish real estate professionals, homebuyers, and investors far more than the banks they were aimed at,” argues O’Toole.

The recent $25 billion mortgage servicing settlement between the nation’s five largest lenders, state attorneys general and the U.S. Department of Justice, has sent servicers back to the drawing board on many thousands of delinquent loans and loans that were already in the foreclosure process. Bank of America alone has suspended 200,000 foreclosure actions, as it offers principal reduction modifications to comply with its $11 billion share of the settlement.

Government and private sector programs are both trying to mitigate the foreclosure crisis, but as the rental market shows no sign of cooling off, investors are increasingly arguing that these troubled mortgages should be allowed to run their course through to foreclosure. That of course benefits investors but ignores the human toll inflicted on so many desperate American families. But again, as O’Toole argues, we’re doing none of these homeowners any good by keeping them in homes in which they will likely never see any equity; underwater borrowers are effectively renting already anyway, not to mention that they are stuck in place because they can’t sell.

Government intervention in the mortgage market, be it foreclosure mitigation, subsidized refinancing, or artificially low interest rates will not abate in an election year because politics always trump fundamental economics. What’s so interesting this year is that while politicians have consistently vilified investors throughout the housing crash, they need them now more than ever to help clear the distressed homes from the market and provide much needed rental housing.

At some point even the politicians will have to look past who did or did not act “responsibly” during the run-up to the housing crash and focus on who has the best chance of setting things right again.

This article was republished with permission from TheStreet.


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