December foreclosure activity in California commenced by recording a Notice of Default (NOD) dropped 32.5% on a daily average from the preceding month of November, as reported by Foreclosure Radar. This drop is attributable in part to seasonal slowness.
However, the number of NODs recorded for December 2009 is up more than 55% from the same period a year earlier. In contrast and seemingly counter-intuitively, real estate owned (REO) inventory for December 2009 was down 34% from December 2008, indicating that banks are taking longer to complete the foreclosure process. [For more information on the NOD/NOTS statistics, see the December 2009 Market Chart NODs and Trustee’s Deeds: Grim signs of real estate’s present condition]
Mortgage delinquencies are very much on the rise in California. Thus, the current dip in NOD recordings reflects a growing disparity between delinquencies and the much smaller number of NODs lenders are recording. This then stalls the appearance of REOs on the market.
first tuesday take: Lenders now seem to finally understand that it isn’t in their best interests to do what’s right to get an early real estate recovery underway in California so that we will have a stronger real estate market by the end of this new decade. They’ve taken to pulling the political strings behind the scenes to slow down the process of recording NODs and to delay releasing foreclosed properties (REOs) onto the MLS market, all at a deliberate snail’s pace in hopes of temporarily propping up real estate prices to hedge against ever bigger losses. This effectively extends the recovery in the hopes that prices will stay up — which of course they will not.
If all the properties they will eventually have to foreclose are allowed to hit the market as fast as the rising delinquencies indicate they should, prices will go down. That is the way the market works to clear out toxic assets and start lending to get this recovery underway.
This adverse market behavior is largely ignored by the federal government, who, up to this point, has only seen fit to do the equivalent of giving lenders a publically “stern talking to” (when they actually show up to listen) by urging loan modifications — a largely ineffective strategy, especially while the banks are making trillions of very cheap dollars available to lenders.
The government also has an interest in keeping foreclosure numbers low: a high number of foreclosures look bad when the country is supposed to be in recovery. The government is walking a stubbornly thin line: on one hand, it does not want to appear to do too little with so many homeowners in distress; on the other hand, it is unwilling to step up and force lenders’ hands by giving lenders the competition they need to get their upside-down portfolios corrected in the form of judicial cramdowns and private money lending opportunities. Both these Congressional efforts have been successfully stopped by lenders.
In the meanwhile, prospective homebuyers, willing and able to buy and occupy homes, are facing an artificially strong seller’s market. Between lenders playing their market games (which includes their refusal to discount to allow short sales to clear out dead, negative-equity inventory, an activity which drives REO prices up) and speculators snapping up the few properties that are available (only to later return them to the market at higher prices), would-be first time homebuyers are facing a relative dearth of affordable low-tier properties to purchase while tax credit subsidies are driving prices up. But at some point during the next two or three years, the lenders are going to have to foreclose on these delinquent loans. Only then will future homebuyers get their revenge on speculators, and quite likely at prices lower than today’s. Gold bugs have different thoughts on the dollar and pricing of hard assets.
Thus, the standstill continues, and full recovery of the California real estate market is put off a few more years. This adversely affects the effectiveness of real estate brokers and their agents, and definitely reduces their income from fees that would result from the sales which could be made now if lenders would foreclose. Foreclosures are necessary to clear the market place of properties held by insolvent owners and the increasing number of negative equity owners whose strategy is to default, a risk the lenders themselves have created by delaying foreclosures.
Of course, prices would drop in the process of clearing the market. The federal and state tax credits were handy, but will be viewed as an artificial jump in sales to individuals who would have bought anyway during the next year and now have, and at prices some will come to regret. [For more information on the affect speculators have on the other players in the real estate market, see the January 2010 first tuesday article Homebuyer beware: the real estate game lacks fair play]
Re: December 2009 CA Foreclosure Report from Foreclosure Radar