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This article presents the trends revealed in the first quarter 2012 default and foreclosure data.

Foreclosures in California dropped again in the first quarter of 2012 — a good sign of a stabilizing housing market. Notices of default (NODs) and real estate owned (REO) resale volume also declined, suggesting that lenders, one way or another, are finally working through their backlogged foreclosure inventory.

34% of all California home resale activity in the first quarter of 2012 was attributed to REO inventory — approximately level with the fourth quarter of 2011 and down from 40% one year earlier. At this rate, five more years will be required for the REO inventory to return to its historic norm of 7%. An estimated 31,900 REO resales took place in the first quarter of 2012, down 13% from one year earlier.

56,258 NODs were recorded in California in the first quarter of 2012, down 9% from 61,516 the prior quarter and down 18% from 68,239 one year earlier. NOD volume peaked in the first quarter of 2009 with 135,431 NODs recorded.

The time taken to process a foreclosure following an NOD is also decreasing, as lenders work through the backlog of delinquencies. It currently takes an average of nine months after the recording of the NOD to complete a trustee’s foreclosure sale in California, down from ten months the previous quarter and just over nine months one year earlier.

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Further Decline in California Foreclosure Activity from DataQuick

NODs and trustee’s deeds: less depressed but still grim

REO resales in CA

The news for troubled homeowners may not be quite as good as it appears, however. Much of the reduction in foreclosures and REOs can likely be attributed to an increase in shortsales. The destruction of FICO creditworthiness experienced by a homeowner who participates in a shortsale is as dramatic as that wreaked by a foreclosure, since homeowners must default before the lender will even consider a shortsale. The shortsale/foreclosure which is ultimately reported will indicate that the owner did not repay the loan as agreed.

This single-act destruction of credit is counterproductive, and helps nobody, including lenders which need loan originations to succeed. Lenders will need to relax their credit scoring requirements in the future, to accommodate homebuyers whose only fault was a recession-induced foreclosure or shortsale.

Trustee’s sales

30,261 foreclosures (trustee’s deeds) were recorded statewide in the first quarter of 2012. This is down 3% from 31,260 in the fourth quarter of 2011, and 30% lower than the 43,052 home foreclosure sales one year earlier. This marks 15 months of continuous decline in foreclosures — a highly positive sign that lenders are better managing their non-performing portfolio.

Among California’s largest counties, some of the greatest one-year drops in foreclosures took place in San Diego (-36%), Riverside (-34%), Contra Costa (-32%) and San Bernardino (-32%) counties.

Low-tier neighborhoods continue to see the highest concentration of both NODs and foreclosure sales, and as with NOD filings, foreclosures remained far more concentrated in the state’s lowest priced neighborhoods.

ZIP codes with median sale prices below $200,000 collectively saw six homes foreclosed for every thousand homes. In comparison, ZIP codes with median prices between $200,000 and $800,000 saw only three foreclosures per thousand. Foreclosures were negligible (less than one per every thousand) in areas with average prices over $800,000.

An estimated 33% of homes sold at trustee’s sales were bought by individuals other than the lender or government groups — up from 29% last year. This third-party high-bidder situation indicates speculators expect future resale pricing to jump, generating sufficient profits on a prompt resale to merit the investment.

Related articles:

California tiered home pricing

Rentiers and debtors: why can’t they get along?

How to facilitate a shortsale transaction

Reduced inventory not a sign of recovery

Trends in NODs and foreclosure are encouraging, although it is still much too early to determine whether these declines in foreclosures will be enough to indicate a permanent trend, Nonetheless, until employment rates dramatically increase it will be impossible for foreclosures to return to pre-recession levels. Employment is the key factor behind demand for housing, home sales volume, and (eventually) prices.

However, first tuesday expects that foreclosures and bankruptcies will turn back up at some future point in the economic recovery, as frustration with ongoing low pricing drives many homeowners to simply quite paying on their negative equity mortgages.

Right now, signs indicate that much of the reduced inventory is due to speculators, not long-term homeowners who actually reside in their property. Speculators hold their acquisitions while the economy is sour, but then throw the properties back onto the market when either prices rise, or economic stagnation prompts them to cut their losses.

As such, much of the REO inventory has not truly been removed from the market, but is only being held in passive stewardship until it is time to sell it once again.

DataQuick reports that absentee homebuyers (a group generally composed of speculators, buy-to-let investors and renovation contractors) accounted for 28% of Southern California (SoCal) March sales, still very near the record high of 30%. Absentee buyers made up 24% of NorCal homebuyers, down from a record 26%. Sales of single family residences (SFRs) to owner-occupant homebuyers remain low.

Even more important, this 28% share of sales does not include the estimated one third of all trustee’s sales that were picked up by speculators. Demand does not currently exist among homebuyers to absorb this inventory.

Speculators and investors require an increase in home pricing to make a profit, but they are not likely to receive one in the near future. Home prices have remained relatively level since bottoming in 2009. Without actual homebuyers — long-term users rather than speculators — the discussion of declining REO inventory will not be meaningful.

In the face of prolonged low pricing, some speculators will convert to buy-to-let investors hoping to reduce their negative cash flow while waiting for prices to increase. Others, however, will return their properties to the market for resale in one to two years (albeit at higher prices). Just like REO resales, the sale of this speculator-held inventory will drive prices down, not up.  As homebuyer demand will remain low until there are jobs to support it, first tuesday predicts the recovery will be slower and more prolonged than mere REO sales would suggest, lasting until 2017 or 2018 before the market returns to a normal resale environment.

More to come

Speculator resales are the subtlest drag on housing prices, but not the most significant or immediate. It does not take a professional economist to point out continuing NODs are strong evidence of plenty more foreclosures and REOs to come. Even now, about 50% of all NODs go on to trustee’s sale.

For perspective, the present number of trustee’s deeds recorded is 50% higher than the peak of foreclosure sales in the 1996-1997 recovery period, when recovery from the preceding recession had advanced much further than we currently have. Foreclosures are expected to remain at or near their current high rate, since home prices will not rise significantly for several years.  Also, an increasing percentage of the 2,500,000 negative equity homeowners in California, both with and without jobs, will eventually become frustrated and default.

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Wobbling housing market reflects wobbling economy

Despite resistance, FHA wrinkles its nose at cramdowns

The government’s decision to allow the ongoing presence of negative equity properties on the market inflicts long-term damage on society. This drag on families permanently reduces the average standard of living nationwide, and especially in California. Severely at-risk properties must be promptly cleared out by lenders or owners if we are to put an end to low prices and poor demand, and get this economy moving. The process of removing these properties from the market is not likely to be concluded until roughly 2016-2017.

To get the California economy recovering and restore strength and stability to the real estate market, it is imperative lenders quickly clear out the delinquencies on their books, either by repairing those defective loans with cramdowns for employed owners or, more brutally, by foreclosing.