Analyst: Foreclosure’s shrinking shadow over housing

BY G.U. KRUEGER / FOR THE REGISTER

Published: May 18, 2012

Veteran Southern California real estate analyst G.U. Krueger adds his commentary on the housing market to this blog in a spot we call “Thursday Morning Quarterback.” Here’s his latest installment. …

There was a time, when the “shadow” of the “shadow supply” was rising and rising – between 2006 and the first quarter 2010.

Since then, the shadow supply of distressed properties has been shrinking. So-called “non-judicial states” — where foreclosures are handled by trustees, an often efficient recycling of distressed properties — lead with shrinking shadows. In judicial states — where courts are involved in the foreclosure process — shadows still loom large.

Mortgage delinquencies tracked by the Mortgage Bankers Association show most shadow supply indicators went in the right direction during 2012′s first quarter:

At the end of the first quarter 2012, 11.8 percent of mortgage loans were either late or in the foreclosure process on a seasonally adjusted basis. That’s down from 11.96 percent in 2011 Q4 and 12.8 percent a year ago. Two years ago the number stood at 14.7 percent, a steady improvement.

This decline in homeowners being late on their payment was almost entirely due to declining delinquencies in various stages of delinquencies. This is important because delinquencies are the leading indicator for future foreclosures. The percentage of loans in which foreclosure actions started was 0.96 percent, down from 0.99 percent the quarter before and 0.12 percentage points lower than a year ago. That’s almost back to “normal”.

Loans that were 30 days delinquent declined to 3.13 percent from 3.22 percent in 2011′s final quarter. The first quarter number was around the long-term average, indicating the positive effects of job growth — and the tighter underwriting of recent loans.

60-day delinquent loans dropped to 1.21 percent from 1.25 percent the quarter before — lowest since the end of 2007.

The 90-day delinquent mortgage bucket stood at 3.06 percent last quarter, down from 3.11 percent in 2011 Q4. This was the lowest since 2008 but still significantly above normal, which would be 0.8 percent. This would be the immediate feeder bucket that would unleash foreclosures following the foreclosure settlement from April 5th this year. It’s significant that this is coming down.

The in-foreclosure bucket is important to watch also to see if banks unleash a new wave of foreclosures. The in-foreclosure bucket remained stubbornly high in 2012 Q1 at 4.39 percent, which is down slightly from 4.48 percent in 2011 Q4, and down only slightly from 4.5 percent a year ago.

Any big impact of bankers’ foreclosure-mishandling settlement will be seen in the judicial states. Ten of the top 11 states with highest foreclosure rates are judicial. California and Arizona, which used to have high foreclosure rates have now fallen below the national average of 4.4 percent — California at 3.29 percent; Arizona at 3.57 percent. It is no coincidence that these sates are seeing first signs of price stabilization.

Adding up all the mortgage distress, we see there are still 5.7 million loans delinquent, but that’s a misleading number. Not all of will end in foreclosure — and even this number has dropped from 7 million-plus two years ago. The shadows of the shadow supply are becoming smaller, especially the delinquencies in the early foreclosure process.

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