Two years ago, banks pulled back on foreclosures after a government investigation into alleged faulty practices. That led market researchers, academics and Wall Street analysts to predict that after lenders resolved the claims and worked through backlog, delinquent homes would deluge the U.S. market, driving down prices for years to come.
RealtyTrac, a seller of property data, warned of a new set of incoming foreclosure waves. Susan Wachter, a professor at the University of Pennsylvania’s Wharton School, said a logjam could be unleashed, destabilizing the market.
In fact, the flood failed to materialize, even after the five biggest U.S. mortgage servicers reached a $25 billion settlement with federal and state regulators in February. Instead, the number of properties for sale shrank to the fewest in a decade, prices appreciated at the fastest pace since 2005, and the gradual healing of the housing market helped boost consumer confidence and the economy.
Banks have stepped up foreclosure alternatives to avoid legal challenges. They’re forgiving debt, modifying payment plans and approving short sales that allow homeowners to sell for less than they owe.
The federal government, criticized by consumer activists for failing to prevent more than 4.7 million homes from being lost to foreclosure or short sales since President Obama took office in January 2009, is also helping to stem the crisis.
Expanded loan-modification programs have gained traction, and the Federal Reserve has kept bank interest rates near zero.
Investors including Blackstone Group and Colony Capital are buying thousands of foreclosed homes in bulk before they even hit the market, further limiting new supply.
With the unemployment rate also coming down, concerns are fading that a deluge in foreclosures will destabilize the housing market as it recovers from a six-year slump.
Many of us, myself included, feared a wave of foreclosures when the settlement came, said Wachter, professor of real estate and finance at Wharton in Philadelphia. I was wrong.
Slowing the foreclosure process has allowed banks to avoid booking losses on nonperforming loans, said Joshua Rosner, an analyst with Graham Fisher & Co. in New York. U.S. banks reduced their net charge-off rate on mortgages to 0.77 percent in the second quarter, the most recent available, from a high of 1.81 percent at the end of 2009, according to data Rosner compiled.
That drop occurred as the rate of noncurrent loans declined to 9.77 percent from 10.15 percent in late 2009.
The goal all along – from the banks, the servicers and the government – was sort of to slow-walk the whole thing, bleed it through over time, Rosner said.
The strategy may be paying off. Home prices in 20 U.S. cities rose 3 percent in September from a year earlier, the most since 2010, the S&P/Case-Shiller index showed this week.
The median price of an existing home sold last month jumped 11 percent from a year earlier to $178,600, the steepest annual increase since November 2005, according to the National Association of Realtors.
The number of previously owned homes on the market in October fell 1.4 percent to 2.14 million, the fewest since December 2002.
The Federal Reserve Bank of New York estimated that as many as 1.8 million properties would be taken back by banks in 2012, according to a January speech by president William Dudley. Through October, there have been about 559,000 home seizures, indicating a pace of about 650,000 for the year, according to Daren Blomquist, vice president of RealtyTrac.
The shadow inventory of pending foreclosures, which may be larger than the visible supply of previously owned homes for sale, is shrinking as new defaults decline and banks work through their backlog of bad loans.
Home loans that were more than 90 days late or in the foreclosure process, a proxy for the shadow inventory, fell to 7.03 percent of properties with a mortgage in the third quarter, the lowest share since 2008, the Mortgage Bankers Association said two weeks ago.
While lenders may bring more distressed properties to market over the next year, it won’t be enough to depress values, said Vishwanath Tirupattur, housing strategist at Morgan Stanley in New York.
I don’t anticipate a flood that will take the market down with it, he said. It will be a much more managed process.
The shadow inventory, which also includes properties owned by banks but not for sale, fell from an estimated 8.8 million homes in 2010 to 5.36 million as of this month, a faster decline than expected as fewer loan modifications re-defaulted, according to Tirupattur.
Changes to Obama’s loan-modification program had the biggest impact on reducing pending foreclosures since late 2010 by creating a template that lenders followed, Wachter said.
That included incentives to compensate loan servicers for reducing principal on loans for delinquent borrowers.