Although the mortgage industry stopped funding subprime loans in 2007, the pipeline has been clogged with faulty mortgages for the past year after several big lenders were busted for carelessly speeding through paperwork and using temporary employees to sign documentation.
It appears, however as though someone has poured a bit of mortgage Drain-O into the pipeline as the number of foreclosures has suddenly spiked.
Nationally, foreclosure proceedings increased slightly during third quarter up from 0.96% in the second quarter to 1.08%.
Mortgage experts say that the public should not be overly concerned about the increase. Patrick Newport, an economist at IHS Global Insight says that it’s just a matter of getting back to business for lenders. In a telephone interview with Bloomberg Businessweek he said, “Banks are starting to speed up the process now that they’ve cleaned up their paperwork. We’re seeing the backlog begin to move.”
Pushing a high number of mortgages back through the pipeline is not a huge surprise for groups like the Center for Responsible Lending . While Americans were still riding high atop the housing bubble in 2006, the group warned that the bubble would not burst, but explode. As history played out they were correct. Just last week the group estimated that 2.7 million American households had lost their homes as of February, and it’s not over yet.
The group predicts that in addition to the 2.7 million mortgages that have tanked an additional 3.6 million mortgages will be foreclosed upon or fail.
A statement made in the group’s study said, "That means the nation is not yet midway through a foreclosure crisis that mires the economy."
Unfortunately, while unclogging mortgages may mean that the housing crisis is trying to find its way out of the woods, it still impacts millions of real people across the country.
People like Darryl Davis who recently talked to the Mission Economic Development Agency (MEDA) in San Francisco about his foreclosure experience. Davis and his family were evicted from their home in October and Davis relates the experience to having a bad dream.
“This whole thing has been a nightmare for my family,” Davis explains. “The way these banks operate, where the left hand doesn't know what the right hand is doing, it's incredible that they're not held accountable. I'm just a guy with limited means, going up against these institutions with unlimited means. I told my son that's why we're going to MEDA today. We need to let our voice be heard so that we can help others who are just like us."
Groups like MEDA work with local and state government entities to help homeowners on the brink of foreclosure stay in their homes.
Kathleen Day, spokeswoman for the Center for Community Capital at the University of North Carolina at Chapel Hill says that big lenders have been pulling the smoke and mirrors routine to divert attention from irresponsible practices.
“It’s industry which has painted this picture of 'oh, it's the borrower's fault,' that the homeowner is behind on mortgage payments. But they do that to deflect attention from the unbelievably irresponsible lending they were doing."
Mortgage Outlook is Not All Doom and Gloom
Although the country appears to still be knee deep in subprime goo, Mortgage Bankers Association economist Mike Fratantoni says that the economy is showing signs of life. He says that the number of borrowers who missed at least one payment, but were not in foreclosure dropped from 9.13% last year to just under 8% this year.
Additionally the economy may be starting to look a little brighter. Freddie Mac economist Frank Nothaft believes that slowly, but surely the country “is showing potential for further gains in the near term" as rates continue to remain low and retail sales are starting to rise.
Nothaft reports that retail sales increased for a fifth straight month in October and consumer confidence increased for the third straight month in early November. Even new homebuilder confident rose in November, which is at the strongest level since May 2010.
Freddie Mac continues to report historically low rates. Currently, a 30 year-mortgage loan fixed rate hovers at 4% and a 15 year-fixed mortgage is at 3.31%.
However, foreclosure rates are still on the high side. In the past a 1% foreclosure rate was the norm. Today that rate is parked at 4.43% and experts wonder how long it will take to process all the bad loans.
Guy Cecala, publisher of Inside Mortgage Finance estimates that it will take at least two years before the industry will be able to reset. "A lot depends on how fast banks … can clear out defaulted mortgages and foreclosed properties," he said.
Now that the industry has resolved foreclosure procedures, "a couple of big servicers" recently increased foreclosure rate, Fratantoni said. The majority of these foreclosures were born from pre-recessionary subprime loans that had been modified but are now delinquent.
Where Are the Majority of Foreclosures?
A backlog has been created in the states where unresolved foreclosures are handled in the courts. States throughout the East and Midwest are seeing the highest rates of foreclosure as all cases must be routed through the court system. Florida currently sits at over 14% and New Jersey at 8%.
California, which does not require court approval for foreclosures, fell to the 19th spot, enduring a little over 4%. Although Nevada foreclosures do not have to go through the courts, the state continues to be plagued with problems with almost 8% of all mortgages in foreclosure.
The Warren Group reported that activity in Massachusetts rose in October due to the backlog of foreclosures making it through the pipeline.
Timothy M. Warren Jr., chief executive of the Warren Group sees the silver lining in this increase. In a news release he said, “A rise in foreclosures is troubling for distressed homeowners, but in this case it's a positive signal that the backlog of foreclosures on bank's books is working through the system. The real estate market cannot fully recover until foreclosures have been dealt with one way or another.”
Foreclosures in New York City are down for the fifth consecutive month this year. Property search website, Property Shark.com reports that, “New scheduled foreclosure auctions decreased 6% in October 2011 compared to the previous month and dropped 76% compared to October 2010.”