A sharp slowdown in the pace of home foreclosures may help ease the financial burden on bankers by helping them unload a glut of repossessed homes more slowly and delay booking losses from the sale of distressed properties.
But it will do little to help millions of Americans families at risk of being tossed from their homes in the next few years.
Lenders are moving fewer U.S. homes into the foreclosure pipeline and have curtailed new seizures, according to foreclosure listing firm RealtyTrac. In July, fewer than 60,000 homes received an initial default notice, down 7 percent from June and down 39 percent from July 2010.
The slowdown follows a wave of legal challenges by homeowners that has all but shut down the machinery of bank repossession in some states. Some homeowners are disputing the widespread practice of "robo-signing," in which lenders process batches of foreclosure fillings with little or no formal review. Other homeowners have successfully halted repossessions by questioning shoddy paperwork or broken paper trails that don't establish clear title to a property.
"The process has more or less ground to a halt in a lot of states that do foreclosures through the court system," said Rick Sharga, a senior vice president at RealtyTrac.
The slowdown has left millions of American households in legal limbo, prolonged the housing market's four-year recession and delayed hopes for a broader economic recovery.
As the housing market continues to languish, lenders are in no hurry to remove families from their homes. Each new foreclosed property adds to a widening surplus of unsold houses on the market, forcing bankers to mark down prices even further to shed them from their books.
"There's an incentive for banks to put their foreclosed inventory on the market slowly so that it doesn't drag down the price," said Paul Dales, an economist at Capital Economics who follows the housing market. "If they were to put them on the market all at once, they would get a lot less for them."
Slowing the pace of foreclosures also helps lenders postpone booking those losses, improving their apparent financial health to investors and regulators. Though some banks write down the value of distressed mortgages before they foreclose, accounting rules don't require them to fully write down the value of a repossessed property until it is sold. The longer they postpone defaulting on a loan, the longer they can maintain it on their books at above-market value. (In banking circles, the practice is known as "extend and pretend.")
The foreclosure pipeline has also been clogged by the moribund demand for housing. Four years after the housing collapse, the market shows no signs of recovering. So bankers have slowed the pace of new foreclosures to match the sluggish pace of home sales
"What we're seeing is a saturation of distressed properties already on the market and not enough buying interest to motivate the banks to proceed with new foreclosures," said Sharga. "So they're just replenishing the pipeline. As they're able to sell off what they've already repossessed, they repossess a new batch, put those on the market and start foreclosure proceedings on the next batch."
A handful of homeowners have managed to dodge the sheriff's sale by convincing their lenders to write down their principal balance or lower their interest rate to reduce monthly payments. But after four years of multiple government and private programs, only a small fraction of borrowers in trouble have been offered new loans. Of those modifications, few have offered enough relief to allow homeowners to keep up with their payments.
"We worked through the modifications," said Shari Olefson, a Fort Lauderdale, Fla., real estate attorney. "And we've seen that really doesn't help."
Slowing foreclosures may help bankers blunt the financial pain of falling home prices, but it prolongs the pain for homeowners looking for a recovery in the housing market. Lenders are holding some 850,000 foreclosed homes on their books; another 1.1 million homes are in earlier stages of foreclosure. Dales estimates another three million homes will be foreclosed before the housing market stabilizes.
"At these rates of foreclosure actions, we could be looking at another two or three years until you work through the pipeline of loans already in default and seriously delinquent that would normally be in foreclosure by now," said Sharga.
The lending industry points to falling delinquency rates as a sign that it may be finally slogging through the last of the foreclosure morass. Mortgage delinquencies in the second quarter improved by nearly 6 percent, the biggest gain since 2009, according to data released Wednesday by consumer credit rating agency TransUnion.
But those statistics mask the ongoing risk that toxic mortgages written during the rogue mortgage lending wave will leave more households homeless.
Part of the reason overall delinquencies are falling is that lending standards tightened abruptly in 2008 after the bursting housing bubble shut down nearly a decade of manic mortgage lending. Those newer "vintages" of mortgages, approved for only the most creditworthy borrowers after 2008, are performing much better than loans written during the freewheeling mid-2000s, when lender profits trumped underwriting standards.
Meanwhile, the ruinous terms imposed by those pre-2008 loans, along with the surge in unemployment brought on by the housing collapse, have wiped out millions of households that might otherwise have been able to make their monthly mortgage payments.
"The most stressed borrowers — the most hit by unemployment — a lot of them have gone through a sale or a refinance or a foreclosure," said Tim Martin, head of U.S. housing and capital markets at TransUnion. "The people who are left have been in that mortgage for quite some time making their monthly payments."
But another wave of default looms on the horizon, especially for the unlucky holders of one the nastiest species of toxic loan written during the height of the mortgage mania.
These "pay option" mortgages included a feature that forced the principal balance higher every month, until the loan abruptly "recasts" to much higher monthly payments, typically between three to five years after the loan was written. Some of these ticking bombs sold during the height of the lending frenzy have yet to explode, according to Sharga.
"We have $200 billion worth of those that are scheduled to start resetting this year," he said. "They're resetting for the most part on properties that have lost 30, 40 or 50 percent of the value they had on paper when they were sold for the past time. So it's a pretty toxic mix."