ForeclosureTruth

How NOT to Fix the Great Real Estate After-Bubble

By Madeline Schnapp | May 7, 2013 | 2 Comments
Categories: Economy, Foreclosure & Housing Markets, Foreclosure Trends, Housing Market

The Huffington Post recently published an essay optimistically titled “How to Fix the Great Real Estate After-Bubble.” The “fix” proposed by Mary Manning Cleveland, a professor of environmental economics at Columbia University, is to get Congress to force banks to write down the principal balances on millions of underwater mortgages to their post-bubble market values.

This “fix,” unfortunately, ignores a critical question: Where would the estimated $2 to $3 trillion cost of the program come from?The answer is overlooked because there is no easy answer.

Make no mistake: The government and banks have collaborated in a major game of extend and pretend favoring the banks at the expense of homeowners and taxpayers. The problem with Manning Cleveland’s proposal is that the financial system, and perhaps even the dollar, might not survive if it were enacted. It’s not about the proposal setting a “bad precedent” if it comes to pass; it’s about survival. It should be clear by now that our government is more concerned about the survival of the “too-big-to-fail” banks than it is about the millions of homeowners who remain mired in debt while the taxpayer shoulders the bills for massive bank bailouts.

Finally, the rule of law in the United States makes it a global safe haven for investment capital. Suppose a mortgage product existed whose terms state that if home values fall below the amount owed anytime over the next 30 years, borrowers get a windfall. What lenders in their right mind, other than the government, would agree to such terms?

Know that I do blame the banks and flawed government policies for the housing bubble. But I don’t blame pension funds and taxpayers who now hold the debt the article proposes to forgive. If we want solutions that make sense, we’re going to have to get real and give up the fairytale that we can wave a magic wand and conjure up trillions of dollars in debt forgiveness without unintended consequences.

Madeline Schnapp

Director of Economic Research

530-550-8801 x27

2 Comments

HAMPered Government Program Needs to be Scrapped

By Madeline Schnapp | May 1, 2013 | 5 Comments
Categories: Uncategorized

The Home Affordable Modification Program (HAMP) has done a dismal job of helping underwater homeowners. The reason is NOT because we’re spending too little on homeowner-relief programs and spending too much rescuing financial institutions, as a blog post last week on MarketWatch titled “Modified mortgages show ‘alarming’ default trend” alleged last week. The reason HAMP is failing is because it completely misses the underlying problem facing the housing market — negative equity.

A typical HAMP loan modification is designed to lower monthly payments by cutting interest rates and extending terms, but does nothing to address negative equity. Mortgage terms are often extended from 30 years to 40 years, a solution that may be good for the banks, but is terrible for the underwater homeowners who get sentenced to a prison of debt for decades.

The HAMP program has initiated 2 million loan modifications since 2009, but 54 percent of them have been canceled, according to the April 24, 2013, Quarterly Report to Congress by the Office of the Special Inspector General for the Troubled Asset Relief Program (TARP). Worse still, the oldest HAMP permanent modifications from the third and fourth quarters of 2009 are re-defaulting at a rate of 46.1 percent and 39.1 percent, respectively. HAMP permanent modifications from 2010 also had high re-default rates ranging from 28.9 to 37.6 percent. Of the 862,279 homeowners who remained in a HAMP permanent modification, 312,000 homeowners re-defaulted as of March 31, 2013.

The report concludes that, “the number of homeowners who have re-defaulted on HAMP loans is increasing at an alarming rate,” and adds that the Treasury Department, is not sure why so many of the HAMP permanent modifications failed and proposes further study.

What I find “alarming” is the fact that Treasury officials either can’t see, or choose to ignore, the negative equity elephant in the middle of the room. Is it smart for homeowners who are 50 percent or more underwater on their mortgage balances to spend the next 40 years tunneling their way out of a negative equity prison one teaspoon at a time? A better choice may be a short sale or foreclosure and beginning the two- to five-year process of repairing credit.

What will most likely happen is the Treasury will spend millions, if not billions, of taxpayer dollars trying to “fix” a failed program rather than have an intelligent discussion on how to address the negative-equity problem.

The lack of conversation is likely due to the size of the negative-equity problem. Using Federal Reserve Flow of Funds data, we estimate negative equity, or excess mortgage debt, to be in the neighborhood of $2-$2.5 trillion. Solutions to a problem of this magnitude are painful, and range from letting the foreclosure process work, accepting higher inflation or imposing higher taxes. Since the electorate and our elected officials are motivated by pleasure and not pain, it is unlikely the focus will shift to addressing the negative-equity problem anytime soon.

In the near term, however, scrapping the HAMP program entirely seems like a good idea. Spending more taxpayer dollars on studying why a flawed federal government refinance program isn’t working is throwing good money after bad.

What do you think?

Madeline Schnapp

Director of Economic Research

http://www.slideshare.net/ForeclosureRadar/california-and-northern-san-diego-housing-update

530-550-8801 x27

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California and San Diego Housing Market Update

By Madeline Schnapp | Apr 23, 2013 | 0 Comments
Categories: Uncategorized

We would like to share the contents of a webinar presented to the Northern San Diego chapter of the Califonia Association of Realtors. In this presentation we highlight current real estate market conditions, opportunities to find new listings and introduce our new product PropertyRadar.

The presentation can be found at the following link:

Madeline Schnapp

Director of Economic Research

530-550-8801 x27

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About Madeline Schnapp:

Madeline Schnapp brings more than 20 years of economic analysis and forecasting experience to ForeclosureRadar. Prior to joining ForeclosureRadar, Madeline was Director of MacroEconomic Research for TrimTabs Investment Research, Inc., a leading provider of financial research to the institutional investment community. While at TrimTabs, Ms. Schnapp was responsible for developing several proprietary real-time economic indicators to track employment, job demand, wages and salaries and disposable income well in advance of traditional government indicators. Prior to TrimTabs, Ms. Schnapp was Director of Market Research with O’Reilly Media, and pioneered the use of web spiders to track real-time economic activity in the information technology sector.

About ForeclosureRadar®:

ForeclosureRadar.com features unprecedented tools to search, manage, track and analyze pre-foreclosure, foreclosure auction, short sale and bank owned real estate. ForeclosureRadar has been serving its customers for nearly five years and counts several thousand investors, Realtors®, government agencies and other professionals among its subscribers. ForeclosureRadar has been cited as an authoritative source by Bloomberg, 60 Minutes, Wall Street Journal, Associated Press, and other leading media outlets. The company was launched in May 2007 by Sean O’Toole, who spent 15 years building and launching software companies before entering the foreclosure business in 2002. From 2002 to 2007, Sean O’Toole successfully bought and sold more than 150 foreclosure properties in California. ForeclosureRadar is privately held and based in the North Lake Tahoe Area.

The NEW Property Report – March 2013

By Madeline Schnapp | Apr 18, 2013 | 1 Comment
Categories: Uncategorized

Market Activity

March 2013 California real estate sales – the sum of distressed and non-distressed property sales – fell 12.9 percent year-over-year. Some of the decline this year is likely due to the roving Easter holiday that landed on March 31 this year and April 8 last year. Over a longer time period, however, Q1 2013 sales are still at their lowest since 2008.

In addition to an overall downturn in sales, the mix of properties for sale in March changed markedly. When sales are divided into distressed and non-distressed sales, non-distressed sales increased to 62.9 percent of total sales in March 2013, up from 48.8 percent and 50.8 percent in January and February 2013, respectively.

Since January 2012 of 65.5 percent, distressed property sales as a percent of total sales gradually declined to 48.8 percent in February 2013. While still a large portion of the market and nearly four times the pre-housing crisis average, distressed property sales in March 2013 saw a sharp decline to 37.1 percent of total sales.

REO resales declined from 24.5 percent of total sales in February, to 13.8 percent of total sales in March. The decline in bank REO resales is perplexing and we are conducting further research to determine the root cause.

Homeowner Equity

The severity of the housing market crash left huge numbers of California homeowners owing significantly more than their homes were worth. Underwater homeowners can neither sell their existing home nor buy another home, removing this important segment of the housing market from either contributing to housing inventory for sale or becoming potential buyers.

As of March 31, out of 7.3 million California homeowners with a mortgage, 1.8 million were underwater. Another 225,000 homeowners had 5 percent or less equity in their properties. We define this group of homeowners as “near negative equity” and include them in the analysis because costs associated with the sale of a home typically amount to 6 to 10 percent of the sales price leaving these homeowners effectively underwater. The total of these two classes of underwater homeowners is 2.0 million. Of those 2.0 million underwater homeowners, more than 1.1 million owe more than 25 percent of their home’s value.

Rising home prices will help lift a certain percentage of underwater homeowners into a state of positive equity and into a position where they could choose to sell. If they choose to sell, these homeowners will help alleviate some of the current inventory problem, while also increasing sales activity.

If home prices increase 10 percent, an estimated 415,000 homeowners, or 23 percent of negative equity homeowners, will be returned to a positive equity state. In addition, if home prices rise 20 percent, an estimated 715,000 homeowners, or 40 percent of negative equity homeowners, will transition to a positive equity state.

Cash Sales

Since 2008, total cash sales have increased dramatically. From 2001 through 2007, cash sales ranged from a low of 27,381 to 51,387 per year and represented only 6.2 percent to 8.4 percent of total market sales. In 2008, as the housing market collapsed and prices plummeted, real estate investing became more attractive and cash buyers returned to the market. In 2008, cash sales were 57,019, or 15.9 percent of total sales. By 2012, cash sales had swelled to 116,549, or 29.2 percent of total sales. So far in 2013, cash sales are 30.2 percent of total sales. Rising prices make it more difficult for investors to find reasonable returns and therefore this number is likely to decline.

Flipping Activity

n March 2013, flipping — defined as reselling a property within six months — reached its highest level since September 2005. Flipping has steadily increased over the past 12 months due to the increase in profit potential in a market where housing prices are on the rise. In 2011, as housing prices trended sideways, flipping was also basically flat, ranging from a low of 1.4 percent of total sales in January, to 1.6 percent of total sales by December 2011. In 2012, flipping began to increase and over the course of the year nearly doubled, rising from 1.7 percent of total sales in January 2012 to 3.3 percent of total sales by December 2012. Since the beginning of 2013, despite the fact that overall real estate market activity has been flat to down, flipping volume continues to rise because of attractive housing price gains. As of March 2013, flipping reached 5.2 percent of total sales, and sales activity was nearly triple from March 2012.

Even with the increase in flipping activity that does play a role cleaning up derelict property, they are such a small portion of total sales that they have no impact on overall market prices.

Foreclosures

California foreclosure filings have been on a steady downtrend since March 2009 as government agencies have rolled out an ever-increasing array of programs that have successfully lengthened the foreclosure process or provided alternatives such as short sales, principal balance reduction loan modifications, second-lien extinguishments and other forms of debt relief.

California foreclosure filings — Notices of Default plus Notices of Trustee Sale — increased 4.0 percent in March, but were down 59.3 percent in the past 12 months.

March Notices of Default (NOD), the first stage of the foreclosure process, rose 9.5 percent from February. More importantly, NODs are up 65 percent since January, suggesting that some of the regulation-driven decline in foreclosures toward the end of last year has reversed course. While the gain since the beginning of the year was large in percentage terms, the longer-term downtrend has held firm. The March 2013 NODs were at their third-lowest level since we began tracking the data in September 2006. Over the past 12 months, NODs were down 65.3 percent.

Madeline’s Take – Director of Economic Research, ForeclosureRadar

A day doesn’t go by without a headline trumpeting the news that the California housing market is in recovery. The most common piece of evidence cited is the double-digit gain in housing prices over the past 12 months. Proclaiming a housing market recovery based on prices alone is akin to a blind man holding the tail of an elephant and proclaiming it a snake.

Several other factors crucial to a healthy housing market seem to be absent in California:

Solid income and job growth.
An increase in housing sales.
Low levels of negative equity.

While a discussion of income and job growth is beyond the scope of this report, suffice it to say that in California, income growth has lagged inflation since 2008 and the unemployment rate remains painfully high at 9.6 percent.

The other two important factors necessary for the housing market to recover are an increase in sales and sufficient growth in homeowner equity to allow more homeowners to enter the market to sell or buy. As our research has shown, first quarter sales were at their lowest level since 2008 and more than 1.8 million California homeowners (25 percent of all homeowners with a mortgage) owe more than their homes are worth. These factors will continue to exert a drag on the market by limiting inventory and constraining sales.

If several crucial ingredients are missing from this housing market recovery — income, jobs, sales, much lower levels of negative equity — then why are housing prices rising so quickly? Sean O’Toole, CEO of ForeclosureRadar provides his perspective below.

Sean’s Take – Founder/CEO, ForeclosureRadar

While there are several reasons why California home prices are rising so quickly, the most dominant is government intervention.

Government intervention has significantly distorted the housing market by constraining supply and keeping mortgage interest rates artificially low. While many state that the lack of inventory will cause housing prices to jump 20 percent or more this year, I believe the increase in home prices will be constrained by availability of credit, appraisals that lag market prices, affordability and return on investment.

Regardless, near-term prices will continue to rise and as prices increase return on investment will decline. Therefore, those looking for long-term real estate investment should act quickly.

Regulatory Update

In conversations with legislative analysts at the state and federal level, we’re seeing little expectation of new laws that significantly impact the housing market this year because several major laws affecting the housing market, such as Dodd-Frank and the California Homeowner’s Bill of Rights, are either recently passed or on their way to being implemented. Legislative focus at both the state and national levels has shifted instead to budget issues. At the federal level, the debt ceiling debate threatens to command center stage later this spring and summer.

In California, a lingering question remains about whether the Mortgage Debt Relief Act extension passed by Congress on January 1 will be implemented at the state level. According to our state legislative contact, SB 30 (the California equivalent of the federal Mortgage Debt Relief Act) passed its first policy committee and is now pending on the Senate Appropriations Committee Suspense File (a legislative process that is used to review bills that cost more than $150,000). A decision about whether the bill exits the “suspense file” status should occur in the final week of May.

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Government Intervention Depresses Short Sales

By Madeline Schnapp | Apr 16, 2013 | 1 Comment
Categories: foreclosure process, Foreclosure Trends, laws, short sales

In a blog post dated April 1, 2013, we reported that the rapid decline in foreclosure sales and short sales since January 1 was likely due to government intervention. At the time of publication we listed the California Homeowner Bill of Rights and the $25 Billion National Mortgage Settlement as the primary drivers of the declines.

Since we wrote that post, additional foreclosure and short sale data has become available. In Q1 2013 short sales and foreclosure sales have declined 18.4 percent and 46.1 percent, respectively (foreclosureradar.com).

Another factor undermining short sales is uncertainty surrounding the status of the California version (SB 30) of the Mortgage Debt Relief Act extension passed by Congress on January 1.

According to state legislative contacts, SB 30 passed its first policy committee and is now pending on the Senate Appropriations Committee Suspense File (a legislative process that is used to review bills that cost more than $150,000). A decision about whether the bill exits the “suspense file” status should occur in the final week of May. Until then, debt excused in a short sale may be subject to California income tax.

Finally, a research report from Barclays cites provisions in the California Homeowner Bill of Rights that significantly increase the litigation risks for servicers. Rather than risk incurring thousands of dollars in legal costs, servicers have become significantly more cautious in carrying out foreclosure sales.

Madeline Schnapp

Director of Economic Research

530-550-8801 x27

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California Foreclosure Filings Up 4.0 Percent in March

By Madeline Schnapp | Apr 11, 2013 | 0 Comments
Categories: distressed properties, Foreclosure Trends, Housing Market

California foreclosure filings — Notices of Default plus Notices of Trustee Sale — increased 4.0 percent in March, but were down 59.3 percent in the past twelve months. Foreclosure filings have been on a steady downtrend since March 2009 as government agencies have rolled out an ever-increasing array of programs to lengthen the foreclosure process or provide alternatives such as short sales, principal balance reduction loan modifications, second-lien extinguishments and other forms of debt relief.

While foreclosures have been declining over a longer period of time, distressed property sales (short sales and bank REO resales of single-family residences and condominiums) are still more than 50 percent of total California real estate sales and will remain an important part of the state’s real estate landscape for some time to come.

Notices of Default up 14.2 Percent

Notices of Default (NOD), the first stage of the foreclosure process, rose 14.2 percent in March. More importantly, NODs are up 72.5 percent since January, suggesting that some of the regulation-driven decline in foreclosures toward the end of last year reversed course. While the gain since the beginning of the year was large in percentage terms, the longer-term downtrend has held firm. The March 2013 NODs were at their third lowest level since we began tracking the data in September 2006. Over the past twelve months, NODs declined 63.8 percent.

Notices of Trustee Sale edged lower in March, falling 4.0 percent from February and 54.1 percent over the past twelve months.

Foreclosure Sales Down 0.9 Percent

Meanwhile, foreclosure sales in March totaled 4,167, down 0.9 percent since February for the month and 50.7 percent for the year. If we split March foreclosure sales into their respective components — Sold to Third Party and Back to Bank (RE0) — Sold to Third party sales were down 25.9 percent over the past twelve months, while REOs declined 65.9 percent.

Note: Total foreclosure sales equal the sum of Sold to 3rd Party plus Back to Bank (REO).

Foreclosure Process Grows to More than 300 Days

Government programs such as HAMP, HARP, the $25 billion National Mortgage Settlement and the California Homeowners Bill of Rights have steadily lengthened the state’s foreclosure process to more than 300 days. Since the beginning of the year, the time to foreclose has jumped to 350 days for homes sold to third parties and 302 days for homes sold back to banks (REOs).

For a complete summary of foreclosure stats and trends, please click on the following links:

For California Foreclosure Stats and Trends, click here.

Foreclosure Starts: 8,410 (-14.2%)

Foreclosure Sales: 4,167 (+0.9%)

Time to Foreclose: 321 days (+9.6%)

For Arizona Foreclosure Stats and Trends, click here.

Foreclosure Starts: 2,713 (-12.8%)

Foreclosure Sales: 1,693 (+5.4%)

Time to Foreclose: 145 days (-2.0%)

For Nevada Foreclosure Stats and Trends, click here.

Foreclosure Starts: 2,398 (+5.1%)

Foreclosure Sales: 693 (+4.8%)

Time to Foreclose: 314 days (-4.0%)

For Oregon Foreclosure Stats and Trends, click here.

Foreclosure Starts: 72 (+9.1%)

Foreclosure Sales: 28 (-22.2%)

Time to Foreclose: 152 days (-6.2%)

For Washington Foreclosure Stats and Trends, click here.

Foreclosure Starts: 2,668 (-2.8%)

Foreclosure Sales: 1,621 (+28.3%)

Time to Foreclose: 128 days (0.0%)

Best,

Madeline Schnapp

Director of Economic Research

530-550-8801 x27

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About ForeclosureRadar®:

ForeclosureRadar.com features unprecedented tools to search, manage, track and analyze pre-foreclosure, foreclosure auction, short sale and bank owned real estate. ForeclosureRadar has been serving its customers for over four years and counts several thousand investors, Realtors®, government agencies and other professionals among its subscribers. ForeclosureRadar has been cited as an authoritative source by Bloomberg, 60 Minutes, Wall Street Journal, Associated Press, and other leading media outlets. The company was launched by Sean O’Toole in May 2007. Prior to starting ForeclosureRadar, Sean spent 15 years building and launching software companies before entering the foreclosure business in 2002. From 2002 through 2006 Sean successfully bought and sold more than 150 foreclosure properties. ForeclosureRadar is privately held and based in the North Lake Tahoe area.

Government Policy Intervention Increasing Neighborhood Blight

By Madeline Schnapp | Apr 4, 2013 | 5 Comments
Categories: Foreclosure Trends, neighborhood blight, time to foreclose

A new Federal Reserve Bank of Boston discussion paper by Lauren Lambie-Hanson titled, “When Does Delinquency Result in Neglect”, links the deterioration in certain Boston, Massachusetts properties to various phases of the foreclosure process. Specifically, the study found that borrowers begin neglecting property maintenance when they are 90 days or more delinquent. Property distress (neighborhood blight) becomes more common as the length of the foreclosure process increases and worsens once the property becomes bank owned (REO).

While this well researched study correctly links neighborhood blight to the length of the foreclosure process, it offers only a passing mention of what we consider the underlying problem – government policy interventions that have lengthened the time to foreclose.

Since the beginning of the foreclosure crisis, the time to foreclose has skyrocketed. In California, for example, the time to foreclose now takes more than 300 days, up from an average of 140 days in 2008 (ForeclosureRadar.com). Meanwhile the time to foreclose in Massachusetts is 440 days and a whopping 820 days in New York (FannieMae).

In our opinion, one of the most obvious solutions to foreclosure induced neighborhood blight is to reduce government obstacles to the foreclosure process and shorten the foreclosure timeline.

We would love to hear what you think.

Madeline Schnapp

Director of Economic Research

Part 1: Government interventions depress short sales and foreclosure sales since January 1

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Part 2 – California distressed property sales still greater than 50% of total sales in 2013

By Madeline Schnapp | Apr 3, 2013 | 0 Comments
Categories: distressed properties, Foreclosure Trends, REO, short sales

Distressed property sales have eased since the housing market crash, but still represent a substantial proportion of California real estate sales. Despite the recent decline in short sales and foreclosure sales we highlighted in Part 1, distressed property sales will likely remain an important part of the California real estate landscape for the foreseeable future.

Let’s take a look at the California property market through the lens of distressed sales versus non-distressed sales. Surprisingly in 2012, despite the rapid decline in foreclosures, distressed sales still accounted for nearly 56 percent of all property sales. Compare that to January 2006, when less than 10 percent of property sales were distressed.

For this discussion sales represent sales of new and existing single-family residences and condominiums. Also, distressed sales represent both short sales and the resale of bank-owned (REO) properties, while all other market sales are considered non-distressed. Because properties sold at trustee sale are not considered market sales, we do not include those sales in our discussion.

The graph below illustrates annual trends of distressed sales vs. non-distressed sales from 2001 to date.

Source: ForeclosureRadar – www.foreclosureradar.com

The graph illustrates that as the housing crisis gathered steam, distressed sales began to increase as a percentage of total sales in 2006 and 2007 while non-distressed sales plummeted. The persistent severity of the housing crisis is evident from 2008 through 2011, when distressed sales exceeded 57% of non-distressed sales in all four years. Beginning in 2012, as the decline in foreclosures accelerated, distressed sales as a percentage of total sales fell. So far in 2013, distressed sales have declined as a percentage of sales but are still 50.3% of that total.

The primary driver behind the decline in distressed sales is the fall-off in REO sales, which reflects the drop in overall foreclosure activity. Foreclosures have declined because government interventions offer homeowners in default a dizzying array of programs ranging from loan modifications to outright debt forgiveness. As we highlighted in Part 1, both the California Homeowner’s Bill of Rights and the $25 billion National Mortgage Settlement significantly depressed foreclosures in 2012.

Another big driver of the 2012 decline in foreclosures was the ability of underwater homeowners to refinance their mortgages through changes in the Federal Government’s Home Affordable Refinance Program (HARP). According to the Federal Housing Finance Agency, 1.1 million underwater homeowners nationwide (including 159,343 Californians) received HARP loans in 2012.

In sum, distressed property sales — still over 50 percent of total sales – will likely remain an important component of real estate sales for some time to come. If distressed property sales in the 5 to 10 percent range represent a “normal” market, then the California real estate market still has a long way to go before returning to “normal.”

Madeline Schnapp

Director of Economic Research

530-550-8801 x27

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Source: ForeclosureRadar – www.foreclosureradar.com

Part 1 – Government interventions depress short sales and foreclosure sales since January 1

By Madeline Schnapp | Apr 1, 2013 | 1 Comment
Categories: Foreclosure Trends, short sales

The falloff in short sales and foreclosure sales since the beginning of the year caught many California real estate professionals and analysts by surprise. We know part of the decline was seasonal, but we have good reason to believe government interventions contributed to the balance of the decline.

In a two-part-series of blog posts, we’ll discuss short sale and foreclosure sale trends and the role government intervention has played in recent declines. In Part 2, we’ll look at distressed property trends.

First, let’s take a look at the data. Since January 1, 2013, short sales have fallen 34.8 percent and foreclosure sales have fallen 32.2 percent. In contrast, over the same time in 2012, short sales fell 15.1 percent and foreclosure sales fell 9.6 percent.

Since the peak of the foreclosure crisis in 2008, however, short sales and foreclosure sales have trended in opposite directions. In fact, since then short sales rose 55.6 percent while foreclosure sales declined 86.6 percent. The abrupt change in short sale trends since January begs an explanation as to what has changed and why.

Source: ForeclosureRadar – www.foreclosureradar.com

We had expected foreclosure sales to decline this year after the California Homeowner Bill of Rights became law on January 1. The law restricts mortgage servicers from advancing the foreclosure process if homeowners are working on securing a loan modification, a process called dual-tracking. Lenders caught breaking the new law are subject to civil penalties of $7,500 per loan. As 2012 came to a close, foreclosure activity plummeted and foreclosure cancellations spiked.

The decline in short sales, however, was surprising. While we suspect seasonal factors are influencing part of the drop-off the past 90 days, since January 1, it’s a safe bet that the following government interventions and the market response to those interventions are playing a role:

The $25 billion National Mortgage Settlement may have pulled short sale activity into 2012. The five largest banks involved in the settlement accounted for 54.2 percent (59,321) of the 109,462 completed short sales in California last year, according to the latest report from the Office of Mortgage Settlement Oversight.
The national settlement may be winding down. As of December 31, 2012, the five largest banks paid out $45.8 billion in consumer relief. Of that total, $24.7 billion qualified as relief to support home ownership in the form of first-lien modification forgiveness, second-lien modifications and extinguishments, short sales, and deeds in lieu. We have contacted the Office of Mortgage Oversight for more information about the settlement program and are waiting for an answer.
Rapid price gains in California real estate may be encouraging lenders to back off or delay short sales because they hope to cash in on higher prices later this year.

The recent declines in short sales and foreclosure sales may give the impression that distressed property sales – the sum of short sales and bank REO resales – are becoming a thing of the past. In reality we point out that since the beginning of the year, distressed property sales comprised 50.5% of total California property sales (Part 2). We see three reasons why California’s market in distressed properties will continue to be a significant portion of the housing sales market:

Nearly 1.9 million, or 27 percent, of California’s nearly 6.9 million homeowners with a mortgage are underwater (ForeclosureRadar.com),
370,000, or more than 6%, are delinquent (NOD, Notice of Default) on their mortgages (Lender Processing Services) and
95,000, or 1.4%, are in foreclosure (ForeclosureRadar.com).

Thus, mining distressed property listings for investment opportunities will remain a key activity for agents and investors.

Part 2: California distressed property sales still greater than 50% of total sales in 2013

Madeline Schnapp

Director of Economic Research