Foreclosure flood may not have crested yet

If the national foreclosure crisis were a baseball game, we would be in about the top of the sixth. And we may have to go to extra innings.

Since the housing market peaked in 2006, some 6.5 million homes have been lost to foreclosure. There are likely another 4.3 million more homeowners who are “seriously delinquent,” meaning they are more than three months behind in their payments, according to data released by the Mortgage Bankers Association this week. Many of those homeowners will soon enter the foreclosure pipeline.

Though the pace of new foreclosures has fallen recently, that is largely the result of lenders choking on the torrent of paperwork created by the millions of foreclosures already in progress.

After lenders tried to speed the process and cut corners by “robo-signing” documents, bank regulators last month ordered them to clean up their act – saying those practices had jeopardized the “safety and soundness” of the banking system. Some 14 of the biggest mortgage lenders were ordered to come up with a plan to fix the problem within 60 days. When they do, analysts expect the pace of foreclosures to pick up again.

There is some good news in the latest data. The number of “early-stage” delinquencies —people who are between one and three months behind in their payments — has fallen, according to Mark Zandi, chief economist with Moody’s Analytics. As of April, 1.9 million first mortgage loans were 30 to 90 days overdue — down from a peak of 2.7 million in April 2009. Zandi says the “normal” level of early stage delinquencies is about 1.5 million.

That means the flood of people falling behind on their mortgages — due to exploding mortgage payments, job loss or other reasons — may have peaked. But those 4.3 million “seriously delinquent” homeowners have yet to receive foreclosure notices, which means the river has not yet crested downstream.

Story: Home sales dip shows slow housing recovery

When those foreclosures occur, they will create another wave of “distressed” sales as banks move quickly to move those properties off their books. Distressed sales have been the major force pushing home prices lower; if the price of the foreclosed house across the street falls by 25 percent, you’ll have a pretty hard time convincing someone to buy your house at “full price.”

Falling prices mean many homeowners owe more than their home is worth. As of the end of last year more than 11 million — or 23 percent — of borrowers were in a "negative equity position," according to the data out this week from CoreLogic. Collectively those homeowners owe their lenders $750 billion more than their properties are worth.

With very few lenders willing to modify mortgage terms, some of those homeowners are opting to walk away.

Builders, meanwhile, continue to sit on the sidelines. Housing starts fell sharply in April – due in part to the severe weather that battered much of the South. With home prices still falling and the cost of materials rising, there are few reasons encouraging builders to get back in the game.

During the peak of the housing boom, investment in residential real estate accounted for roughly 6.1 percent of the nation's gross domestic product. That has fallen to just 2.1 percent – the lowest level since the Great Depression according to Dales of Capital Economics. He figures new home construction will remain depressed for as long as another four years.

The good news on distressed sales is that they may have peaked, according to the National Association of Realtors. Home prices continued to fall in April, and the median home price was 5 percent lower than a year ago. But the share of distressed sales shrank a bit -from 40 percent in March to 37 percent in April.

“In terms of house prices, what matters is the share of sales that are distressed,” said Zandi. “We’re going to have an elevated level of foreclosure for an extended period. But the impact on price is going to abate by this time next year as the share begins to go back down.”

Zandi estimates home prices will fall another 3 to 5 percent before leveling off over the next 18 to 24 months.

Those national averages mask a wide range of conditions from one part of the country to the next.

Many parts of the Midwest that avoided the excesses of the housing boom have been spared the pain of the bust. Most of it is being felt in a handful of states. Roughly a quarter of all mortgages in foreclosure are in Florida.

“We have areas of recovery, but those numbers are often overwhelmed by the bad numbers still coming out of a few large states," said Jay Brinkmann, chief economist for the Mortgage Bankers Association.