Back in 2009 I was early on the theme that the waves of Americans living in homes they don’t make a payment on was a boon to the economy (not so much for banks). Over the next year this became relatively mainstream in the financial blogosphere. Even Mr. Cramer “got it” by early 2010. While I talked about it for a year and a half, I haven’t touched the topic this year because not much had to be said. It’s the ‘quiet’ stimulus. But with this headline on CNBC I think it’s worthwhile to take a quick look at the ‘benefits’ for the economy.
While the amount of money ‘saved’ that can be used for expenditures is up for debate a simple example says the average delinquency (now up to 21 months nationally and far higher in some states) leads to savings of approx $27,000 (assuming the average monthly note of $1300). If you believe the average note is lower or higher feel free to reduce my takeaway by 5-10-15% whatever. This assumes said folk continue to pay property taxes, which is highly questionable – so there is probably upside to my estimate on that front. This is now happening in at least 1 in 10 mortgages in this country – I havent looked at any housing statistics too deeply of late to see if its 1 in 9 or worse (better). But let’s say its 8M to 10M households employing this tactic – we’re talking an annual ‘stimuli’ to the economy of $125 – $155B. That’s at or better than levels the 2% payroll tax holiday provides. Boo yah! And no, it doesn’t matter if the default is strategic or not – that is all money not going to the banks (or investors) to pay off the mortgage; it is being used in the rest of the economy.
Back in 2009-2010 I took the view that it’s actually going to be a net negative for the economy when we are done with the foreclosure mess, because then we’ll be back to an era where everyone living in housing actually is paying for it. But we are still years away from that.
- Foreclosures are setting new records again, this time not in their overall numbers, but in the time it is taking for all of these properties to be processed through the legal system. The average loan in foreclosure has now been delinquent a record 631 days, according to a new report from Florida-based Lender Processing Services.
- The after effects of the so-called “robo-signing” foreclosure paperwork scandal, now more than a year old, continue to plague states which require these cases to go before a judge.
- The differences in processing times are blatant when you compare judicial versus non-judicial states. Non-judicial state foreclosures inventories are less than half those of judicial states, and foreclosure sale rates in non-judicial states are four to five times that of judicial states. Judges are starting to ramp up the process.
- Bank repossessions actually surged in October in many judicial states, up 48 percent in New Jersey and up 73 percent in Indiana month-to-month, according to RealtyTrac. Still the backlog is still enormous. Overall foreclosure inventory is at an all-time high, 4.29 percent of all active loans, according to LPS.
- “The discrepancy will go on in perpetuity, as there always has been a difference between judicial and non-judicial timelines,” said Kyle Lundstedt, managing director of LPS Applied Analytics. “Even prior to the worst of the crisis, loans were 4-5 months more delinquent in judicial states at time of foreclosure sale. The number today is more like 8 months, but will return to the 4-5 month difference depending on when and how fast foreclosure sales occur.
- While there is considerable investor demand for distressed properties, new foreclosures are still outnumbering foreclosure sales by over 3:1.
- In addition to the “robo-signing” delays, we are now beginning to see the effects of ineffective loan modifications.
- Repeat foreclosures made up nearly 45 percent of new foreclosures in October.
- Of the 2.1 million modifications since the start of 2008 more than 10 percent were in foreclosure with another 27.4 percent delinquent 30 or more days, as of the end of the third quarter of this year, according to the Office of the Comptroller of the Currency.
- Lundstedt said foreclosure moratoria, process/documentation reviews, evaluation for loss mitigation and bankruptcies make up the rest of the repeat foreclosures.
Trader Mark is the author of Fund My Mutual Fund.