Credit Trends: When Will Foreclosure Levels Start to Fall?
By Janet Dedrick
The apple falling on Sir Isaac Newton’s head—true or not—shaped modern physics and our understanding of the universe.
Can it help us understand the foreclosure market?
What goes up must come down.
The higher the climb, the harder the fall.
The U.S. housing market has clocked more than five years in an unprecedented, prolonged housing correction. Home prices are down 30 percent from the peak, in late 2005 as the housing market is “rightsizing.” This adjustments comes after home price increases, ranging from 10 percent to as high as 80 percent in the most speculative housing markets from 2001 to 2006. It’s the law of gravity at work.
Equifax U.S. Consumer Credit Trends documents that mortgage delinquency rates peaked in January 2010 at 8.07 percent and are currently at 6.80 percent. Foreclosure starts (recording of the first step in foreclosure process), a new metric Equifax is monitoring, were less than 0.50 percent in early 2006, but today are over 3 percent—almost nine times higher. In fact, foreclosure starts have been bumping around this level since early 2009. All the action is in the late-stages of mortgage nonpayment.
Typically, as nonpayment lingers, a loan is written off. In the case of mortgage loans, the legal action is foreclosure. Equifax U.S. Consumer Credit Trends documents that mortgage write-off levels approached 4 percent at the end of 2010 but have declined moderately due to current mortgage servicer foreclosure-processing issues.
Mortgage write-off options are foreclosure or bankruptcy. Unfortunately, foreclosure at this stage means the homeowner has lost his or her home. Foreclosure is complete. Bankruptcy, however, does not necessarily mean the homeowner has lost his or her home. Some homeowners may be filing bankruptcy as a “home retention” action, trying to buy time to become current on their homes and to rightsize their finances.
What is motivating these homeowners? Do they have equity in their homes? Are they becoming collateral damage of the Great Recession? Or are these homeowners delaying the inevitable?
Will we see the housing correction reverse and the housing market rebound? Equifax is monitoring the housing market throughout 2011 for a bottom. Stay tuned.
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