Where is the Floor for Foreclosure Rates?

Kendall Baer August 12, 2016 @ 3:57 pm In Daily Dose

In the recent market update presented by Rick Sharga of Ten-X, Sharga stated that foreclosure, at the rate it’s going will potentially inverse to below pre-crisis and historical levels by 2018.

“I can finally say with some certainty that we're almost to the end of the crisis which really is good news economically, said Sharga. “What we saw at the peak of the crisis were both the number of delinquent loans and the number of loans in foreclosure were at all-time highs, something that we haven’t seen since the great depression.”

According to the update, during a normal year about 1 percent of loans go into foreclosure as well as 4 percent of loans are delinquent. During the peak of the crisis, though, levels of homes in foreclosure rose to 4 percent while properties that were delinquent rose to levels of 11 to 12 percent. These heights came precisely at a time there was the highest number of homeowners in the history of the country. This meant that not only were the percentages off the charts but they were high percentages against high homeownership.

The update says that now levels are down to 7 percent for both loans in foreclosure and delinquent, about two points higher than normal. These levels are about one and half times the normal level but are down more than half from the worst of the crisis. Sharga cites RealtyTrac, saying 80 percent of the loans in foreclosure today are on loans issued prior to 2010. These old loans are extraordinarily delinquent and Sharga says there is almost no chance that these loans are going to be rehabilitated.

“They are very often the cases when the borrower hasn't made a payment in 2, 3, 4, or 5 years,” says Sharga. “These are loans coming out states like New York, or New Jersey and Pennsylvania and Massachusetts, Florida, and Illinois where there has been a backlog of judicial processes in executing foreclosures.”

Now, though, delinquency rates are down and continue to go down on a year over year basis for many months. Sharga says there may be an occasional blip when some of the old loans work their way through the system, but in totality these levels are trending down on a year over year basis.

“This poses challenges for companies or people whose business depends on a lot of distressed inventory coming to market,” says Sharga. “My belief and most of the economists I've talked to agree with this is that by next year in 2017 at some point in the year we will be back to pre-crisis normal levels of foreclosure activity.”

Sharga feels there is also a very good chance that an inversion will be seen in 2018 where for the first time in decades there will be a lower number of properties in foreclosure. The update attributes this to the strict lending standards over the past few years.