The specter of shadow inventory looming in the background of the housing crisis may be even worse than anticipated according to data released Monday by Lender Processing Services (LPS).
The February Mortgage Monitor report indicates that, while delinquencies continue to decline, there is an enormous backlog of foreclosures in the pipeline that may be as great as 30 times the monthly sales volume of already foreclosed homes. This implies foreclosed homes will continue to come on the market for many years into the future, continuing downward pressure on home prices in the hardest hit areas thanks to an abundance of vacant and often deteriorating housing units.
While there have been occasional spikes over the last year, the February Mortgage Monitor report shows that both delinquencies and foreclosures starts have declined steadily over the last year. Foreclosure starts in March 2010 numbered 250,174; there were 204,916 starts in February 2011 (a decrease of 0.2 percent from January) and the delinquency rate over the same 12 month period has declined from 9.66 percent to 8.80 (down 1.2 percent from January.) However the backlog of foreclosures in the pipeline has continued to expand. There are 6.86 million mortgages in some state of delinquency or foreclosure nationwide, an 8.80 percent delinquency rate, and 2.17 million of those loans are 90+ days delinquent and 2.2 million are in foreclosure. In March 2010 there were 7.3 million delinquent mortgages with 2.87 million 90 days or more delinquent and 1.99 million in foreclosure.
A major reason for the backlog is the steadily increasing amount of time loans are spending in the foreclosure pipeline. The average time a loan in the 90+ day bucket has been delinquent by February was 351 days and those in foreclosure had been delinquent for 537 days. In January 2011 those figures were 344 and 523 respectively and 12 months earlier, in March 2010, the figures were 278 and 426 days. A full 30 percent of loans in foreclosure have not made a payment in over two years.
The protracted process as well as lenders' modification efforts may be working to the benefit of some borrowers as the data shows that 22 percent of loans that were 90+ days delinquent 12 months ago are now current. There has also been improvement in the roll-rate, the numbers of loans that progress from one stage of delinquency to another such as 30+ days to 60+ days. The roll-rate across all stages is now at a three year low.
Delinquencies and foreclosures are highest in Florida, Nevada, Mississippi, New Jersey, and Georgia while the healthiest states in terms of their residential mortgage status are Montana, Wyoming, Alaska, South Dakota, and North Dakota.
Since the beginning of the foreclosure epidemic there has been a subtext of concern over what might happen when the hundreds of thousands of Option ARM mortgages reset. Many experts worried that resets, when the interest rate, often set even lower than the prevailing rate when the loan was written, converted to the potentially much higher rate specified in the loan documents, it would trigger a whole new wave of delinquent loans and, eventually, foreclosures. This was potentially a more serious problem with Option mortgages than with other adjustable rate loans as the option payment feature often resulted in negative amortization and thus a larger principal balance at reset than when the loan originated. According to the Monitor, these Option mortgages are now having significant problems.
The February data shows that the rate of Option ARM foreclosures has increased 23 percent over the last six months and now stands at 18.8 percent. LPS says that this is a higher level than Subprime foreclosures ever reached. The current delinquency rate for these loans is 23 percent. There has also been deterioration in the Non-Agency Prime segment. Both Jumbo and Conforming Non-Agency Prime loans showed increases in foreclosures and were the only product areas with increases in delinquencies.
