Current Foreclosure trends explained

[mike2]

Thanks to Deejayoh said for posting this info in yesterdays thread:

Seattle Metro/King-Snohomish Counties
10/31/06: 195/2,165 (9.0%)
11/30/06: 126/2,376 (5.3%)
12/30/06: 131/1,500 (8.7%)
01/30/07: 146/1,548 (9.4%)
02/27/07: 124/1,503 (8.3%)
03/30/07: 251/1,466 (17.1%)
04/30/07: 511/1,566 (32.6%)

It got me wondering why successful foreclosures are up, while preforeclosures are trending down.

I think what this points to is that banks are getting pickier at choosing which houses to foreclose on, and better at identifying which foreclosures will give them the highest return.

I read on Calculated Risk yesterday that many of these 80/20 loans are turning out to be "untouchable" in foreclosure for this reason:

- If a borrower defaults on the 2nd mortgage, the odds of recovering enough equity to make the foreclosure profitable are very low since homes typically sell at auction for 80% or less of the market value.

- In the event that the second mortgage holder does think there is enough equity to sucessfully foreclose, the borrower can then stop paying on their first mortgage. This encumbers the assett and puts the second mortgage holder second in line to recover anything from the foreclosure sale- thus wiping out pretty much any chance for the second mortgage holder to recover anything.

- The borrower can then catch up on paying the first mortgage and stop the foreclosure.

Pretty neat, huh? If you don't have to pay the second mortgage, houses are quite a bit more affordable than I thought!

Implications for Seattle specifically? Since our market is still relatively strong, banks have an incentive to foreclose quickly. Much more so than an area that has already seen 5% price declines.

As a result of this scenario happening on a wide scale, yesterday S&P made a dignificant downgrade of second mortgage debt. Anyone that thought the correction in the mortgage market was over was terrribly wrong. This downgrade will push up the interest rates on second mortgages and further tighten qualification standards.

[TJ_98370]

....Second-lien mortgages often have been obtained by homeowners in lieu of down payments. Subprime versions of such ``piggyback'' loans have performed worse than subprime housing- debt overall, putting some AAA rated securities sold by Goldman Sachs Group Inc. at risk of downgrades from Moody's and leading HSBC Holdings Plc to set aside more reserves for losses.

``People are taking out these loans and then realize they can't make payments on them,'' said Terry G. Osterweil, an analyst at New York-based S&P, one of the two largest credit- rating services. ``The first one they're going to default on is the second lien, not the first lien, because many times a servicer will write off the second lien and not foreclose.'' ...

Interesting article mike2. As you imply, maybe this is the way to incorperate a 20% discount on the purchase price of a new house! Wahoooo! Everything suddenly appears much more affordable!

Okay, what am I missing here?

[Alan]

[deejayoh]

Just realized I could update this...

Seattle Metro/King-Snohomish Counties
10/31/06: 195/2,165 (9.0%)
11/30/06: 126/2,376 (5.3%)
12/30/06: 131/1,500 (8.7%)
01/30/07: 146/1,548 (9.4%)
02/27/07: 124/1,503 (8.3%)
03/30/07: 251/1,466 (17.1%)
04/30/07: 511/1,566 (32.6%)
05/09/07: 593/1,591 (37.3%)

9 days later, foreclosures up 16%. Still a small base, but that thing is only moving one way, and fast...

over 400 of the foreclosures are in King county. NONE are going to auction according to the site.

[deejayoh]

I updated this data again as of today. Oh my. FC are up 46% in less than a month. PFC are up 14%.

And check out what is happening to the ratio of FC:PFC. It's over 40% now - from <10% a year ago.


Seattle Metro/King-Snohomish Counties
10/31/06: 195/2,165 (9.0%)
11/30/06: 126/2,376 (5.3%)
12/30/06: 131/1,500 (8.7%)
01/30/07: 146/1,548 (9.4%)
02/27/07: 124/1,503 (8.3%)
03/30/07: 251/1,466 (17.1%)
04/30/07: 511/1,566 (32.6%)
05/09/07: 593/1,591 (37.3%)
05/25/07: 747/1,814 (41.2%)

[Jazen]

DJ, I look at that and think, wow, I never thought it would happen that fast and I have been a real estate bear since 2005.
Nice data, thanks.

[george]