Foreclosure Timeline Lengthens to Record 21 Months

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Increasingly in some states, foreclosure is like a Roach Motel: Houses come in, but they don’t get out. This has led to an egregious statistic in the new issue of Mortgage Monitor, a report from data-tracker LPS Applied Analytics, which shows that the average loan in foreclosure has been delinquent for 631 days. That’s nearly 21 months, a new record.

Much of the lag has to do with the processing of foreclosures. Since the “robo-signing” scandal — where financial institutions were accused of moving foreclosures along without taking the time to properly read and process the paperwork — lenders have been carefully dotting every “i” and crossing every “t.” This has slowed the timeline of moving a home through its repossession and into resale to a new owner.

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Because homes aren’t moving out of foreclosure, the ratio of foreclosures to active mortgages is at an all-time-high, according to LPS. October foreclosure inventory was at 4.29%, a jump from 4.18% in September.

I say “active mortgages” because many homes in the U.S. have no mortgages on them at all. (If, say, you bought your house when you were 25, and now you’re 60, you’ve probably paid it off.) Homes owned free-and-clear aren’t counted as part of this ratio.

The foreclosure statistics are the bad news; the good news is that fewer homes are going into delinquency, where the owners are running late with their payments. Delinquencies as a percentage of active mortgages fell, and pretty significantly from a year ago, to 7.93% of active mortgages from 9.29% a year ago.

To take a mental picture of this, think of the pool of foreclosures as a pool of water on the floor, fed by — bear with me — a leaky faucet of delinquency. What’s happening in the economy is that the faucet is dripping slower and slower, which is great news. Delinquencies down significantly, that’s wonderful.

However, because foreclosures aren’t being “mopped up,” if you will, the pool of water on the floor is getting bigger and bigger.

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In very hard-hit states, that pool of foreclosed-but-not-yet-on-the-market houses is a real hazard, keeping property prices depressed. Florida, for example, has gotten slammed in the foreclosure crisis. LPS shows that a whopping 22.8% of loans there — nearly one out of four — are not being kept current. Of those, 8.4% are delinquent and 14.4% are actually in foreclosure.

Prices for the big Florida metro areas reflect the problem: In Tampa, for instance, prices were down in October by 6.7% from the year before, while in Miami, they were down 4.0% from the previous year.

The huge number of foreclosures is a hazard for renters too, as anecdotally we hear stories of landlords who rent out their properties, then quit paying their mortgages — but keep collecting rent until the sheriff shows up to evict the poor unsuspecting tenants.

“Non-judicial” states — states where foreclosures don’t automatically have to go through the court system — seem to be healing much more quickly. In Arizona, the number of non-current mortgages dropped by more than 20%, and the foreclosure rate is now at 3.5%.

What does this mean if you’re a potential buyer? I think in many ways a purchase now could make sense, because interest rates are very near historic lows. And I’m generally in favor of consumers buying a home that they can stay in for seven to 10 years, which is usually enough time to ride out an unfavorable market cycle. However, you’ll want to review localized default and foreclosure rates with your real estate agent, just to make sure that your local real estate market isn’t going to suffer continued downward pricing pressure from foreclosures coming to market. In other words, it’s ok to buy; just make sure that you don’t slip in that pool of water on the floor.