Debunking the "Record Wave of Foreclosures Coming" Myth

Articles like this one:

Foreclosures: 'April was a shocker'

have gotten an awful lot of play in the media these last couple weeks.

Here's what they're not telling you - or not explaining why it's important: This particular article actually mentions it in passing "That's due, according to Saccacio, to the many legislative and company moratoriums that have prevented the foreclosure process from starting on delinquent loans." However, they don't really explain what it means. Yes, Virginia, there was a moratorium on foreclosures in effect. Actually, there were several, some voluntary, most not. Most were related to what happened when Fannie Mae and Freddie Mac were taken over by the federal government last year, and one of the conditions was a moratorium on foreclosures for six months. These days, Fannie and Freddie hold just about every sort of mortgage paper there is except "hard money." Everything from the bluest chip mortgage given to people with immaculate credit, a huge down payment, and three times the income they needed down to the iffiest subprime loans ever. So when the moratorium on foreclosures hit, it cut a broad swath through the market, slowing down the process and delaying it by months for absolutely no improvements from the borrower. Didn't matter how many payments they missed; there was a moratorium on foreclosures in effect. Many of these borrowers took full advantage of this and several miles beyond; they didn't send a single dollar in for those months. This didn't help their situation any.

(How Fannie and Freddie got so deep into subprime, which was never their mandate and in fact was supposedly forbidden them by their charters, is a story guaranteed to make you hate Congress, and particularly, certain members of Congress, if you research it. After all, it's your taxpayer dollars that are going to make good the bad debts those clowns got them into, short-circuiting, obstructing and frustrating the regulatory oversight that was in place.)

So when that moratorium expired during March, Fannie and Freddie started moving forward on foreclosures that had been delayed six months or more, it took them a while to get up to speed. March was way up, but April was even more up. Shouldn't be a surprise. When a logjam breaks, there's going to be an abnormally high amount of water (and logs) going downstream for a while until the backlog gets dealt with. Those borrowers that just skated on what they thought was good fortune were the first ones in for a rude awakening.

Look at what they're telling you: "filings inched up 1% from March and rose 32% compared to April 2008." April 2008 wasn't just after a months-long foreclosure moratorium was lifted. It's a rotten, intentionally misleading comparison without that datum. They weren't going gaga over the drop in foreclosures in other months. I remember reports - buried deep in the "who cares" middle of the financial pages. Average out the numbers over the months the moratorium was in effect, and we're actually seeing a statistically significant decline in average foreclosure activity.

There is good news in the background. First, in the past six months, lenders have finally gotten serious about mortgage loan modification. No, they're not writing off grievous amounts of principal for everyone who asks. That's actually quite rare, and correctly so. But for borrowers making a serious effort and who can maybe kind of afford the properties they bought, the lenders are modifying interest rates downward for long periods of time - more than enough to permit the markets to recover, and long enough to prevent a future huge wave of foreclosures from hitting all at once.

Second, there's a minor but still helpful group of programs now being used to refinance people who formerly couldn't refinance: Both Fannie and Freddie now have programs offering up to 105% refinancing (maybe) without PMI in effect. For those who were otherwise able to finance, but prevented by deflating values, this is all they need to make it good and be able to keep their property. Particularly with sub-5% loans available right now.

Neither of these covers everybody, nor do both of them together. Nor do they help those who went the most overboard in terms of seeking out new and innovative financing forms, to paraphrase Star Trek. But they don't have to cover everyone. All they have to do is make enough of a dent in the future foreclosure market to keep the markets from being foreclosure saturated. Both of them are taking huge chunks out of the short sale market already. People don't (or shouldn't) do a short sale if they have another option, and these alternatives give a large number of people those other options.

We're not out of the woods yet; particularly not if the federal government persists in the sort of undesirable meddling in the markets they've been doing way too much of for the last year. But absent that interference, the trees are definitely thinning out, especially in the markets that took off early, crashed early, and have economic reasons to drive their housing demand back to where it was a few years ago. San Diego is one such. I am certain there are others.

Caveat Emptor