Does the ‘Why’ Really Matter?

It’s pretty interesting to look at what’s going on with foreclosures across the country these days.

It’s been nearly two years since the “robo-signing” scandal was breaking news, and a few months since the country’s largest lenders agreed to a $26 billion settlement with states’ attorneys general over questionable procedural practices. It would seem that as this legal scrutiny gets worked through, banks are starting to again turn on the foreclosure faucet.

RealtyTrac, an online foreclosure listing firm, reports that foreclosure filings in the United States were up by 2 percent in the first half of 2012, compared to the last six months of 2011. Also, new foreclosure filings went up by about 9 percent in the second quarter this year. The figures indicate a willingness by banks to again foreclose on delinquent properties.

Another recent report, however, showed that about 800,000 fewer households are under water – owe more than their home is worth – at the end of this year’s first quarter than there were in the previous quarter. According to data firm CoreLogic, 23.7 of U.S. borrowers have negative equity in their home, compared to 25.2 percent a quarter ago.

That 1.5 percent difference represents progress. For one, it’s about 800,000 households that are less likely to lose their homes, as underwater mortgages statistically have much higher default levels. Additionally, about 1.9 million households are now under water by only 5 percent, according to CoreLogic.

What the data tells indicates is that new foreclosures are up because of previously delinquent loans that got held up as banks worked out their foreclosure practices. With fewer new delinquencies and fewer underwater borrowers, it would seem that while the flow has increased down the line, there is less volume being pumped into the start of the foreclosure pipeline.

That’s good for a couple of reasons. First, it means that fewer families are likely to lose their home – that’s important. And second, fewer foreclosures mean further stabilizing prices in areas that were hard hit by foreclosures.

Which leads me to another point: A lot of experts are saying that prices in hard-hit areas have started to stabilize because bank-owned repossessions – “real estate owned” or REO – have been purposely held off the for-sale market. There are reports that as many as a million homes across the country have yet to hit the market, and some are critical of this practice, saying that it’s artificially creating shortages of inventory in some markets. As inventories have shrunk, prices have risen.

I wonder how much it matters, though, that banks might be withholding REO from the market. I realize that all real estate is local, but as a nation, the U.S. has been in this foreclosure circle for so long, and if banks’ timing their inventories helps break the circle, so be it.

If that’s part of why inventories are lower, does it matter? That has helped stabilize prices, which has led to fewer underwater borrowers, which, in turn, will lead to fewer defaults and foreclosures. Fewer defaults and foreclosures will mean further stabilization of prices. Maybe banks see that somebody has to do something to get real estate off this treadmill. Maybe they’re only trying to help themselves, but the byproduct sure seems to be helping a real estate recovery right now.

And while economists are arguing that institutions holding back REO are manipulating the market, can you really blame them? How many homeowners have held off on putting their own houses on the market because it hasn’t been a great time to sell? For many, they just can’t take the kind of loss selling a home in a buyers market entails. Or they don’t want to compete with all the other homes on the market right now.

Remember that every REO property a bank holds also probably represents a loss for that bank. And as we’ve trudged through this unprecedented era of foreclosures, repossessions and short sales, banks have had to figure out on the fly how to minimize these losses. It would seem they’ve developed some ideas – fewer repossessions and more short sales is one – and holding homes off the market is another.

Eventually, there will be a shortage of homes. New homes have been built at around a 400,000-a-year average for the past three or four years, which is less than half of normal. In addition, foreclosed homes that are considered blights have been torn down. If banks systematically introduce REO inventory onto the market once these shortages start catching up to us, they’ll be minimizing their own losses and mitigating the possible shortages of homes for certain markets.

There could be worse outcomes, right?

This isn’t to say we shouldn’t be concerned about a new wave of foreclosures hitting the market at once. That would be bad. But let’s consider the facts rather than wring our hands over what might be.

Fact: Fewer homeowners are under water.

Fact: Prices are stabilizing in areas where things have been bad for a long time.

Fact: Banks are less likely to take homes from people.

These things all seem to be pretty positive to me. If the “why” is partially attributed to banks holding onto some of their REO inventory for now, then the “why” doesn’t really matter.