U.S. Loans in Foreclosure Tie Record as Lenders Delay Seizures

U.S. Loans in Foreclosure Tie Record as Lenders Delay Seizures

U.S. mortgages in the foreclosure process matched an all time high record at the end of 2010, as lenders and servicers delayed the final foreclosure to investigate charges against that alleged their foreclosure documentation was improper.

Records show what 4.63 percent of loans were in foreclosure in the fourth quarter, up from 4.39 percent in the previous three months. The combined share of foreclosures and loans with overdue payments was 14 percent, or about one in every seven mortgages.

Property seizures plunged at the end of 2010 as lenders such as Bank of America Corp. and JPMorgan Chase & Co. temporarily halted proceedings to review their handling of court documents. That left more homes in the foreclosure process with their status unresolved. Repossessions tumbled 32 percent in the fourth quarter from the prior period, according to data from RealtyTrac Inc. in Irvine, California.

“It’s clear that the process issues were driving the increase,” Jay Brinkmann, chief economist of the Washington- based Mortgage Bankers Association, said in an interview. “We would expect the foreclosure inventory to start coming down as that gets resolved and the court situations get cleared up.”

That share of mortgages in foreclosure tied the record reached in the first quarter of last year.

Foreclosure actions were started on 1.27 percent of home loans in the fourth quarter, down from 1.34 percent in the prior three months, according to the report. The share of mortgages with overdue payments dropped to 8.22 percent from 9.13 percent in the third quarter as an improving labor market and an expanding economy helped homeowners to stay current on their loans, Brinkmann said.

‘Robo-Signing’ Claims

Bank of America, JPMorgan and Ally Financial Inc. began resuming foreclosures at the end of last year. The allegations of impropriety such as “robo-signing,” the mass processing of paperwork without proper verification, have spurred an investigation by attorneys general across the country.

The foreclosure inventory of home loans held by prime borrowers, traditionally the best-performing type of mortgages, increased to a record 3.67 percent from 3.46 percent in the prior quarter, the report said. Prime loans with late payments dropped to 5.48 percent from 6.29 percent in the preceding quarter, MBA said.

Foreclosures are depressing property values and discouraging buyers who don’t want to make a deal if they think prices have further to fall. The S&P/Case-Shiller index of home values in 20 cities dropped 1.6 percent in November from a year earlier, the biggest 12-month decrease since December 2009.

Negative Equity

The median sale price nationally fell 1.1 percent in December from a year earlier, according to the National Association of Realtors. Declining home prices contribute to foreclosures because if homeowners who have lost equity fall behind on their loans they can’t sell their properties unless they are able to pay off the difference between their mortgage balance and the sale price, Brinkmann said.

At the end of last year about 15.7 million mortgaged single-family homes, or 27 percent, had negative equity, according to Zillow Inc., a Seattle-based real estate information company. It was the highest share in data going back to the first quarter of 2009.

Federal Reserve policy makers described the U.S. real estate market as “depressed” in a Jan. 26 statement following the end of a two-day meeting in Washington. The central bankers said falling home values continued to stymie the consumer spending that accounts for about three-quarters of the world’s largest economy.

The real estate market market may find some ray of hope by a broader economic recovery. U.S. gross domestic product is expected to grow 3.2 percent, the fastest pace since 2004, according to the median projection of 92 economists in a Bloomberg survey. Unemployment probably is expected to drop to 9.2 percent from 9.6 percent in 2010, the estimates show.  Whether this will truly boost the demand for real estate remains to be seen.