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Finally…Some Positive Foreclosure News On The Horizon

October 23rd, 2008 categories: Foreclosures / Short Sales, Loans / Financing, Market Update

Despite the current mayhem and chaos on Wall Street and in the world’s financial markets, there may be a glimmer of hope on the horizon, as we may finally be on the brink of a major change in the foreclosure landscape.

That’s because we’re about to enter a period where fewer and fewer of those ugly subprime loans will reach their initial reset date. And those adjustable rate resets – where a borrower might have seen his or her payment go from an affordable $1,800/mo. to an unaffordable $3,500/mo. – are the root of the mess we’re in right now.

Generally, it may take two to six months from the time a subprime borrower’s loan resets until they come to the realization that their only way out is to either do a short-sale on their house or simply let it go to foreclosure. Add to that another 4-5 months for the home to go through the foreclosure process and another month or two before that foreclosed home comes back on the market as a bank-owned listing.

So for all the foreclosures that have come on the market over the past two years, you can probably go back anywhere from six to nine months and arrive at the subprime reset date that signaled the beginning of what ultimately would turn into a distress sale situation.

I recently attended a conference where the deputy chief economist for the California Assn. of Realtors (CAR), our state association, provided an adjustable rate mortgage reset calendar (click here), that illustrates how many mortgages were scheduled to reset between 2007 and early 2013. It shows that after months and months of increasing loan resets nationwide, we’re about to enter a period where the number of loan resets will decrease dramatically. And that should at long last signal the beginning of the end of the current real estate meltdown.

Now, don’t expect any immediate changes, for, as I already pointed out, it usually takes six to nine months from the time a loan resets until its goes all the way through the foreclosure process (perhaps a little sooner if the homeowner does a short sale instead). Accordingly, as the number of subprime resets diminishes, it will probably still take another six to nine months before we see a marked decrease in the number of foreclosures coming on the market.

If you look at the graph, you’ll see that April, 2007 was the first month where there was a substantial increase in the number of subprime loan resets, a trend that continued throughout the rest of 2007 and into the summer of 2008. Since that time, there has been a gradual downward trend in the number of subprime loans that are scheduled to reset. But overall, the number of resetting loans has remained quite high.

Until now, that is. Starting in November, we’ll be entering a period where there will be significantly fewer subprime loan resets than at any time since at least 2006. In terms of raw numbers, in January, 2007, approximately $18 billion worth of subprime and “Alt-A” loans entered their reset period. By October of that year, that number had essentially doubled, when about $35 billion were scheduled to reset. By May of this year, we were still at around $30 billion.

Then the trend started to reverse itself, but in a slow, gradual manner. From July through September, the numbers were fairly consistent – right around $17 billion, which was still pretty close to where they’d been back in Jan. 2007. This month, there was another modest dip, down to about $15 billion.

But beginning next month, the numbers will change substantially, with only about $7 billion are scheduled to reset in November. And that trend will continue, with fewer and fewer subprime loans scheduled to reset in each successive month. By next fall almost all of the subprime loans will have worked their way through the system.

The chart does show that while the bulk of the subprime loans that were made several years ago have now already passed their reset dates, a new wave of other high-risk loans will start resetting in large numbers next spring. However, as CAR economist Robert Kleinhenz pointed out at the conference I attended, by the time those loans reset many may no longer be on books, as some will have already been refinanced and others will have already completed short sales.

He predicted that while there will be some impact and no doubt some additional foreclosures, since many of the loans in this next round of adjustable rate resets were to investors, it won’t be anywhere close to the magnitude that we experienced with all those first-time/subprime buyers.

Keep in mind, too, that amid all the recent intervention by the federal government, many lenders are now much more inclined to modify an ugly loan or take other steps to prevent it from becoming a future foreclosure. And it’s reasonable to think that this trend will continue. Moreover, it’s possible that additional new homeowner assistance programs may arise out of the $700 billion bailout bill, which could help further reduce the number of future REO listings, too.

Whenever things are going bad, everyone looks for a glimmer of hope or a ray of light signaling that better times are on the horizon. At long last, that faint glow you see may actually be that long-awaited light at the end of the tunnel.

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This entry was posted on Thursday, October 23rd, 2008 at 2:53 pm and is filed under Foreclosures / Short Sales, Loans / Financing, Market Update. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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