The October Foreclosure Surprise

BLOG VIEW: October is typically a month we all look forward to for spooky reasons. Spending time with our families for Halloween and the upcoming holidays is normally what’s on our minds.

Over the past few years, there is one area of our lives that’s been consistently spooky – the national real estate market. Luckily, it has bounced back from the foreclosure crisis and economic meltdown. There are certain pockets within the country that remain in flux, but overall, the national real estate market looks good.

One reason is that foreclosure filings and bank repossessions (REOs) have been falling steadily during that time. They’ve been kept relatively in check – so much so that they’re at the lowest levels since the meltdown.

As the presidential election drew near, a curious spike took place in October. Some suggest it’s nothing more than an anomaly, while other prognosticators have been forecasting a crack in the national real estate armor for some time.

So, what’s the deal with the new numbers? According to RealtyTrac, real estate statistic and foreclosure trends reflect that there are currently 910,847 properties throughout the country in some stage of default or foreclosure – i.e., a borrower can be in default (delinquent), a notice of default and/or foreclosure action has been filed, or the property is in REO status. According to RealtyTrac, the number of homes listed for sale is 638,354.

So, what’s the big deal?

In October, the number of properties that received a foreclosure filing was 27% higher compared with September but 8% lower compared with October 2015. What’s most concerning about that is Federal Housing Administration (FHA) loans are a big part of that equation.

Home sales in September were down 67% compared with the previous month but up 38% compared with a year ago. The median sales price of a non-distressed home was $235,000. The median sales price of a foreclosure home was $130,000, or 45% lower than non-distressed home sales. Those figures make you scratch your head.

Although some states are still sifting through the remains of stated loans or other mortgage-backed securities from the housing crisis, foreclosure activity has increased in states such as Arizona, Colorado and Georgia with respect to post-crisis-originated loans. What does that mean exactly? It means, this can’t be blamed on Countrywide, Lehman Brothers or subprime mortgages. Theories are coming out of the woodwork as to why this is happening, such as market correction, bad underwriting, out-of-touch automated underwriting systems using trended credit data, loan origination fraud, latent bad loans held over in servicing by lenders, etc.

Before we get all riled up and go nuclear, it should be noted that the October spike doesn’t provide measured evidence of any type to indicate a new foreclosure crisis is on the horizon. What it does reflect is that all is not candy canes and rainbows in our national real estate markets, that’s all.

There is something else to consider: Private investment money has always been a funding source for a certain segment of the nation’s real estate market. Right after the crash, those investors bolted. As a result, they left a gaping hole for certain consumers seeking financing. Subsequently, the FHA had a significant increase in loan originations after the crash. Suffice it to say, increased loan originations means a greater chance for increased foreclosures at some point in time.

Moreover, after Countrywide was history, and Lehman was a bad memory, FHA loan originations jumped. More recently, they jumped from approximately 3% in 2005 to a high of 18% by 2010. In the end, that’s nothing more than a numbers game that has come to life.

Here’s the skinny and the rub on FHA loans. They are clearly not subprime loans, but due to lower FICO score requirements, they cater to a certain type of credit-challenged consumer, which is more indicative of subprime loans. Some of the underwriting rules and the trended credit data requirements now in place under Fannie Mae’s Desktop Underwriter 10.0 have some suggesting that the FHA is the new home for subprime-like loans.

Additionally, down payment thresholds on purchase money loans is lower than some old subprime loan programs. Under FHA guidelines, a consumer can put as little as 3.5% down, with a qualifying FICO score of 580.

So the question is, because FHA and other look-alike programs were the vacuum that took in the subprime refugees, wouldn’t the aforementioned FHA factoid be a more plausible explanation as to why foreclosure filings are starting to increase and may continue to do so?

What some industry professionals are suggesting is that depending on where a property is situated (considering a soft job market or a fluxed sales market), those two items, and the type of loans originated, point to post-crises, look-alike subprime loans as the potential cause.

Truth be told, one month of data doesn’t make a trend. Needless to say, there may be other contributing factors at play as to why there was such a huge spike in October. For now, the sky isn’t falling. For some prognosticators, taking into consideration that a new administration is coming to power, it just may be the beginning of something.

What exactly, who knows – the crystal ball is murky at best. Hang tight – 2017 could be a smooth ride … but it could be a bumpy one, too.

Jimmy Alvarez is director of risk management for Financial Asset Services Inc., a national asset management company specializing in providing asset management, property disposition and valuation services to mortgage companies and financial institutions.

(Do you have an opinion to share with MortgageOrb? Get in touch! Send an email to pbarnard@zackin.com.)