Founder & Chief Visionary of REThinkRealEstate.com
In real estate, the news of the week (so far) was that foreclosure “activity” was at a record high in April, with one of every 374 American households receiving a foreclosure notice last month. Maybe I’ve just seen so many of these sorts of headlines that it’s tough for me to get super worked up about them. Or maybe I know enough from working with homeowners and their lenders every day that I can see past the headlines and into the other market and mental factors that might be inflating these numbers. Either way, my first thought when I read the RealtyTrac press release announcing the April foreclosure numbers was not horror, like many observers, but rather – hmmmm, let’s dig a little deeper and see what this is all about. In my world, horror is related to fear, panic and paralysis, so dissecting the data to understand it holds the power to calm and empower. I choose dissecting.
First, there’s lots of hyperbole here, so let’s cut through that first. By foreclosure “activity” RealtyTrac means foreclosure filings – primarily, filings of Notices of Default, the first public notice a lender makes when a homeowner is (in most states) 90 days behind on their mortgage. I’ve never seen good studies for how many properties have a NOD filed, but are later rescued from foreclosure, but in my own office and experience I’d say it’s a lot. Well over 80 percent of the homeowners in my clientele are able to either reinstate their loans by catching up on back payments or, more commonly, received a foreclosure-preventing loan modification from their lender(s). Long story short – the fact that an NOD is filed on a home does not equal that the home will be lost to foreclosure.
Beyond the hyperbole, there’s lots of interesting factors at work here that are making these numbers seem abnormally high. First, the fact that these numbers are a record high should be more fully explicated: they are a record high for the four years that RealtyTrac has been keeping records. Enough said.
Second, a good number of lenders and governmental entities had imposed moratoria on foreclosures, many of which expired in April. So, there are untold thousands of homeowners who really should have received a foreclosure notice in January, February or March, but didn’t. The lenders are only now able to file those notices, so what should have been more of a trickle now seems like an avalanche.
Third, and I see this every day – homeowners have gotten much savvier about loan modifications, and have realized that their lenders are more likely to modify their mortgages (e.g., by reducing the interest rate and monthly payment) if they are behind on the payments on their loans. Many of my office’s loan modification clients have learned this in their own experience trying to get a DIY loan mod from their lenders. So they intentionally (with unfortunate effects on their credit, and unsanctioned by my office) go behind on their payments, then call us up to help negotiate the loan modification. And the reality of our experience working with lenders on these mods is that they are more willing to negotiate on the loans that are in default! (Talk about creating a bad feedback loop for your borrowers – in fact, this is exactly the consumer learning that the MakingHomeAffordable.gov program is trying to reverse by literally paying lenders to modify loans of borrowers whose payments are still current.)
Anyhow, many of these homeowners who are intentionally defaulting to get the loan modifications they need to stay in their homes over the long term will not end up in foreclosure.
Even RealtyTrac itself, in the press release, noted that while April’s ‘record’ foreclosure ‘activity’ increase was a 38 percent increase over April 2008, it was less than a one percent increase compared to the immediately preceding month, March 2009. Should we be concerned? Absolutely. But horrified? No – IMHO, a better use of that energy would be to push for the banks to get better about modifying loans before people are late on their payments, so we don’t continue to develop this enormous population of homeowners who are victorious in obtaining a more affordable payment through loan mod, but are burdened with the battle wounds of late mortgage payments and a foreclosure filing on their credit report.
