A Foreclosure Tsunami is Quickly Approaching

Looking ahead to the foreclosure wave due for shore we want to answer two questions: How many? How fast?

How Many?

CoreLogic estimates 22.8% (11.1 million) of all mortgages on residential properties are underwater. The figures are higher – 27.8%; 13.6 million – if you include borrowers with near-negative equity (<5% equity).>

Foreclosures won’t stop until these numbers come down. A paper we dug up from early 2008 shows the Federal Reserve Bank of Boston was concernrned when 10% of mortgages in Massachusetts were underwater in 2007. The proportion of underwater mortgages nationwide is now more than double this figure. We don’t know the ‘acceptable’ level of negative equity share, but we estimate it must drop below 10% before foreclosures bottom out.

To get below this 10% threshold, another 6.2 million homes could go through the foreclosure process. 8.7 million foreclosures would be needed to bring the negative equity share to 5% of all mortgages outstanding.

This, of course, assumes negative equity will be resolved by eliminating underwater mortgages. A 25% increase in home prices could also decrease the percentage of underwater mortgages (to a still high 20%). But how likely is that in the near future!?

 

How Fast?

2011 will be remembered as the year when ‘robosigning,’ the practice of a bank employee signing thousands of documents and affidavits without verifying the information contained within, put the brakes on the foreclosure process. But the chart below shows a recent acceleration in foreclosures. With the robosigning settlement now behind them, banks are likely to increase the pace of foreclosures that were backlogged in 2011.

 

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.