The Foreclosure Rate Abates

Foreclosure rates may have leveled off, but it would be a mistake to count on that being a long-term trend.

New data from RealtyTrac shows  foreclosure filings — default notices, scheduled foreclosure auctions and bank repossessions — were reported on 332,292 U.S. properties during the month, a decrease of 3% from the previous month but still up nearly 19% from October 2008. That may be a bottom of sorts, but not a very convincing one. Nevada, California, and Florida continued to be the hardest hit states.

The data is a sign that the battle for home ownership is reaching a tipping point. The Administration has earmarked billions of dollars for mortgage modifications to keep creditworthy people in homes by reducing monthly payments. Unfortunately, a large part of people who take advantage of the program still default, in some cases because they are discouraged that the equity value of their houses is gone and may never bounce back.

Some currents are pushing mortgage defaults and delinquencies higher and they are not likely to change in the next few quarters. The first is that unemployment is still rising and some pessimistic analysts believe the jobless rate will hit 11% next year–the highest level since The Great Depression.

There is likely to be another wave of defaults as “interest only” loans reset so the mortgage holders have to begin to pay down the principal on their home loans. Nearly $71 billion of these instruments will change in the next year so that owners will be making much larger payments. Some portion of these homeowners will be unable to take on the larger burden.

Foreclosures may have leveled off for the time being, but the odds are that the trend will be short-lived.

Douglas A. McIntyre