Housing Crisis Could Peak in 2011 as Foreclosures Rise to Record

The housing crisis could peak in 2011, as the number of homeowners receiving foreclosure notices climbs about 20%, putting a further drag on prices, according to the latest forecast from RealtyTrac Inc.

As high unemployment persists and banks resume seizures after a moratorium to correct paperwork snafus, the market will see a steady increase in volume this year, the tracker of housing data reported.

"We will peak in foreclosures and probably bottom out in pricing, and that's what we need to do in order to begin the recovery," Rick Sharga, RealtyTrac's senior vice president, said in an interview at Bloomberg News headquarters in New York. "But it's probably not going to feel good in the process."

Properties receiving notices of default, auction or repossession rose 2% from a year earlier to a record 2.87 million in 2010, the Irvine, California-based data seller said yesterday (Thursday). Actions against homeowners in default jumped despite a plunge in filings in the latter part of the year – including a 26% drop in December – as banks were forced to review their practices.

Banks seized more than 1 million homes in 2010, according to RealtyTrac. That was up 14% from 2009 and the most since the company began reports in 2005.

About 3 million homes have been repossessed since the housing boom ended in 2006, Sharga said. That number could balloon to about 6 million by 2013, when the housing market may "absorb the bulk of distressed properties," he said.

About five million borrowers are at least two months behind on their mortgages and more will miss payments as they struggle with job losses and loans worth more than their home's value, industry analysts said.

"What makes this almost inevitable is the fact there are 5 million seriously delinquent loans not yet in foreclosure," Sharga told Bloomberg. "They've got to eventually get in the pipeline unless the homeowners cure the defaults."

Money Morning Contributing Editor Martin Hutchinson sees the projected increase in foreclosures as part of the natural evolution of the market after the bubble burst in 2007-2009.

"This is just the backlog. The market's seeking its proper level," Hutchinson said in a phone interview. "It doesn't mean its falling into an infinite pit. It's just catching up with itself."

As the nation's unemployment rate stubbornly hovers at more than 9%, foreclosures mushroomed over the last three years and U.S. housing prices have continued to shrink. Prices have fallen as much as 33% since their peak in 2006, based on the S&P/Case-Shiller Index of 20 cities.

Despite the number of properties in distress, home values may rise 0.6% in 2011, the first annual increase since 2006, according to Fannie Mae (OTC: FNMA), the largest buyer of U.S. mortgages.

Barring something unforeseen, Hutchinson thinks that prices are unlikely to fall much further.

"Prices shouldn't show much more downward momentum, but interest rates will determine that," he said. "A lot depends on how fast the Fed decides to raise interest rates, which could be quite quickly if inflation begins to get out of hand. Of course, unemployment is the real problem."

If large numbers of jobless homeowners facing foreclosure find work this year, then that could push down filings. On the other hand, if unemployment remains high, then 2011 could set another record as banks increase their foreclosure filings to make up for the delays in 2010.

Roughly 250,000 foreclosure filings that would normally have been processed towards the end of 2010 were delayed by an ongoing investigation into lender practices, according to RealtyTrac.

Attorney generals in all 50 states are conducting a probe into whether banks and loan- servicing companies rubber-stamped faulty loan documents using a process that has come to be known as robo-signing. Companies including JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC) and Ally Financial Inc. temporarily halted some repossessions as they reviewed their procedures.

Foreclosure filings in December totaled 257,747, the lowest monthly tally since June 2008. The number fell 2% from November and 26% from a year earlier, the biggest annual decline in RealtyTrac records.

Even though the courts have yet to rule definitively on the matter, the banks have concluded their foreclosure processes are valid and are moving ahead. Those proceedings will hit the pipeline early this year, resulting in an "ugly" first quarter, Sharga said.

For the fourth year in a row, Nevada had the highest U.S. foreclosure rate with more than 9% of the state's households receiving a filing. Arizona was second at 5.7% and Florida third at 5.5%.

Five states accounted for 51% of the U.S. filing total in 2010, totaling almost 1.5 million. California led with 546,669, down almost 14%; Florida was second at 485,286, down 6%; and Arizona was third at 155,878, down 4%. Illinois ranked fourth at 151,304 and Michigan was fifth at 135,874, both down about 15% from 2009.

Georgia, Texas, Ohio, Nevada and New Jersey also ranked among the top 10, said RealtyTrac, which sells data from counties representing 90% of the U.S. population.

News & Related Story Links:

• Bloomberg:
  U.S. Foreclosure Filings May Jump 20% in 2011 as Crisis Peaks
• Money Morning:
  Continued U.S. Housing Price Decline Won't Derail the U.S. Economic Rebound
• Money Morning:
  No Rebound in 2011 as the Housing Market Continues to Rot
• Money Morning Archives:
  Housing Market

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