Something curious happened in California in January: the foreclosure process virtually ground to a halt. Specifically, as RealtyTrac describes it, "the downward foreclosure trend in California accelerated into hyper speed in January, decisively shifting the balance of power when it comes to the nation’s foreclosure activity", shifting it in favor of homeowners and effectively preventing banks from sending out Notices of Default (NOD) repossessing homes whose owners no longer pay their mortgages. This was the result of the Homeowners Bill of Rights, or legislation which "extends many of the principles in the national mortgage settlement — including a prohibition on so-called dual tracking and requiring a single point of contact for borrowers facing foreclosure — to all mortgage servicers operating in California. In addition the new law imposes fines of up to $7,500 per loan for filing of multiple unverified foreclosure documents." The outcome of this law as it propagates through the market can be seen in the chart below: in January 2013, California foreclosure starts are now down to levels not seen since 2005!
And for the first time since 2006, Florida properties with foreclosure filings surpassed those in California.
As a result of this latest artificial intervention (the first one of course being the Robosigning fiasco which hit in November 2010 and which resulted in the wristslap mortgage settlement whose sole purpose was, again, to give a legitimate reason to boost shadow inventory) preventing underwater properties in the state with the most impaired mortgages and the most "underwater" housing, from hitting the market, the outcome is simple: a direct, explicit subsidy by US banks to prop up the housing market.
As we explained before when we clarified the concept of "foreclosure stuffing", as a result of clogging up the foreclosure pipeline, where millions in homes will not clear the market for years, as even less inventory will enter and exit the foreclosure process, the inventory of available homes declines even more, pushing prices even higher, but not due to a rise in demand, but simply due to a subsidized contraction in supply.
What else happened in January as a result of this latest intervention in the California housing market:
- U.S. foreclosure starts were down 11 percent from the previous month and down 28 percent from a year ago to the lowest level since June 2006 — a 79-month low.
- U.S. bank repossessions (REO) decreased 5 percent from the previous month and were down 24 percent from January 2012 to the lowest level since February 2008.
This is all shown dramatically in the next chart, which demonstrates that as a result of the latest crunch in California foreclosure activity, foreclosures at the national level, both starts and completions, in January plunged some 30% below year ago levels.
Note in the chart above the dramatic contraction in all foreclosure activity starting in November 2010 - the month when the "Linda Green" robosigning scandal so conveniently broke out. Because while the punishment to the banks as a result of the "mortgage (robo)settlement" was laughable, what it did do was provide a perfectly legal cover to reset the foreclosure activity to a new baseline: from 330K per month on average to just 210K currently, and in the process keep some 3.2 million additional properties (using a simple back of the envelope analysis) in the shadow backlog, and thus out of the market supply, resulting in what some still erroneously dub a "housing recovery."
Two other charts that show how exogenous intervention reduces the supply of housing availability for sale, are the charts of foreclosure starts, and completions, both of which have plunged to multi-year lows.
Yet while informative, none of the above, which frequent readers are well aware of, is the focus of this story.
What is, is that as always happens when central planning is involved, when one tries to stop a leak here, two new leaks appear elsewhere. Because while the Homeowners Bill of Rights managed to grind foreclosure activity to a halt in California, what is happening elsewhere is the dreaded Boomerang Foreclosure phenomenon, or, said simply, redefaults.
In other words, those homeowners who tried to take advantage of the most recent housing bubble mania created over the past year by the unholy trinity of the Fed (open-ended liquidity, REO-to-Rent programs, and $40 billion in monthly purchases of MBS), foreign buyers (who launder illicit money courtesy of the NAR's anti-money laundering exemption and park it in ultra luxury US real estate, usually sight-unseen) and of course, the banks, who with the aid of the robosigning fiasco and the Homeowner Bill of Rights, have over the past year subsidized the housing market by keeping non-cash flow generating mortgages on their books in exchange for a wholesale subsidizied rise in housing prices, ran out of cash before they could flip the "hot potato" that is the house they just bought, to a greater fool, and since they had no actual cash to pay the mortgage with, and with no fear of retribution, handed it right back to the bank.
As the chart below shows, while California foreclosure activity is collapsing, things in other places are starting to indicate that the second housing bubble blown by Bernanke in 5 years, is finally starting to crack:
RealtyTrac has more:
- Scheduled foreclosure auctions increased from the previous month in 26 states and the District of Columbia, hitting 12-month or more highs in several key judicial foreclosure states, including Florida, Illinois, Pennsylvania, and New Jersey,
In other words, ignore the sad and very much artificial reality of California where the real estate market is no longer indicative of what happens in a free market, and instead keep a close eye on those states where all artificial attempts to crush foreclosure starts and completions have been used up, and where reality is about to come back with a bang.
Because for all the propaganda, and all the artificial attempts to juice the market, the sad reality is that the US consumer has less and less disposable cash flow, and when one adds such $1 trillion + debt items as student debt (now greater than all credit card debt combined), has a soaring debt load to add.
The only question is how long until the funding to prop up this latest artificial housing market subsidy runs out, and banks realize that the time to dump all those millions of underwater homes on their books into the market is now.
Because, like with everything else, those who sell first, sell best.