Foreclosure Stuffing

Back in November 2010, the robosigning scandal hit in which it was made clear that when it comes to keeping track of mortgage titles, nobody really knows what belongs to whom, except maybe for Linda Green. The immediate result of this was a complete collapse in the foreclosure process as banks no longer had leverage to evict those who don't pay their monthly mortgage bills, since the banks couldn't confirm they actually had rights to the underlying mortgage, and the total monthly foreclosure total dropped from a ~330,000 average houses/month to roughly 250,000. Then in February, to much administration fanfare, the banks, and the attorneys general, signed what we dubbed the Robo-settlement: an event which was supposed to be the "resolution" to the robosigning scandal, and which should once again unclog the foreclosure pipeline. This did not happen. Instead, as RealtyTrac has been diligently reporting month after month, the monthly foreclosure total has continued to decline, and in August hit a level of 193,508 total foreclosures. The immediately spin is that this was a 1% improvement from July's 191,925. The reality is that it was a drop of 15.1% from a year earlier. As the chart below shows, ever since the advent of fraudclosure, the average monthly foreclosure total has dropped from a 330K/month average to just 219K. And declining.

So why did the robosettlement not undo the robosigning foreclosure crunch? Simple - foreclosure stuffing.

What happened is that since the properties not entering the foreclosure pipeline are effectively kept out of inventory, even shadow inventory, and thus the distressed end market, the monthly drop in foreclosures has acted as a form of subsidy to the housing market, as month after month less inventory than otherwise should, enters the market.

As the chart above shows, there is now a 2.5 million "backlog" of properties that should be foreclosed upon based on historical trendlines, but which are being completely ignored by banks. A stuffed foreclosure channel, if you will.

What this has resulted in is a logical increase in prices of the properties that are on the market. The trade off, naturally, is that there are millions of properties, not only in shadow inventory, but in this sub-shadow pre-foreclosure space, where the tenants live mortgage-free as the banks refuse to begin the foreclosure process (which already takes a record length of time - think years - to go from issuance of Default Notice until a new tenants buys and moves into the property). It is these beneficiaries of bank generosity that are to "thank" for the fact that houses are rising in price, or, in other words, less affordable for everyone else.

Because while the number of houses where the equity is underwater may have declined, what has also declined is the number of actual buyers who may purchase said suddenly more expensive houses.

Finally, what hasn't declined, is the number of people who now and going forward will live completely mortgage free just to perpetuate the illusion that "housing has rebounded." Consider them sunk costs in this latest attempt to reflated housing. Also, thank them if suddenly that home you have wanted to buy is once again just out of purchasing reach.

As for those who have a mortgage, and are wondering if they should continue paying it or not: why pay? It is now not only the administration, but the banks who are effectively handing out free housing.

Remember: in this New Socialist Normal, "just say no" when asked to pay for anything.