RealtyTrac released a report showing that foreclosures shrank 10% in January from December. While the press focuses on the headline, the details to RealtyTrac’s report are much grimmer and shows a housing market that is still in trouble. The month-to-month drop is a positive, but year-over-year foreclosures are up 15% from January 2009. REO (real estate owned by the bank) was down 5% from January – another positive, but it is up 31% from this time last year. James Saccacio, the CEO of RealtyTrac, paints a grim picture going forward:
“January foreclosure numbers are exhibiting a pattern very similar to a year ago: a double-digit percentage jump in December foreclosure activity followed by a 10 percent drop in January… If history repeats itself we will see a surge in the numbers over the next few months as lenders foreclose on delinquent loans where neither the existing loan modification programs or the new short sale and deed-in-lieu of foreclosure alternatives works.”
The following graph shows that delinquencies are continuing to trend upwards even as loan modification programs stall the increases in foreclosures and bank owned properties.
The banks realize that the foreclosure problem is not going away anytime soon. Citibank implemented a program similar to Fannie Mae that allows homeowners to stay in the home as long as they deed the title back to the bank. The homeowners get to live rent free for up to 6 months with this program, but, in return, the homeowner must maintain the property, pay utilities, cover the taxes, and chalk up homeowner association dues. Citi will also provide the homeowner with up to $1,000 in relocation costs after the 6 months. Additionally, the deed in lieu of foreclosure allows the homeowner to avoid the credit score hit of a true foreclosure.
Certainly, Citi is hoping this makes them look like nice guys who are out to help the struggling consumer. It certainly helps, but Citi knows this is good for them as well. Citi ensures that the homeowner will maintain the property by cutting the lawn, shoveling snow (critical in the Mid-Atlantic states right now), and other upkeep. It also deters homeowners from destroying the place, which is all too prevalent in a foreclosure. Citi avoids having to pay for taxes, utilities, and homeowners association dues that a foreclosure would bring. Even more importantly, Citi can delay writing down the property on their balance sheet for at least six months. The writedown of a foreclosed home is the key reason foreclosures have not kept pace with 90 day delinquencies. The banks would have to raise capital to cover these losses.
While this may be a wise program for the banks and homeowners, it shows the banks acknowledge that more pain is ahead. This is even more prevalent considering the massive number of option ARM recasts coming our way over the next two years.
The banks might regret delaying many of these foreclosures once the home buying tax credit and the Fed’s mortgage backed security (MBS) purchase ends in early April. Without the government prop, housing could see another serious rough patch.