America's Growing Foreclosure Nightmare

A friend of mine forwarded this article by Matt Taibi to me from the November 25th edition of the Rolling Stone.  I read the article and it was most illuminating and more than a bit disturbing.  It describes the legal process that is undertaken when banks proceed through court and the rubber-stamping of foreclosure documents by judges in the Florida court system.  You will quickly come to the conclusion that there is something wrong with the entire mortgage/banking system.  Sure, people got in over their heads by taking on debt that they could not afford but the banks acted like loan sharks by making additional mortgage funds available to mortgagees that were obviously never going to be serviceable over the long term.

Here's a quote from the article:

"It (the foreclosure court) exists to launder the crime and bury the evidence by speeding thousands of fraudulent and predatory loans to the ends of their life cycles, so that the houses attached to them can be sold again with clean paperwork. The judges, in fact, openly admit that their primary mission is not justice but speed. One Jacksonville judge, the Honorable A.C. Soud, even told a local newspaper that his goal is to resolve 25 cases per hour. Given the way the system is rigged, that means His Honor could well be throwing one ass on the street every 2.4 minutes."

Seems fair - if you're a banker....or a judge...or a lawyer.

As background information to this posting and the Rolling Stone article, here is a map from the RealtyTrac website showing the proportion of foreclosures by state:

Nationally, 2,171,120 homes are in foreclosure; in the month of October 2010, one in every 389 American homes on average across the United States received a foreclosure notice.  As you will notice from the Foreclosure Rate Heat Map, the worst hit states are in the western sunbelt, Florida and Michigan (likely because of the Detroit and Flint rustbelt issues). 

In the month of October 2010, there were 332,172 new foreclosures, down 4.39 percent from 347,420 in  September.  The top five cities for foreclosures were Las Vegas, Miami, Chicago, Phoenix and West Palm Beach. 

A particularly frightening statistic comes from Lender Processing Services (LPS).  According to LPS, in the United States, there are 7,043,000 mortgages that are at least 30 days past due or in the process of foreclosure.  Of these, 2,090,000 have been referred to an attorney for foreclosure (and from the Rolling Stone article above, we know that this means another family will be homeless as soon as a judge rubber stamps the necessary paperwork), 4,953,000 are 30 days or more overdue but not yet in foreclosure and 2,238,000 of these are at least 90 days overdue.  LPS estimates that the total mortgage delinquency rate stands at 9.29 percent of all outstanding mortgage loans.  The states most affected (total foreclosures and delinquencies as a percentage of all loans) are Florida, Nevada, Mississippi, Georgia, Louisiana and New Jersey with the lowest percentage being found in Montana, Wyoming, Arkansas, South Dakota and North Dakota.

If we compare the LPS data to the Mortgage Bankers Association (MBA) data, MBA shows that 4.39 percent of all mortgage loans were in the process of foreclosure in Q3 2010 compared to 4.57 percent in Q2 2010 and down from 4.47 percent in Q3 2009. MBA's analysis shows that 13.78 percent (non-seasonally adjusted) of all mortgages in the United States are not current (one payment or more past due or in foreclosure) down from 13.97 percent in the previous quarter.  If the delinquency rate is seasonally adjusted (whatever that means in the case of foreclosures), it stands at 9.13 percent.

Here's a quote from the MBA press release:

"“Mortgage delinquency rates declined over the quarter and over the past year, due primarily to a large decline in the 90+ day delinquency rate.  The number of loans in foreclosure also dropped, bringing the serious delinquency rate to its lowest level since the second quarter of 2009.  However, the foreclosure starts rate increased for all loan types and the foreclosure starts rate for prime fixed loans set a new record high in the survey, as more loans entered the foreclosure process,” said Michael Fratantoni, MBA’s Vice President of Research and Economics.   

“Most often, homeowners fall behind on their mortgages because their income has dropped due to unemployment or other causes. Although the employment report for October was relatively positive, the job market had improved only marginally through the third quarter, so while there was a small improvement in the delinquency rate, the level of that rate remains quite high.  As we anticipate that the unemployment rate will be little changed over the next year, we also expect only modest improvements in the delinquency rate.”" (my bold)

With 14.8 million Americans officially out of work, the situation is highly unlikely to improve soon.  It really is off-putting when the United States mortgage situation is considered to be improving when MBA statistics show that the percentage of mortgages that are not current has dropped from 13.97 percent to 13.78 percent, a percentage drop of 1.4 percent.  By comparison to last month, MBA statistics from March 2008 (before the Great Recession was entrenched) showed that 2.04 percent of all loans mortgage loans outstanding were in the process of foreclosure in Q4 2007 and that 5.82 percent (seasonally adjusted) of all mortgage loans outstanding were delinquent, roughly 64 percent of the rate for October 2010.

Heaven help us all should interest rates rise to historical norms once Mr. Bernanke’s Quantitative Easing 2 experiment is over next year.  The banks will no doubt become the largest owners of real estate in the United States.

But, on the upside, there will be lots of employment for judges and lawyers.