We released our monthly CA Foreclosure Report today. I really enjoy pouring through all the stats looking for interesting items to highlight for our many report subscribers. That said, I'm frankly tired of reporting "record" foreclosure levels. As I talked to reporters throughout the day I inevitably got THE question - when will this end? I sure wish I knew. Frankly, we have yet to see any signs that it is even slowing. With builders and Realtors reporting that sales are picking up in many parts of the state, it is easy to think things will improve soon.
As I prepare for our monthly report, I look at two stats beyond the basic foreclosure levels to try and gain some understanding of what may lie ahead.
The first stat I look at each month is the percentage of foreclosures that originated in 2004. In April I'm happy to report that was under 5%. With negative equity being the primary driver in foreclosures the concern is that as prices continue to deteriorate folks that purchased or refinanced in 2004 will begin to feel foreclosure is their only option as well. This has yet to happen, but given current price declines, it remains possible that we will see these loans begin to add to current foreclosure levels in the future.
The second stat I focus on is the total amount due on the loans sold at auction versus the original amount of the loan. In April this averaged 110%, up from 109% in March and 107% in February. Why is this important? Because while we have a reasonable handle on ARM resets, it is not yet clear what will happen as Prime Option ARMs begin to recast due to negative equity limits.
Many borrowers are only making the minimum payments on these pick-a-payment loans, resulting in negative amortization, which increases loan balances. If this negative amortization reaches 110 to 125 percent of the original loan amount, depending on the bank, the borrower's loan gets recast, which in many cases will double the borrowers payment. Given that many of these loans were made in 2005 and 2006 and are likely under water without the negative amortization, many of these prime borrowers may not make these higher payments, even if they are able to.
While I carefully watch these two stats for signs of what lies ahead, the TRUTH is that we are well into uncharted foreclosure territory and for now predicting when this will end remains a fools errand.