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The falloff in short sales and foreclosure sales since the beginning of the year caught many California real estate professionals and analysts by surprise. We know part of the decline was seasonal, but we have good reason to believe government interventions contributed to the balance of the decline.
In a two-part-series of blog posts, we’ll discuss short sale and foreclosure sale trends and the role government intervention has played in recent declines. In Part 2, we’ll look at distressed property trends.
First, let’s take a look at the data. Since January 1, 2013, short sales have fallen 34.8 percent and foreclosure sales have fallen 32.2 percent. In contrast, over the same time in 2012, short sales fell 15.1 percent and foreclosure sales fell 9.6 percent.
Since the peak of the foreclosure crisis in 2008, however, short sales and foreclosure sales have trended in opposite directions. In fact, since then short sales rose 55.6 percent while foreclosure sales declined 86.6 percent. The abrupt change in short sale trends since January begs an explanation as to what has changed and why.
We had expected foreclosure sales to decline this year after the California Homeowner Bill of Rights became law on January 1. The law restricts mortgage servicers from advancing the foreclosure process if homeowners are working on securing a loan modification, a process called dual-tracking. Lenders caught breaking the new law are subject to civil penalties of $7,500 per loan. As 2012 came to a close, foreclosure activity plummeted and foreclosure cancellations spiked.
The decline in short sales, however, was surprising. While we suspect seasonal factors are influencing part of the drop-off the past 90 days, since January 1, it’s a safe bet that the following government interventions and the market response to those interventions are playing a role:
- The $25 billion National Mortgage Settlement may have pulled short sale activity into 2012. The five largest banks involved in the settlement accounted for 54.2 percent (59,321) of the 109,462 completed short sales in California last year, according to the latest report from the Office of Mortgage Settlement Oversight.
- The national settlement may be winding down. As of December 31, 2012, the five largest banks paid out $45.8 billion in consumer relief. Of that total, $24.7 billion qualified as a relief to support homeownership in the form of first-lien modification forgiveness, second-lien modifications and extinguishments, short sales, and deeds in lieu. We have contacted the Office of Mortgage Oversight for more information about the settlement program and are waiting for an answer.
- Rapid price gains in California real estate may be encouraging lenders to back off or delay short sales because they hope to cash in on higher prices later this year.
The recent declines in short sales and foreclosure sales may give the impression that distressed property sales – the sum of short sales and bank REO resales – are becoming a thing of the past. In reality, we point out that since the beginning of the year, distressed property sales comprised 50.5% of total California property sales (Part 2). We see three reasons why California’s market in distressed properties will continue to be a significant portion of the housing sales market:
- Nearly 1.9 million, or 27 percent, of California’s nearly 6.9 million homeowners with a mortgage are underwater (ForeclosureRadar.com),
- 370,000, or more than 6%, are delinquent (NOD, Notice of Default) on their mortgages (Lender Processing Services) and
- 95,000, or 1.4%, are in foreclosure (ForeclosureRadar.com).
Thus, mining distressed property listings for investment opportunities will remain a key activity for agents and investors.
Part 2: California distressed property sales still greater than 50% of total sales in 2013
Director of Economic Research
About Madeline Schnapp:
Madeline Schnapp brings more than 20 years of economic analysis and forecasting experience to ForeclosureRadar. Prior to joining ForeclosureRadar, Madeline was Director of MacroEconomic Research for TrimTabs Investment Research, Inc., a leading provider of financial research to the institutional investment community. While at TrimTabs, Ms. Schnapp was responsible for developing several proprietary real-time economic indicators to track employment, job demand, wages and salaries and disposable income well in advance of traditional government indicators. Prior to TrimTabs, Ms. Schnapp was Director of Market Research with O’Reilly Media, and pioneered the use of web spiders to track real-time economic activity in the information technology sector.
About PropertyRadar®: PropertyRadar.com features unprecedented tools to search, manage, track and analyze pre-foreclosure, foreclosure auction, short sale and bank-owned real estate. ForeclosureRadar has been serving its customers for nearly five years and counts several thousand investors, Realtors®, government agencies, and other professionals among its subscribers. PropertyRadar has been cited as an authoritative source by Bloomberg, 60 Minutes, Wall Street Journal, Associated Press, and other leading media outlets. The company was launched in May 2007 by Sean O’Toole, who spent 15 years building and launching software companies before entering the foreclosure business in 2002. From 2002 to 2007, Sean O’Toole successfully bought and sold more than 150 foreclosure properties in California. PropertyRadar is privately held and based in the North Lake Tahoe Area.