Foreclosures up 75% in 2007
More than 1% of all households slipped into foreclosure in 2007, as more borrowers failed to keep up on their mortgages. Nevada led the nation with the highest foreclosure rate, while California had the highest total number of foreclosures.
U.S. foreclosures jumped 75% in 2007 to more than 2.2 million filings. The end of the year saw an acceleration in the rate of foreclosure activity, which was up 7% in December from the previous month and 97% from the previous year, according to the data firm RealtyTrac. December was the fifth straight month to have more than 200,000 filings, erasing any hopes that the surge in foreclosures was slowing.
"We really don't see any indication that the rate of activity will come down anytime soon," says Rick Sharga, RealtyTrac vice president.
A total of 642,150 foreclosure filings -- from notices of default to bank repossessions -- were reported in 2007's fourth quarter. That represents a 1% increase from the previous quarter and an 86% boost from the fourth quarter of 2006.
The number of foreclosures is expected to increase steadily through the second half of this year, when the next wave of subprime adjustable-rate mortgages (ARMs) -- the industry's worst-performing loans -- is expected to reset.
Until these low-quality loans work their way through the system, Sharga says, there's no reason to expect the number of foreclosure filings to drop.
Nevada, Florida, Michigan lead the pack
While foreclosure filings totaled more than 2 million in 2007, the number of properties in trouble rose to 1.3 million, up 81% from the 717, 522 homes in foreclosure in 2006. (Some homes have more than one loan out on them.) More than 1% of all households were in some phase of the foreclosure process last year, up from just over 0.5% in 2006.
Nevada posted the highest rate of foreclosure for the year -- more than three times the national average -- followed by Florida and Michigan. Rounding out the top 10 were California, Colorado, Ohio, Georgia, Arizona, Illinois and Indiana.
Nevada's 66,316 foreclosure filings on 34,417 properties last year represented a 215% increase from 2006 and were largely a result of high-risk lending and a frenzy of real-estate speculation. Almost 3.4% of households in Nevada were in foreclosure in 2007.
Florida had the second-highest foreclosure rate, with more than 2% of households entering some stage of foreclosure. This was due in large part to an extended boom that had pushed prices up so high that borrowers were stretching themselves to get into a home. A total of 279,325 foreclosure filings on 165,291 properties were reported in the Sunshine State during the year -- more than twice the number reported in 2006.
Michigan had the third-highest foreclosure rate for 2007, with 1.95% of its households filing foreclosure, largely a result of auto-industry layoffs in Detroit. A total of 136,205 filings on 87,210 properties were reported last year -- a 68% increase from 2006.
California keeps foreclosure agent busy
California posted the highest number of total foreclosure filings for the year, with 481,392 notices of default, action and bank repossession on 249,513 homes. That number had more than tripled from 2006, and its foreclosure rate of 1.92% was the fourth-highest in the country.
Indeed, Southern California Realtor Leo Nordine, who specializes in bank-owned properties, had more listings than he could possibly sell last year so he cut back his business to just two financial institutions. "It's just been a steady increase since 2006," Nordine says, with two new bank repossessions being handed to him every day. "This is by far the scariest (downturn) I've been through so far."
Banks, Nordine says, are now slashing prices on their repossessed homes by $10,000 to $30,000 a month in Southern California just to move them off their books. But buyers aren't exactly snatching them up. "They know the longer they wait, the better off they are going to be," he says.
Meanwhile, these price cuts are further dampening sale prices on surrounding homes, Nordine notes, delaying a recovery.
Government aid has yet to help
RealtyTrac estimates that between half a million and three-quarters of a million bank-owned properties in the U.S. will return to the market this year.
December's surge in foreclosure filings suggests that state intervention efforts have yet to make a dent in the problem. The bailout program announced in December by Treasury Secretary Henry Paulson did not affect these numbers, as it did not include borrowers already in default. (Read more on who qualifies for the bailout here.)
Still, activists don't hold out much hope that that program will turn the tide of foreclosures either, mainly because many homeowners won't qualify to have their loans refinanced. Moreover, the program is voluntary and doesn't require lenders to report the outcomes of their discussions with troubled borrowers. (Read more on why the plan is being called inadequate here.)
The Center for Responsible Lending (CRL) estimates that the Paulson program will help only about 118,200 U.S. borrowers, or about 3% of the outstanding subprime mortgages with adjustable interest rates. "Even if it's up and running as best as can be, it's not going to stem the tide, says Kathleen Day, CRL spokeswoman.
Refinancing gets bogged down
State-run counseling and refinance programs are encountering some of the same problems borrowers are in getting workouts done.
Brian Hudson, director of Pennsylvania's Housing Finance Agency, says he has been able to refinance 29 loans since launching a program to refinance struggling homeowners last October. The agency has another 300 loans that are being reviewed as part of a separate campaign which seeks to work out loans in which the borrower owes more than the house is worth. However, resolving these cases with servicers and investors has been difficult.
"I'm frustrated in that it's tough to get some decisions quickly when you may have a sheriff's sale in a week or two," Hudson says.
The CRL says that for every loan modification done on a subprime adjustable-rate mortgage -- those mortgages at the root of the current crisis -- foreclosures outnumber it 13 to 1.
Activist groups push to change laws
Activist groups such as the CRL are pushing for reforms to give distressed borrowers an opportunity to work with their lender.
One is a change to U.S. bankruptcy laws to allow court-supervised modifications of distressed mortgages for homeowners, who have typically been excluded. Legislation to lift this barrier for homeowners is now moving through the House and Senate.
And a bill introduced in the New York Assembly seeks a one-year moratorium on foreclosures, similar to the one enacted in Massachusetts last spring, which gave victims of predatory lending a 60- to 90-day moratorium after a complaint.
The mortgage banking industry opposes moratoriums and changes to the bankruptcy law. Lenders such as Chase Home Lending say they have ramped up hiring and are now able to modify far more loans than they did last spring. "We are geared up and able to meet the demand," says Chase spokesman Tom Kelly. Chase has modified 17% of its subprime ARMs that were scheduled to reset by March 2008, in most cases lowering the rate on loans, Kelly says.
Since last year, it has begun calling its ARM customers to warn them that their rate was going up and to inform them of their new payment amount and where to call if they were not going to be able to make that new monthly payment.
"We are trying to talk to them ahead of time before we get into problems," Kelly says.
By Melinda Fulmer, MSN Real Estate