Foreclosure Crisis Update

The crisis tally so far: about 4.7 million completed
foreclosure sales from July 1 2007 through 2012 (extrapolating the 4th quarter), and more than 12 million foreclosure
Adding short sales brings the total home losses to well above 5
million.  If we define the shadow
inventory as mortgages presently more than 90 days delinquent or in the
foreclosure process already, another 3 to 3.5 million homes are at risk,
although the success of modifications will determine how many of those end in
home losses.

The trends are all in the right direction, but the rate of
recovery is still agonizingly slow. Beware of charts that start on or after January
1, 2007.  To return to normal foreclosure
levels, we need to see all these rates return to something like early 2006
levels.  For example, the third quarter
2012 foreclosure numbers are the best since 2008, but still 2.5 to 4 times what
they were in 2006.  The foreclosure
inventory is still 4% of first lien residential mortgages, down from its 4.6%
peak in 2009 but still way above its 1% level in 2006.

For the mortgage bubble to burst (as contrasted with the
home value bubble) total mortgage debt needs to come down from its $11 trillion
peak, but as of September 30 residential mortgage debt has just dipped below
$10 trillion

Screen shot 2012-12-22 at 8.58.34 AM

The combined effect of plummeting home prices and downward-inching mortgage
debt is pictured in the chart. 
Trillions of dollars of home equity wealth were wiped out in the first
years of the crisis, and the recent gains, touted by HUD in the chart title, are dwarfed in comparison.  

bright spot in the third quarter data is the continued upward trend in
principal reduction modifications.  OCC reports that a stunning 75% of
modifications made by banks on mortgages in their own portfolios included
principal reduction.  For Fannie and Freddie mortgages, on the other
hand, principal reductions, at 0%, showed no change.

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