The seemingly insatiable foreclosure monster that has terrified the housing market over the past few years has at least one last good scare left in it before it fades into the darkness from whence it came.
We expect that scare to come this year, on the heels of an eerily quiet 2011 on the foreclosure front.
Foreclosure filings were reported on 1.9 million U.S. properties in 2011, a decrease of 34 percent from the 2.9 million in 2010, according to the RealyTrac 2011 Year-End Foreclosure Market Report. Total U.S. foreclosure activity and the U.S. foreclosure rate in 2011 were both at their lowest annual level since 2007.
One of the bright spots in the report was the Washington, D.C., metro area, where annual foreclosure activity hit the lowest level since 2006. A total of 19,176 properties in the metro area had a foreclosure filing during the year, down 56 percent from 2010 and down 66 percent from the peak in 2009 — when 56,347 properties in the Washington area had foreclosure filings.
The Washington metro area’s foreclosure rate was well below the national average and ranked 128th out of the 211 metro areas nationwide with a population of 200,000 or more.
Unfortunately, this good news is just a little too good to be true, both nationwide and in the DC area. We believe that the dramatic drops in foreclosure activity in 2011 were artificially inflated because of foreclosure processing delays triggered by the robo-signing controversy around the beginning of the fourth quarter of 2010.
U.S. properties foreclosed in the fourth quarter of 2011 took an average of 348 days to complete the foreclosure process, up from 336 days in the third quarter and up from 305 days in the fourth quarter of 2010. The length of the average foreclosure process has increased 24 percent from 281 days in the third quarter of 2010, when lenders began to re-evaluate foreclosure procedures in earnest after robo-signing hit.
These delays are affecting some states more than others. For example, the average foreclosure process in Maryland as of the end of the fourth quarter was 634 days, the fourth longest of any state behind New York, New Jersey and Florida. The average time to foreclose in Maryland is up from 396 days in the third quarter of 2010 — before the robo-signing controversy came to light — and up from 167 days back in the fourth quarter of 2007.
Meanwhile, the average foreclosure process in Virginia as of the end of the fourth quarter was 132 days, the fourth shortest of any state behind Texas, Delaware and Kentucky. The average foreclosure timeline in Virginia was still up from 91 days in the third quarter of 2010 and up from 90 days in the fourth quarter of 2007.
The astronomically long timelines in states like Maryland reflect a dysfunctional foreclosure process that is inefficiently dealing with the glut of distressed properties weighing down the housing market. Although the longer timelines are buying distressed homeowners more time, they are also prolonging a robust housing market recovery.
But there were strong signals in the second half of the year that lenders are beginning to selectively push through delayed foreclosures — at least in some local markets. For example, in the Washington metro area there were two straight months of year-over-year increases in default notices — which start the foreclosure process in many states — in November and December. Those two consecutive annual increases followed 20 consecutive months of annual decreases in default notices in the metro area.
Not surprisingly those increases were largely driven by increases in Maryland counties given that Maryland has seen bigger delays in foreclosure processing than Virginia.
We expect this trend to be repeated in more markets throughout 2012 as lenders slowly but surely push through batches of deferred foreclosures that they believe can stand up to the increased scrutiny now focused on foreclosure documentation and procedures. This will mean foreclosure activity in 2012 will increase from the artificial trough of 2011 in most markets, although we don’t expect it to return to the peak of 2010.
So steel yourselves for another scare from the foreclosure monster this year. But take heart, that monster is weakening and will eventually be defeated.