Foreclosures Down: Is the Glass Half-Full or Half-Empty?

The Lehmann Letter (SM)

Two articles on the real-estate crisis appeared on CNN's website this morning:

“Foreclosures Down for Seventh Straight Month"

http://money.cnn.com/2011/05/12/real_estate/foreclosures_fell_again/index.htm?iid=HP_River

and “Obama: Homeowners Need More Help"

http://money.cnn.com/2011/05/12/news/economy/obama_housing/index.htm?iid=HP_LN

The first article reported a drop in foreclosure filings and bank repossessions of foreclosed properties. That looks good, BUT……..

The article makes clear that banks have NOT slowed foreclosures because fewer homeowners are in trouble. Rather, banks have slowed foreclosures because they are double-checking their paperwork and because many markets already have a glut of foreclosed homes. The banks know that too many foreclosed homes mean a lower price for the property that they wish to sell. Consequently banks have slowed foreclosures in order to help markets absorb distressed properties. That way the banks receive a better price for the homes on which they have foreclosed and will foreclose.

Unfortunately that does not guarantee a reduction in future foreclosures. One-quarter of American mortgages are underwater. Many homeowners cannot or will not pay their mortgages. Their payments are in arrears even if the banks have not begun foreclosure proceedings. That means a longer stretch out of distressed homes going on the market in the years to come. It does not mean an overall reduction in distressed properties. True: The slowdown in foreclosures may help home prices, but it may not. The slowdown may only serve to lengthen the period of distress.

As for the President’s observation that homeowners need help…….. Who can argue? But the President has no new, viable plan. Indeed, House Republicans have just finished voting to discontinue the President's old plan. And the banks will not voluntarily agree to write down loan amounts, which is the only meaningful relief that would assist distressed homeowners. The President's moral suasion will fall on deaf ears.

"Foreclosures Down" looks like the glass is half-full. But in truth it serves to highlight the fact that the glass is half empty.

© 2011 Michael B. Lehmann