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Foreclosures in/foreclosures out.

In this month's mortgage performance data, we found some signs of improvement for market participants. While national foreclosure inventory levels have remained steady for the past 14 months, the pipeline showed increased activity in January (see Figure 1). Both foreclosure starts and foreclosure sales were up almost 30 percent from the previous month.


For some observers, the increase in both foreclosure starts and sales may sound like bad news. But more foreclosure starts going into the pipeline (FI) and more foreclosure sales coming out (FO) is essential to reducing the delinquency backlog and returning the mortgage industry to stability.

Not only is the FIFO pace up, it is up across multiple categories--a further indication of progress.

Most of the January increase in foreclosure starts is due to repeats. Repeat-foreclosure starts occur when loans enter the foreclosure process as required by the investor, but then are removed for loss-mitigation efforts, document review and moratoria, then are subsequently put back into foreclosure.

While up slightly in January, new-foreclosure starts are near four-year lows.

Foreclosure starts were up in both judicial (+39 percent) and non-judicial states (+2o percent). From 2008 through 2011, mionth-over-month changes in foreclosure starts have been almost identical for both types.

On average, judicial states start the foreclosure process after 12 months of delinquency--not all that different from non-judicial states, which start after 11 months. The non-judicial states with the largest increases in foreclosure starts were Texas and Rhode Island; Florida and New Jersey topped the list in the judicial states.

Government-sponsored enterprise (GSE) monthly foreclosure starts were up 6o percent over the previous month, while all other investor categories were up about 10 percent. This is further indication that servicers are smoothing out their compliance with GSE foreclosure requirements and likely becoming more efficient in the process.

Note that these data facts are from January, and the settlement between major servicers and the states' attorneys general occurred in February. Hopefully the settlement will free up resources to further focus efforts at resolving the lingering pipeline constraints.

Turning to the "FO" part of the foreclosure FIFO equation, foreclosure sales. were markedly up in January. In October 2010, as scrutiny increased over the processing of foreclosures, foreclosure sales dropped off significantly, particularly in judicial states. For loans in the foreclosure pipeline, this increased the average length of delinquency at sale from 13 months to 20 in non-judicial states and from 19 months to 30 in judicial states.

Also for judicial states, foreclosure sales in January, as a percentage of foreclosure inventory, were more than 5o percent higher than at any other point since late 2010. If this trend continues, over time, the average delinquency at foreclosure sale will drop, particularly for judicial states, as loans with multiyear delinquencies are finally resolved.

Foreclosure sales were up most for the most-delinquent loans. In 2009, foreclosure sales were noticeably highest among the least delinquent. In January, foreclosure sales were highest for the most-delinquent loans (24 months or more delinquent).

Part of this is simply common sense--there are many more severely delinquent loans now needing resolution. But what is key is that the pipeline is moving, even for the most delinquent category of loans.

Foreclosure sales are up, but not yet keeping pace with the delinquency backlog. In January, more than 40 percent of loans in foreclosure were more than two years past due, and there are still many delinquent loans that have yet to enter foreclosure. The Home Affordable Modification Program (HAMP) extension and settlement-related modifications may well cure some of these delinquencies, but also risk adding additional time before starting foreclosure to those that do not qualify.

As we wait for--and you work for--delinquencies to work their way through loss mitigation and the default process, here are some trends to watch for that indicate resolution:

* A decrease in the gap between the inventory of delinquent loans and loans in foreclosure;

* A decrease in the gap between foreclosure starts and foreclosure sales; and

* A decrease in the average number of months' delinquent at all stages of foreclosure.

The foreclosure inventory is bloated and will remain so for many months. Each month that these gaps decrease is one step closer to an acceptable risk-adjusted level. In the not-too-distant future, we hope to report that foreclosure FIFO levels are down--foreclosure starts in, foreclosure sales out; resulting in a just-in-time inventory for an efficient, stable and healthy mortgage market.

Herb Blecher is senior vice president, analytics, for Jacksonville, Florida-based LPS Applied Analytics. He can be reached at
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Title Annotation:Full Disclosure
Author:Blecher, Herb
Publication:Mortgage Banking
Date:Apr 1, 2012
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