Mortgage Settlement to Drive Increase in Foreclosures

Last week, we explained that the National Mortgage Settlement gave banks a roadmap showing them how to proceed with the backlog of foreclosures (known as shadow inventory) that has been hanging over the housing market for more than a year. We believe that understanding this dynamic is crucial in determining home prices as we go through the year. We believe the number of houses sold will grow somewhat dramatically in 2012. However, the increase in demand will be offset by an increase in supply of distressed properties that sell at a discount.

Others also feel there will be an increase in foreclosures as we move through the year.

Calculated Risk

“It does appear the number of completed foreclosures will increase following this settlement – especially in some judicial states with large backlogs – so there will probably be more REOs (lender Real Estate Owned) for sale.”

Brandon Moore, chief executive of RealtyTrac

“The settlement sets forth clear guidelines for lenders and servicers to follow when foreclosing, which should allow them to push through some of the delayed foreclosures from last year.”

Susan Wachter, professor of real estate and finance, University of Pennsylvania’s Wharton School

“There remains a danger that ‘a wave of foreclosures’ may destabilize the housing market. The logjam has to be unleashed – [the settlement] will do that.”

Mark Zandi, chief economist Moody’s Analytics

“I think there’ll be more price weakness, because we’ll see the number of distressed sales pick up. But I think the price declines will be modest.”

What does ‘modest’ mean? Celia Chen, Moody’s Analytics suggests:

“The latest settlement will hasten the pace of filings and push up the distress sale share of total sales over the next several quarters, driving national house prices down another 3%.”

Bottom Line

The increase in supply will cause prices to soften even though we will see an increase in demand. Check with a real estate professional to help you understand how this will impact your local market.

Attention Real Estate Professionals

Watch the replay of our free webinar on shadow inventory here.