Don’t Let the Talk of the Coming Foreclosure Flood Distract You from the Recovery
The terms of the state attorneys’ general $25 billion settlement with the five largest mortgage servicers over flaws in their servicing and foreclosure practices was due out at the end of last month. We’re still waiting to see those filings, which should be coming soon. But ahead of that some observers speculate that the settlement is a precursor to a “flood” of foreclosures. Recent history does not support that conclusion and, more importantly, focus on a possible flood diverts attention from the positive effect that the settlement could have on the very real issue of shadow inventory—the 2 million to 4 million (based on who you ask) homes with mortgages in some stage of delinquency or foreclosure that must be worked through before we are truly out of the housing crisis.
The flood narrative states that the large servicers are concerned about their exposure and the finality of foreclosures in light of new servicing standards set out in the settlement, and they therefore are holding off foreclosing on properties until after the settlement is complete. Now that it is done the floodgates will open.
But it’s worth looking back at the last time mortgage servicers held back foreclosures, which was fall 2010 after the announcement of the “robosigning” scandal in which servicers’ employees blindly signed thousands of documents attesting that they understood the details of the loans before they filed for foreclosure. Ally suspended a large portion of foreclosures September 20, 2010 pending an internal review. Chase followed September 29 and Bank of America suspended all foreclosures on October 8. Wells Fargo and Citigroup did not institute moratoria.
By January 2011 the moratoria at the largest servicers were all but gone and foreclosures resumed. For the next year foreclosure filings remained essentially flat and even dropped some.
When foreclosures started up again they were at levels two-thirds that of the quarter before the moratorium in the third quarter of 2010, and stayed at those levels all year. So even with three of the largest servicers stopping foreclosures altogether in late 2010, we didn’t see a big flood in 2011. Now, when there has been no moratorium and no obvious pent-up foreclosure need, there is no evidence of a coming flood.
Talk of the flood, however, distracts from the bigger issue—the shadow inventory. The potential flood of foreclosures would likely be in the range of 100,000 to 200,000 properties over a short period of time. The shadow inventory, on the other hand, represents millions of homes that will take years to work back into the market, depressing prices and slowing the recovery for years.
Rather than creating a flood of foreclosures, the state attorneys’ general settlement is more likely to have a substantial positive effect on the shadow inventory by providing a $17 billion fund for principal reduction and mortgage modifications that could prevent a large number of properties from entering the shadow inventory because homeowners become delinquent in their payments.
By way of comparison, activity from the Home Affordable Modification Program—the federal government’s program offering mortgage servicers cash incentives to offer sustainable mortgage modifications—is one-eighth that size, consisting of around $2 billion in servicer incentive payments that led to nearly 1 million permanent loan modifications (including trial modifications the number is closer to 2 million).
The bottom line: There is no evidence of a coming foreclosure flood due to the settlement, but concern about it could cause us to overlook how the settlement could help keep more homes from falling into foreclosure.
Alon Cohen is a Consultant on housing for the Center for American Progress. Daniel Molitor is an Intern with the Economic Policy team at the Center.
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