Defaults, Foreclosures Fall -- But Housing Recovery Not in Sight

With stocks dramatically shifting on a whim and debt concerns in the U.S. and Europe heightening investor fears, one thing antsy investors don't have to worry about is mortgage rates.

Meanwhile, fewer people defaulted on their mortgages in July, with default notices falling 7% from the month earlier to 59,516 U.S. properties, according to RealtyTrac, an online marketplace for foreclosure properties. Defaults were down 39% year-over-year.

Even as key housing numbers and optimism improve, however, industry trackers will not go so far as to call it a full housing recovery, and some even claim the sector could face downfalls through 2015.

While it would be nice to report that foreclosure activity is dropping because of an improvement in the housing market or even in the overall economy, thats simply not the case, said Rick Sharga, senior vice president of RealtyTrac.

The delinquency rate on mortgages improved to 5.98% during the second quarter, hitting its lowest in two years since rates peaked at 6.9% in the fourth-quarter of 2009, according to trend data company TransUnion, which derives its numbers from 27 million anonymous consumer reports.

The national mortgage delinquency rate, or the rate of borrowers 60 or more days past due, fell for the sixth-straight quarter to 5.82% over the last three months, led by improvements in 49 states and the District of Columbia.

The only increase in missed payments last quarter was in Vermont, but at 2.98%, it still remains far below the national average. In metropolitan statistical areas, 79% saw declines, much better than the 68% last quarter and the 44% last July.

Relatively low home prices and high unemployment continue to exert pressure on delinquency rates; however Tim Martin, who overlooks the U.S. housing market in TransUnions financial services business, said those troubles are more than offset by the impact of more conservative lending policies by banks as they approve consumers with higher credit scores.

In 2008 the housing bubble popped as banks sold mortgages to unqualified consumers, which in many cases ultimately led to default and foreclosures, and investor trading of risky, complex mortgage-backed securities imploded, causing billions in losses.

Not only are these consumers less likely to default if house prices continue to edge downward throughout the year, but their willingness to repay their debt obligations in the face of high unemployment rates is greater, Martin said.

It is because of these dynamics that lenders today take a much closer look at the borrower's income history and overall debt situation than before the recession began in 2007, he added.

Mortgage delinquencies have improved for six straight quarters and Martin said the pace of improvement seems to be picking up as tighter lending standards and consumers timely payments offset the impact of falling home prices, and investors flee to Treasury bonds. TransUnion predicts rates will close 2011 just above 5%.

While Martin called the news encouraging, he warned that at their current level, rates are still nearly three times the pre-recession norm, and with the current pace of improvement, may not reach those levels again until the end of 2015.

Foreclosures falling, but recovery still a ways off

Foreclosures, too, are on the decline. Some 212,764 U.S. properties filed for foreclosure last month, a decrease of 4% from June and 35% from the year-earlier period, according to RealtyTrac.

The latest improvement marks the 10th straight month of year-over-year decreases in foreclosure activity and the lowest monthly total since November 2007, according to chief executive of RealtyTrac James Saccacio.

This string of decreases was initially triggered by the robo-signing controversy back in October 2010, which forced lenders to substantially slow the pace of foreclosing, but the downward trend in foreclosure activity has now taken on a life of its own, he said.

Processing delays and national and state-level efforts to prevent foreclosures such as loan modifications, lender-borrower mediations and mortgage payment assistance for the unemployed may allow more distressed homeowners to avoid foreclosure, according to Saccacio.

Still, though, one is every 611 U.S. homes filed for foreclosure in July, and Nevada, California and Arizona continue to struggle the most.

Hurt by struggling Las Vegas, Nevada posted the nations highest foreclosure rate for the 55th straight month in July, with one in every 115 housing units receiving a foreclosure notice. However the 9,930 foreclosed homes were slightly lower than a month ago and down 28% from 2010.

Led by weaknesses in Stockton, California had the second worst rate in the country, with one in every 239 houses units getting foreclosed. While Arizona dramatically improved its foreclosure rating after holding the second worst spot for the past seven months, it still saw one in every 273 housing units foreclosed.

Were looking at a 44 month low (on foreclosures) due largely to process delays and a saturation of foreclosure properties in some of the hardest hit markets, Sharga said.

The stark figures are a reminder that the falloff in foreclosures is not based on a robust housing market recovery but on short-term interventions and delays that will extend the current housing market woes into 2012 and beyond, Saccacio said.

Until this law jam breaks up and foreclosure activity starts to get back to levels it should be at right now, it portends a long, slow recovery for an already embattled housing market, Sharga said.