Last week I wrote about the government's Housing Bailout Bonanza and some staggering figures from Lender Processing Services about delinquency rates and foreclosure turnover. In particular, it was the long cycle between borrowers going delinquent and going into foreclosure, which averages out to 417 days. As it turns out, there are roughly 7 million people currently living in their homes while in delinquency, and they essentially don't have to pay for more than a year under the cocktail of mortgage bailout plans currently in action. The reason I bring up those previous thoughts is because they dovetail well with the latest foreclosure report from RealtyTrac.
In March, foreclosure filings hit a new record high of 367,056, increasing by 7.6% year over year, and perhaps more alarmingly, 19.0% month to month. The brunt of the increases is coming from the later stages of foreclosure, including the actual foreclosure sales and bank repossessions. What this means is the increases in foreclosures largely represent new supply going directly onto the market. And, as we know, this new supply is likely to strain prices.
What is notable about the increases largely coming at the later end of the foreclosure cycle is that it represents borrowers who were already delinquent, but are just now being considered for eviction. That brings us back to the 417 day foreclosure cycle; it seems as though homeowners who have been delinquent for months on end may now be being thrown into the long-waiting fire. Yes, it it just one month of data so far, but right now it looks as if the banks have finally given up after persuing all options ala the White House's HAMP mortgage modification plan. Speaking of HAMP, it just so happens the program began last February, approximately 400 days before the end of March. That brings us back once again to the 417 day foreclosure cycle. Could it be that we are now cycling over the first applicants of the HAMP program?
We already know for a fact that HAMP is delaying more than a million borrowers' payments, but only converting about 20% into the full program. That means 80% of the HAMP borrwers are most likely destined for foreclosure... at some point. If you asked me now why I think foreclosures are suddenly surging, I would be inclined to point my finger at the HAMP program cycling over. Make no mistake, HAMP has good intentions. In fact, you have to wonder where foreclosures would be now without it considering they can hit new record highs with the program in place. Nevertheless, we may now be witnessing the downside of government programs that are in effect temporary fixes.
The worry now from my standpoint is that after the initial spike in March, more increases may be in store. Throughout 2009 the amount of borrowers under HAMP increased quickly, and we may only be cycling over the first batch. What we also need to be aware of is that there are roughly 7 million delinquent borrowers out there. We can keep putting bottlenecks into the foreclosure system, but keep in mind there is a massive overhang of potential foreclosures over the housing market. If we were to suddenly let go of all of our backstops, the housing market would go back into a tailspin without a doubt. The problem I suspect we are facing now is that our backstops are being overwhelmed and fresh supply may bring home prices back down. We are at a very important crossroads to the recovery of our economy. Are we willing to throw more money at this problem? Can GDP drag itself through another housing dip?