California foreclosure activity in the fourth quarter of 2013 dropped to the lowest level since the third quarter of 2006. Foreclosure activity has been steadily declining in the state on an annual basis since the first quarter of 2010.
But there are three signs there are still some old, rotten and fermented foreclosures festering in the California foreclosure pipeline that eventually will be completing the foreclosure process and hitting the market — in 2014 if the market is lucky. If they linger any longer these old foreclosures could really stink things up.
1. Foreclosure starts rebounding
First, California foreclosure starts increased 10 percent on a year-over-year basis in the first quarter of 2014. That might not sound serious, but it stands out because it’s the first annual increase in the state’s foreclosure starts since first quarter of 2012, and even then foreclosure starts increased less than 1 percent from the previous year. The last double-digit percentage annual increase in California foreclosure starts was way back in the first quarter of 2009.
California foreclosure starts increased 10 percent from a year ago in the first quarter of 2014, the first double-digit percentage annual increase in the state’s foreclosure starts since the fourth quarter of 2009.
RealtyTrac predicted this rebound about six months ago after foreclosure starts dropped precipitously in the beginning of January 2013, when a new law called the Homeowner Bill of Rights took effect. That legislation codified in California for all lenders some of the principles of the National Mortgage Settlement for the nation’s five major lenders. Those principles include no dual-tracking (where a foreclosure progresses concurrently while a homeowner is pursuing a foreclosure alternative); and a single point of contact at the mortgage servicer for delinquent homeowners. The law also allows for a fine of $7,500 per loan foreclosed improperly in addition to additional damages that can be pursued by the homeowner for material violations of the law.
The law only applies to California foreclosures pursued using the typical non-judicial process in the state, but interestingly part of the rise in foreclosure starts in the first quarter comes as a result of skyrocketing judicial foreclosures. This indicates lenders in some cases are willing to use the often lengthier judicial process to avoid some of the potential minefields in the re-invented non-judicial foreclosure process. Out of the 20,228 California foreclosure starts in the first quarter, 1,396 were filed judicially — up from just one judicially filed foreclosure start in the first quarter of 2013.
2. Average default amounts rising
The rise in foreclosure starts is clearly not the result of a new wave of distress hitting the California housing market, but old distress finally entering the foreclosure pipeline. That’s clear because the average default amount on the first quarter batch of foreclosure starts is the highest average default amount RealtyTrac has documented in a single quarter since it began tracking this metric in the first quarter of 2011.
The default amount is the amount a homeowner is behind on payments when the mortgage servicer files a public notice starting the foreclosure process. The average default amount on California foreclosure starts in the first quarter of 2014 was $56,415, up 53 percent from the average default amount of $36,839 in the first quarter of 2013. Assuming a monthly mortgage payment of roughly $3,000 — which is likely on the high side — that average default amount represents homeowners who have been missing their mortgage payments an average of 18 months before the bank starts the foreclosure process. On top of that, the average time to complete a foreclosure once it starts in California is now at 429 days.
The average amount California homeowners are behind on payments was more than $56,000 for properties that started the foreclosure process in the first quarter of 2014.
3. Bank-owned homes lingering
That leaves the California foreclosure process at an average of 993 days — more than two and a half years — from the first missed mortgage payment to bank repossession. But the process to completely resolve that distressed property situation takes even longer because it’s taking longer for banks to sell foreclosed properties even after the foreclosure process is complete.
Bank-owned properties that sold in the first quarter of 2014 had been foreclosed an average of 220 days when they were sold, up from an average of 172 days an year earlier.
Bank-owned properties sold in the first quarter of 2014 took an average of 220 days to sell from the time they completed the foreclosure process. That’s actually down from 247 days in the fourth quarter of 2013, but it’s up 28 percent from an average of 172 days in the first quarter of 2013.
That now puts the entire distressed property disposition process at an average of 1,213 days from delinquency to REO sale — well over three years.
The average time it takes to complete the entire foreclosure process, from delinquency to disposition of the REO, is now more than 1,200 days in California.
Real-life example of a sleeper foreclosure
I recently encountered one of these well-aged foreclosures in my neighborhood. I knew it was in foreclosure several years ago, but I assumed the situation had been resolved because the homeowner continued to occupy the home.
But then one day I was walking by and noticed furniture strewn about the lawn and several signs posted in the front window. One of those signs announced the property owner had been evicted by the Orange County Sheriff. Another announced the property was not yet listed for sale, but provided the name and phone number of a real estate agent who will be listing the property for sale eventually.
My curiosity pricked, I looked the property up on RealtyTrac — which I should have been doing anyway as a responsible neighbor — and discovered it had started the foreclosure process in September 2010, but did not complete the foreclosure process and become bank-owned until January 2013. Then it took more than a year before the bank evicted the homeowner, and it will likely be at least another couple months before the property is listed for sale.
This property started the foreclosure process for the most recent owner in September 2010, was foreclosed in January 2013, and the homeowner was evicted in January 2014. The property is still not listed for sale.
I’d call a property like this a sleeper foreclosure. For the last few years it showed no visible signs of being in distress, but now it certainly is, and the longer it sits vacant the more it could negatively impact the values of surrounding homes in the neighborhood — including mine. As more sleeper foreclosures like this across the state are re-awakened it could become a bit of a reality check for the California housing market in 2014.