Lender Turmoil Impacts Foreclosure Numbers

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Auction Investment Opportunities Continue to Increase

January 2009 CA Foreclosure Activity

Foreclosure is currently the only functioning mechanism for clearing the negative equity that is otherwise leaving homeowners in a prison of debt

ForeclosureRadar (http://www.foreclosureradar.com), the only website that tracks every California foreclosure, and provides daily auction updates, issued its monthly California Foreclosure Report for January 2009. January brought an unexpected, across the board drop, in the total Notices of Default, Notices of Trustee Sale, and sales at auction, not only from the prior month, but year over year as well. Even after accounting for the fact that January had two fewer days than December, only properties sold at auction saw a slight increase of 3.4 percent. Analyzing the data at the lender level, it appears these drops can be primarily attributed to the significant changes taking place among the country's major lending institutions. Wells Fargo, with its recent acquisition of Wachovia, saw a drop in Notice of Default filings of 46 percent, while JP Morgan, which acquired Washington Mutual, saw a drop of 49 percent. Bank of America, which earlier acquired Countrywide, saw a significant 281 percent increase in filings, though still below the levels Countrywide experienced in the second quarter of 2008. Given the significant integration issues faced by most major lenders today, it would be irresponsible to draw any conclusions about market direction from current foreclosure numbers.

The number of properties sold to third parties at auction continues to rise - up 6.6 percent from December 2008 and more than doubling from January of last year. Lender discounts at auction statewide averaged 41.4 percent from the outstanding loan balance for January, a significant increase from the 16.1 percent average discount a year earlier. Overall, lenders discounted their opening bid on 92 percent of properties taken to sale, making prices at auction reasonable for third party buyers.

High-level findings for January include:

  • Notices of Default decreased 11.8 percent over Notices recorded for December, to a total of 36,138 default filings, a 10.6 percent decrease from January 2008. Due to the fact that January had two fewer recording days then December the average daily decrease was only 3 percent.
  • The average daily volume for Notices of Trustee Sale filed from December to January decreased 8.3 percent, with a month over month total decline of 16.6 percent. The 22,328 Notice of Trustee Sale filings for January represent a 4.5 percent decrease from Notices of Trustee Sale recorded in January 2008.
  • Properties taken to sale at auction decreased 6 percent from December to January; a 23.1 percent decline from the same period last year, and a 46.8 percent decrease from peak volumes seen in July 2008. The 15,314 properties sold at auction represent $6.8 billion in loan value. Slightly more than 94 percent of these properties were sold back to the bank at auction.

"Foreclosure is currently the only functioning mechanism for clearing the negative equity that is otherwise leaving homeowners in a prison of debt," says Sean O'Toole, founder of ForeclosureRadar. "While it is our hope that better mechanisms for clearing unsustainable mortgage debt are ultimately identified, we are delighted to see continued improvements in the efficiency of California's foreclosure marketplace as evidenced by the increasing number of sales to third parties at auction."

In Orange County, third parties purchased foreclosures with loan balances totaling $67.5 million at auction, representing 14 percent of the total properties sold. The average discount from the loan balance to the opening bid in Orange County was 34.1 percent. Ten percent of properties sold in Sacramento County went to third parties, with an average discount of 45.9 percent. San Francisco County, with one of the lowest average discounts in the state of just 24.6 percent, still saw 9 percent of auction properties sold to third parties.

A review of Notices of Default filed within the last 120 days, commonly referred to as preforeclosures, against data from Multiple Listing Services, found less than 7.8 percent are currently listed for sale. Marin and Sonoma Counties have the highest numbers of listed preforeclosures at 15.4 and 14.1 percent respectively. These figures are disappointingly low given the significant advantages to both homeowners and lenders of completing a short-sale when compared to allowing the home to be sold at foreclosure auction.

A similar review of properties taken back by a bank in the last 120 days found that only 12.9 percent were currently listed. Contra Costa County, at 20.1 percent, has the highest percentage of listed bank owned properties. These numbers are not surprising given the time involved in evicting the prior owner or occupant, and preparing the property for sale. In fact, it is not unusual to see bank owned properties listed six months to a year after the foreclosure auction.

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Dan Downey
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