The Detroit News

Foreclosures threaten Metro Detroit housing recovery
New wave of defaults could choke off comeback

Brian J. O'Connor / Detroit News Finance Editor

A budding recovery in Metro Detroit home prices could soon be wiped out by a new wave of foreclosures and a growing stockpile of bank-owned homes and condos.

April's report that the median home price for the 10-county southeastern Michigan region rose from $25,225 to $37,000 seemed like the rare ray of good news in the region's troubled housing market.

The cause for that improvement included a drop in the supply of unsold homes and the fact that regular home sales were finally outpacing the sale of foreclosed properties, according to data from RealComp II, a Farmington Hills real estate data firm.

But that glimmer of encouragement could be short-lived: The foreclosure glut appears to be back.

A report released last week found that despite a new state law and other programs aimed at preventing foreclosures, the number of Metro Detroit homes seized by banks in April nearly doubled from the same month last year.

Data from RealtyTrac Inc. of Irvine, Calif., showed the number of Metro Detroit homes taken back by banks rose from 2,072 in April 2009 to 4,111 last month -- a jump of 98 percent. The number of homeowners falling into serious default and likely to lose their homes in the coming months rose 8 percent for the same period.

On top of that, the new foreclosures are adding to a huge stockpile of bank-owned properties that still haven't hit the market. According to RealtyTrac, nearly 44,000 bank-held properties sat on the books during April in Wayne, Macomb, Oakland, Livingston, Lapeer and St. Clair counties. That's 45 percent more than the 30,218 condos and homes listed for sale in those counties during the same month.

The jump in new foreclosures coincides with a backlog of bank repossessions that built after the state put new foreclosure rules in place last summer, and despite efforts by lenders, consumer groups and the federal government to help struggling borrowers modify their mortgages and stay in their homes.

Jobless can't afford homes

The problem: No matter how much leeway or extra time a lender might grant troubled homeowners, too many out-of-work Metro Detroiters simply can't afford to keep their homes.

"Unemployment or a reduction in income has been the main reason for people struggling now regarding their homes," said Kathy Conley, a housing specialist with Greenpath debt counseling in Farmington Hills. "The unemployment is still there, so they weren't able to work anything out, even with extra time. A lot of properties wound up in that backlog, and now that backlog is breaking loose."

The huge increase in the number of bank-owned properties -- called "bank real estate owned" by lenders, or "bank REOs," for short -- comes after five months of steady declines in property seizures that started in August, right after the Michigan Foreclosure Prevention law took effect. The law requires lenders to wait 90 days before taking a foreclosed home to a sheriff's sale, so the homeowners can try to work out a loan modification.
The sheriff's sale is the last step in the foreclosure process, which starts when a homeowner defaults by missing two or three payments, is then notified that a foreclosure sale is pending, and finally loses the property to either an auction bidder or, in most cases, to the original lender.

In August, many troubled homeowners got a timeout before their homes were auctioned off, reducing the number of properties going back on the balance sheets of banks and other lenders. Foreclosure notices also temporarily dropped, but then jumped back up after two months.

Besides the state foreclosure prevention law, other factors keeping foreclosed homes off the auction block include more bankruptcy filings, owners trying to arrange "short sales" for less than the full amount owed and federal home loan modification programs.

Some real estate experts also argue that lenders are slowing the pace of foreclosures to help manage their corporate earnings by keeping loan losses down, especially during the last few months of 2009, before filing year-end financial results.

"We think the government programs, as well as other factors, were delaying a lot of properties from going to that final stage of foreclosure," said Daren Blomquist, a RealtyTrac analyst. "Now it appears that backlog is finally being taken back by the banks. The risk is that, in some areas, housing prices have stabilized and another flood of REOs could threaten that fragile stability."

To avoid that -- and further protect their balance sheets -- lenders are increasingly holding more of those repossessed homes and condos off the market in what real estate experts call the "shadow inventory."

"It's a game of 'extend and pretend' to delay the recognition of the loss," said Greg McBride, senior financial analyst at the consumer finance site Bankrate.com.

"Most financial institutions just don't have the capital cushion to absorb all those losses in a short period of time," he said. "And there's likely some wishful thinking that home values will rebound before they put many of those properties back on the market."

Foreclosure pace quickening

Whether the shadow homes come back on the market, they're likely to be joined by still more foreclosed homes. The total pace of foreclosures -- the combination of bank seizures and notices of new foreclosures -- is approaching the record numbers seen during the summer of 2007, at the height of the mortgage meltdown.

For his part, real estate agent Gerry Miller of Real Estate One in Clinton Township would like to see more bank-owned properties hit his part of the market.

"When one does hit the market and it's priced right, there's often multiple offers," Miller said. "Those properties are listed at extremely low prices, but there are as much as five other offers and the property gets bid up over the asking price."

He hasn't seen many foreclosures listed lately but, if they're out there, Miller says they should all get "For Sale" signs.

"If there is a phantom wave of bank-owned properties waiting to hit the market, my recommendation to the banks is let them out," Miller said. "If the supply goes up by a large amount, it is going to affect prices, but you've got to find the bottom sometime."

boconnor@detnews.com (313) 222-2145

From The Detroit News: http://www.detnews.com/article/20100517/BIZ/5170339/1001#ixzz0oC8rCEzZ