My Mortgage Blog

In a report released last week, Foreclosure Radar cited the fact that fewer foreclosures were initiated in prominent Northern California Counties-- Santa Clara, Alameda, San Mateo and Contra Costain January than at any time since 2006. Notices of default fell lower than any levels achieved since the firm began recording data in September of that year. Similarly, notices of sales fell to 2007 levels. And the number of homes actually sold on courtyard steps, the standard foreclosure procedure, were at their lowest level since 2007.

One of the things that is a bit odd about this data is that the improvements seem to have occurred all at once rather than sequentially. We might have expected the foreclosure initiations to decrease first, then the notices of sale, and finally, the actual foreclosures. That they didn’t fall sequentially suggests that were seeing a change in attitude among many lenders, more than that were seeing a change in the number of foreclosures that could, in more ordinary circumstances, be occurring.

For the ailing homeowner, as for the broader real estate economy, this is good news mostly. It seems to reveal the changes that are resulting from the fact that major lenders are far more ready and willing to work with their borrowers to engineer short sales that close far more efficiently, to forgive a bit of the owed principal for underwater homes, to help homeowners avoid losing their homes.

I said mostly good news because the real estate market has been thriving, in an awkward way, on investor purchases of distress properties. Last December, 40% of all sales in Sacramento were funded by cash, not by purchase money loans. Since the level of sales was high, this is somewhat sobering. It suggests that the volume of real estate sales is currently dependent on factors like heavy investor participation that aren’t usually as significant in a normal market.

It means, most likely, that the strength of the market is being exaggerated by unusual investor activity. And, unless were wrong here, that activity is likely to slow in the foreseeable future.

Further, real estate consultancy RealtyTrac noted that January’s dramatic decline in foreclosures is a widespread phenomenon in California. In Sacramento, for example, the numbers were the lowest since you guessed it 2007. And RealtyTrac linked the improvement to the implementation of the Homeowner Bill of Rights in California, which became law on January first.

Lo and behold, for the first time since January 2007, California did not have the most properties with foreclosure filings among all states. [Peter Carey, Sacramento Bee]

But notice well the full implications of this. First, Big Lenders seem to be much more willing to work with buyers and avoid foreclosures. Its early in the game, but if you’re wondering why the Big Lenders are suddenly anxious to reduce the number of foreclosures (and you’re probably not wondering, actually), its extremely likely that the minefield for lenders created by the Homeowners Bill of Rights will make lenders far more reluctant to start up foreclosure processes.

If this is so, is it good? Only time will tell. The downside is that it will decrease the number of foreclosures and distress listings that have fueled the investor market, quite possibly slowing the rise of home prices as a result.

The other side of that coin, though, is that, at the same time that they slow the advance of home values, the reduced foreclosure filings are likely to bring more homes to market, as fewer potential sellers wait for home prices to rise further before listing their homes. And that should mean more sales, more activity, more profits and more new construction.

But it also means that we lose one artificial support for sales the foreclosure market that has created such a following among investors and substitute another artificial support the concern about bill-of-rights-inspired litigation that will make lenders see red when they consider initiating foreclosures.

So who knows when well have a market that is walking entirely on its own legs? Were talking real estate here, and the answer is probably, Never! It is incumbent upon us, therefore, to watch the artificial forces the legislative acts, the attempts by the government to support homeownership rates, the regulations surrounding lending practices if we want to have any idea of where the market may be going next.

Meantime, we may be seeing another force that could retire the Shadow Market that, to this day, economists warn us about so vehemently.