The Ever-Increasing Foreclosure Pipeline of 45,000 - Homeowners in Limbo

Over the last 3 years more homeowners in Phoenix have entered the foreclosure process than have come out of it. Currently the system is backed up with more than 45,000 homeowners who are waiting to be foreclosed on. These pending foreclosures have been growing from just 2,300 in June 2006 to the astonishing number it is at today. Experts predict foreclosures will increase even more before they level off, most likely in the next 12 months.

The reasons for the backlog are heavily argued:

- banks are purposely limiting the flow of foreclosure homes into the market, which prevents further sliding of home prices and would allow the Phoenix market to stabilize sooner

- banks are stalling the foreclosure process because the demand for higher-end homes is very low and selling off assets at sharply reduced prices could cause smaller banks to fail

Banks have been quiet about their strategies for working with pending foreclosures. One thing is for sure, the number of pending foreclosures (properties that have received a default notice because they are 90 days behind and have 90 days left until auction) have increased steadily. Over the last 3 years 73,000 home foreclosures were completed.

Currently numbers indicate we are on track to reach 5,000 foreclosures by the end of June for this month alone, which would be the second-highest month, behind February 09 with 5,240.

Some foreclosures are taking longer that 90 days because borrowers are attempting to work out a loan modification or short sale with the lender. Short sales have increased over the last year but are still only less than 5% of home sales.

One theory of lenders stalling the process is that they are waiting for the bailout funds. The pipeline is a sort of warehousing of properties until it would be helpful to bring them onto the resale market. Dumping 45,000 homes onto the market at one time would deliver a knock-out punch to a real estate economy which is already struggling.

Loan mod guidelines issued by the Obama administration in March appear to be doing a better job of keeping borrowers out of foreclosure.

More than 1/2 of loan mods negotiated prior to the Treasury Department launching of the $75 million Making Home Affordable program in March were back in default within 6 months.

In May the rate of "re-default" fell by about 12% when homeowners payments were reduced through a loan modification.

One reason for the high volume of foreclosures is job losses. Job recruiters are seeing the job market get worse before it gets better. That and homeowners who are simply walking away from mortgages because they owe more than the home is worth.

Commercial property owners and lenders are preparing for a storm of foreclosures as well. The office and retail markets are expected to be hit hard in the coming months. The value of high-end homes and commercial real estate is still on the decline, which means that waiting may cost lenders more, even though they have no desire to take those properties back.

- Arizona Republic Business section 6/23/09