Bailout

Foreclosure datapoint of the day

By Felix Salmon

HAMP might not have helped lots of homeowners stay in their houses over the long term, but it did push back the point at which they got foreclosed on. To now. Here’s a graph from the latest report from Lender Processing Services:

What you’re seeing here isn’t subprime dreck: it’s sensibly-underwritten conforming loans which were bought by Fannie and Freddie. Through 2009 and the first half of 2010, the rate at which those loans entered foreclosure proceedings was pretty steady. But as we enter the second half of 2010, there’s a huge spike, especially in the loans which have been delinquent for more than six months.

That spike is loans which entered the HAMP modification process, but then got kicked out, for reasons good or bad. Without a successful permanent HAMP modification, foreclosure comes soon enough.

As homes move out of HAMP and into foreclosure, the amount of distressed real-estate sales will rise, and home prices will of course fall in the effected areas, pushing ever more homeowners into the negative-equity status which is very highly correlated with default risk. And so the vicious cycle continues.

We should break that cycle, by forcing loan servicers to allow homeowners to stay in their houses at a market rent. HAMP did its job in terms of pushing off foreclosures for 2009. But now it’s causing more harm than good. And pretty soon, if they continue to rise at this rate, foreclosures are going to be a big political issue again. Some inventive replacement is desperately needed. Ideally one which isn’t cruel and bound to fail.

Full post as published by Macroprudential on August 27, 2010 (boomark / email).