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The Number of Homes in Foreclosure Continues to Decline

Brent Nyitray, CFA, MBA

The Housing Market Continues to Work off Foreclosure Inventory

(Continued from Prior Part)

Government encourages servicers to avoid foreclosure

The federal government has taken numerous steps to reduce foreclosures, starting with loan modification programs. The government is also encouraging servicers to pursue other means of dealing with delinquent borrowers.

Loan servicers handle the day-to-day management of the loan pool for the ultimate investor. They’re responsible for collecting mortgage payments, forwarding the interest and principal to MBS (mortgage-backed securities) holders, and handling delinquent borrowers. Ever since various state regulators and the Consumer Financial Protection Bureau started leaning on Ocwen Financial Corporation (OCN), the servicing industry has been under tremendous regulatory pressure. Originator Nationstar Mortgage Holdings (NSM) has been under intense pressure, as well.

CoreLogic notes that the serious delinquency rate has been falling, as well. In September, it was 3.4%, or about 1,292,000 homes. This is a change of 1.4% month-over-month and 21% year-over-year.

As the real estate market recovers, foreclosures are falling. Early in the real estate bust, many defaults were strategic defaults. In other words, the borrower had the means to pay, but knew that real estate prices were falling and chose to toss the keys to the bank instead of continuing to pay on a depreciating asset. Those strategic defaults are now more or less a thing of the past.

As you can see from the above graph, foreclosures as a percentage of all mortgages outstanding have been declining rapidly. In the second quarter of 2015, they fell to 2.1% of outstanding loans, according to the Mortgage Bankers Association. We should be getting the third quarter numbers out of the MBA soon.

Falling foreclosures add to the inventory problem

Homebuilders such as Toll Brothers (TOL), PulteGroup (PHM), and D.R. Horton (DHI) have benefited from the dearth of inventory. To the surprise of many real estate market observers, the builders, which you can trade via the SPDR S&P Homebuilders ETF (XHB), continue to be able to raise prices. Lennar Corporation (LEN) recently reported third quarter earnings and recorded a 5.4% increase in its ASP (average selling price).

That said, we’re starting to see the sector begin to find merging an easier way to gain scale. Builders Standard Pacific and The Ryland Group recently completed their merger of equals, renaming the company CalAtlantic Group (CAA).

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