Will the bank deal lead to a spike in foreclosures?

The recently announced, 49 state bank settlement deal is going to be a subject of discussion for some time to come as we sort out all the details. Roughly three quarter of a million homeowners will receive payments for damages suffered in the “robo-signing” foreclosure process. Millions more will apparently have the opportunity to refinance their loans or make other adjustments to ease their financial situation. But according to one analysis from Bloomberg, before the relief arrives there will likely be a massive spike in foreclosures.

The $25 billion settlement with banks over foreclosure abuses may result in a wave of home seizures, inflicting short-term pain on delinquent U.S. borrowers while making a long-term housing recovery more likely.

Lenders slowed the pace of foreclosures as they negotiated with attorneys general in all 50 states for more than a year over allegations of faulty and fraudulent paperwork used to repossess homes. With yesterday’s agreement, banks are likely to resume property seizures…

A surge of home seizures may drive down values, at least for a while, in a fragile market. The number of new foreclosure filings fell 34 percent last year, according to RealtyTrac, resulting in a backlog that now may flood the market with low- cost properties. About 1 million foreclosures will be completed this year, up 25 percent from 2011, according to the firm.

So help is on the way, but not quite yet. Apparently there were a large number of mortgages which were facing foreclosure, but banks were holding off on acting while they waited for the results of these negotiations. With the uncertainty removed, they will now move to close the books on the majority of those while shuffling the details on millions of others to hopefully make them less likely to fail.

The other, secondary effect predicted by Bloomberg is that a new round of foreclosures and homes sitting vacant will drive housing values down even further in the short term, which seems fairly obvious. The real question is, has the market finally found its bottom and reached a realistic level, or are we still riding the remnants of a bubble?

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David Strom 6:41 PM on January 26, 2023