NEW YORK – 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 50 attorneys general for more than a year over allegations of faulty and fraudulent paperwork used to repossess homes. With Thursday’s agreement, banks are likely to resume property seizures.
“The best thing about the settlement, frankly, is that it will be done,” said Stan Humphries, chief economist for Seattle-based Zillow Inc., a provider of home-sales data. “The shadow of the settlement hung over the market for a year now.”
The backlog of foreclosures has trapped homeowners in properties they can no longer afford, depressed neighborhood prices by increasing the number of abandoned homes and led banks to tighten mortgage credit standards.
Foreclosure starts fell 46 percent in December from October 2010, when the investigation into the so-called robo-signing of mortgage documentation began, according to Irvine, Calif.-based RealtyTrac Inc.
The agreement will direct $17 billion to writing down debt to buffer about 1 million homeowners from foreclosure through mortgage forgiveness, forbearance or loan modification programs, according to Housing and Urban Development Secretary Shaun Donovan. About 750,000 borrowers may get direct payments of as much as $2,000 to compensate them for servicing errors.
Principal reductions and other loan modifications will be accessible to a small universe of borrowers because the deal doesn’t include loans owned or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, which pools and sells Federal Housing Administration loans.
The five banks included in the settlement control or own 7.3 percent of all outstanding single-family mortgages, according to Inside Mortgage Finance.
“The primary beneficiaries of any principal reductions, loan modifications or refinancings are really a universe that excludes 92 percent of mortgage borrowers,” said Guy Cecala, publisher of the newsletter.
A surge of home seizures may drive down values, at least for a while. 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.
“All of this will result in more foreclosure pain in the short term as some of the foreclosures that should have happened last year instead happen this year,” Daren Blomquist, a RealtyTrac vice president, said in an email Thursday.
About 5 million homes have been lost to foreclosure in the U.S. since 2006, according to RealtyTrac.
“I think there’ll be more price weakness, because we’ll see the number of distressed sales pick up,” said Mark Zandi, chief economist for Moody’s Analytics Inc. in West Chester, Pa.
Home prices have dropped 33 percent from their July 2006 peak, according to the S&P/Case-Shiller index of values in 20 U.S. metropolitan areas. About 11 million U.S. homeowners have negative equity, or owe more on their mortgages than their homes are worth, according to CoreLogic Inc., a real estate data provider. That has limited their ability to sell or refinance and reduced the incentive to keep paying.
HOME SALE PRICES KEEP DROPPING ACROSS WASHINGTON STATE
Sales of existing homes in Washington rose in the final quarter to 2011, but prices continued to drop.
A report by the Runstad Center for Real Estate Studies at the University of Washington said the rise in sales reflects bargain hunting and the large number of distressed properties in lower-priced neighborhoods.
Sales of homes were 9.6 percent higher than in the fourth quarter of 2010, the report said.
But the statewide median price was down 8 percent from 2010, to $219,700. That’s the lowest fourth-quarter price since 2003, when the median was $205,700.
“The 2012 market will continue to challenge sellers trying to preserve their equity,” said Glenn Crellin, associate director of the center.
The Associated Press
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