After several months of improvement, we are beginning to see home foreclosures pick up again. Last month, data showed that nearly half of states are seeing a dramatic increase in foreclosures. It’s not a giant surprise, many experts are expecting 2012 to be a boom year of foreclosure filings and there are a number of interesting developments that help us to understand why.
In October 2011, legislation took effect to slow the foreclosure process. Banks are now required to file an additional affidavit to begin the foreclosure process. That additional paperwork adds time, and moved many homes facing foreclosure in 2011 into the 2012 foreclosure season. This was more than evident in the dramatic increase in homeowners underwater in their mortgages.
We are now coming to an end of the year of the “robo-signing foreclosure scandal.” Due to improper foreclosure processing by banks, major commercial banks like Wells Fargo and Bank of America found themselves the subject of a massive lawsuit filed by most states. While the court drama played out, the nation’s largest mortgage holders slowed down the pace of foreclosures to avoid fallout from the cases.
However, we’ve seen a settlement and end to the lawsuits and banks aren’t wasting anytime accelerating foreclosures in 2012.
The federal government, in an election year, is aggressively pushing for a mortgage write-down policy. Essentially, those with underwater mortgages can have their mortgage principal magically disappear overnight. The idea has some merits. Those with equity in their home tend to resume payments. However, it also undoubtedly encourages people to default in order to benefit from the write-downs. With agreements with BofA already made and talk of a Fannie-Freddie write down policy, we may be starting to see the fruits of strategic defaults.
Sometimes it’s hard to separate the cause from the effect. Recent studies have shown that debtors have switched their preferences in loan repayment. Americans used to pay their mortgage first, auto loans second and credit cards third. However, that traditional order in consumer payment preference has shifted to car loans first, credit cards second and mortgages third.
It could simply be a product of all the factors above: underwater mortgage, strategic default or slow down in foreclosure process. Regardless, the way people treat mortgage as debt has altered, perhaps for the long-term. It could be an indicator for rises in foreclosure rates.
The housing industry has had a direct impact on our current economic turmoil. The fact that home foreclosure is picking up could mean more unemployment and slower growth. If you want to gauge what the future of the economy will be, keep an eye on the foreclosure indicators I’ve detailed above.
Shaun is the author of the blog Smart Family Finance, a site dedicated to exploring the challenges of family finance; from starting a marriage to starting a family, from teaching your children about finance to helping them pick a college, from single income to multiple income. The intricate world of family finance unlocked, one post at a time.