NEW YORK (
) -- Foreclosures continue to pile up on bank balance sheets, and financial companies are faced with some difficult challenges to dealing with the mounting problem.
According to new data from the Mortgage Bankers Association released on Thursday, loans in the foreclosure process at the end of the second quarter rose to 4.3% of all loans, up 45 basis points from the first quarter and 155 basis points from the year-earlier period. The MBA says that while foreclosures on subprime loans have fallen, increases in the foreclosure rates on prime fixed-rate loans had the biggest increase -- a sign that mortgage performance is being driven by unemployment.
"As for the outlook, it is unlikely we will see meaningful reductions in the foreclosure and delinquency rates until the employment situation improves," MBA's chief economist Jay Brinkmann said. "In addition, in some areas where a number of borrowers have mortgages that are larger than the current value of their homes, any life events such as divorce or loss of a job are likely to translate into foreclosures until prices in those areas recover, not just flatten."
Foreclosure listing service RealtyTrac suggests that one in every 355 households received some form of foreclosure filing in the month of July. The number likely will only get worse as more adjustable-rate mortgages reset at higher rates in 2010 and unemployment remains at record levels, making existing home loans too expensive for many homeowners.
Moreover, the Obama administration's Making Homes Affordable loan modification program is set to expire soon, which could soon flood the market with even more foreclosure inventory, says Brad Geisen, the founder and CEO of Foreclosure.com, a national database for distressed real estate data. The bulk of loan modifications made through the program "are going into foreclosure anyway," Geisen says.
"That's really a short-term solution to a long-term problem," he says. "We're going to see a big wave of those properties come onto the market ... probably at the end of the year into next year."
That is unwelcome news for banks, which are becoming overwhelmed with inventory, many industry insiders say. Lenders will be forced to continue to hold elevated levels of loan loss reserves and subsequent capital until the troubled mortgages work their way from delinquent to foreclosed status, and are eventually sold back into the market.
Banks' portfolios of real estate owned for reasons other than direct business purposes, which includes foreclosed properties, are expected to experience peak losses in 2011, even though impairments could remain elevated until 2013, according to analysts at Credit Suisse.
As these "Other Real Estate Owned," or OREO, portfolios usually lag non-performing loan levels by about three to four quarters, Credit Suisse believes "the peak is still more than one year ahead due to the higher inflow of non-performing loans that companies are experiencing."
The analysts suggest that among the regional banks,
have the largest risk to OREO impairment.
Bank of America
offered a glimpse of the troubles foreclosures are posing after saying that non-performing assets during the second quarter were inflated as a result of a moratorium on new foreclosures it voluntarily observed while the Obama administration set up its loan modification efforts.
"Various moratoriums we instituted on foreclosures have had the effect of holding up loans in non-performing status vs. allowing them to clear into
real estate owned and ultimate
ly sell," the company said during a second-quarter conference call to discuss earnings results. But the "formal moratoriums have now been lifted" and "once a loan has been evaluated under all our various
relief programs, if no other alternative exists, those loans will be released into foreclosure."
According to the Center for American Progress just 160,000 trial mortgage modifications were made by loan servicing companies, with another 165,000 offers outstanding. The figure pales in comparison to the more than 1.5 million properties that received foreclosure notices through the first half of 2009, the Washington think tank says.
The government has been hounding lenders to make more progress. Late last month, top government officials met with several big banks including
to hash out a facilitated method to provide relief for homeowners facing foreclosure. The administration is targeting 500,000 trial modifications by Nov. 1, it says.
On a positive note, areas that have been severely hit by the housing crisis are starting to see housing prices rise. Brokers selling properties for banks are seeing somewhat of a bidding war for some properties, says Rick Sharga, senior vice president at RealtyTrac.
"Some of those markets may have actually overcorrected, which is a good thing," he says.
PNC Financial Services
sold more than 1,600 foreclosed properties during the second quarter, the company said. CEO James Rohr said the ability to dispose of those assets is "good news to see that that market is starting to open up," during an analyst conference call. The company declined to comment further on its foreclosure sales.
Still, PNC may be an exception as industry observers say that for the most part, banks are not getting foreclosed properties to market quickly enough, especially since there is increasing buyer interest.
said earlier this month as part of its quarterly results that "a considerable number" of foreclosed homes are not yet on the market.
The hurdles to banks unloading properties are high. The companies must first evict tenants before the properties are able to be listed, and once they take possession, are responsible for making needed repairs and dealing with issues like tax liens and other financial matters.
Some observers say that banks have been purposefully holding back listing foreclosed properties so as to not flood the market, while others speculated that because no one specific regulator to oversee that banks' foreclosure assets, which are typically written down at the time of sale, some banks may be deferring losses by pushing out the sale of repossessed properties to some point in the future.
According to the National Association of Realtors, distressed sales -- foreclosures and short sales -- were 36% of existing home sales in the second quarter. First-time homebuyers represented one-third of the transactions.
Foreclosure.com's Geisen says that more short sales will help the banks move through distressed inventories. Still banks have been reluctant to undergo short sales because that would mean taking a loss on the loan.
Short Sales Are the Answer
Another alternative is for banks' to rent out the foreclosed properties, he adds.
Renting does make sense," Geisen says. For banks "financially strong enough to hold the inventory, the market will be back in two to three years and they will be able to recoup the losses."
Written by Laurie Kulikowski in New York.