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Banks Hold Off On Foreclosure Notices

I'm sure you've all seen the headlines from RealtyTrac today that show a new record for bank repossessions.

Foreclosure
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Foreclosure

In some of the news reports today, I've also heard TV anchors make mention of some bright news in the report, that Notices of Defaults (NOD's) are down 30 percent from a year ago.

NOD's are the first stage in the foreclosure process. So that should mean that while there are still a lot of borrowers working through the system, at least the number of newly troubled borrowers entering the system is improving, right?

Wrong.

According to Rick Sharga at RealtyTrac, the NOD number is down only because banks are not sending out NOD's to borrowers who are seriously delinquent.

"We are seeing people in more and more serious stages of delinquency, who in a normal market long ago would have received an initial notice of default or been in the foreclosure process who are not there yet. I do think it is one of the mechanisms that the industry is using to manage supply and demand levels of this distressed inventory to keep the market from melting down."

"We are seeing people in more and more serious stages of delinquency." -RealtyTrac, Rick Sharga

We already know that banks are managing their owned inventory (REOs) by not flooding the market with all the properties they repossessed. They do this so as not to drive home prices down even further (although it's not really working).

I was really amazed to hear this from Sharga, who points to the bucket of seriously delinquent loans as proof. It keeps getting bigger, while the NODs get smaller.

That doesn't make sense.

Yes, banks are trying to get people into modifications, but we already know those numbers are very small in comparison.

Since I was so skeptical, and happened to also be doing an interview with Doug Duncan, the chief economist over at Fannie Mae, about their National Housing Survey released today, I posed the question to him. He agreed with Sharga.

"The survey shows significant softness on the demand side of the equation, and if you are concerned about the broad based economic effects of significant price declines, if you were to bring large quantities of foreclosed or distressed properties onto the market suddenly, you would definitely put serious downward pressure on prices and that would have broad effects," says Duncan.

He went on to say, "The various parties involved [banks, lenders], either on policy or in executing in the market, are attendant to that and are concerned about the possibility about making the problem greater. My sense is that there is not an attempt to avoid the problem but rather to manage the problem to minimize the damages to both the housing sector and to the economy."

This is why Sharga estimates we will not see a peak in foreclosures until 2011.

Questions? Comments? RealtyCheck@cnbc.com

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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