A Look Inside the Foreclosure Pipeline

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For the first time in years, a guy who quantifies the foreclosure crisis got to report some good news.

Kyle Lundstedt's colleagues at LPS Applied Analytics call him Dr. Doom, as he calculates all the numbers for the monthly Mortgage Monitor Report.

But this month he got to report a drop in mortgage delinquencies, down more than 11 percent month-over month, to the lowest level since 2008.

"We're starting to see that there are a lot of folks who are still hanging in there," says Lundstedt. "The population is a better credit quality population."

The subprimes, Alt-A's, the bad lending of the housing boom, have largely moved through the system already, not to mention that big banks and servicers are getting far more aggressive with loan modifications. One quarter of the loans that were more than 90 days delinquent last year are now current. That's not to say they will all stay current, but that's a good sign.

Unfortunately, that's all Dr. Doom could muster on the bright side: "It's progress; it's not game-changing."

That's because the foreclosure pipeline, that is loans 90+ days delinquent or in the foreclosure process, is enormous. Foreclosure inventory is at a new all-time high. There are so many loans still waiting to go into foreclosure...in fact the total number of loans 90+ delinquent is 45 times the size of the current monthly foreclosure sale number. 45 times!

It would take 4 years, at the current foreclosure sales pace, to process all those troubled loans, and that's just selling the loans back to the bank, not selling the foreclosed properties onto the housing market; you can add another year for that. And that's why I'm not exactly ready to call a bottom to home prices. All that foreclosure inventory, for that long period of time, will weigh on prices no question.

But isn't it just in those few bad states, like Florida, Arizona, Nevada and California?


Those were the states with the biggest subprime lending problems, which means they have seen the bulk of the foreclosures completed already. Yes, their volumes, their absolute levels, will be the highest, but the greatest increase in REO (bank-owned) activity is yet to come in places like the East Coast, the Rockies and the Pacific Northwest. That's where the borrowers fell behind because of unemployment and the recession, not because of the quality of their loans.

So is the foreclosure crisis over? I think that all depends on the ultimate cost of the clean up.

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