The Breakdown

Explaining Southern California's economy

Faster foreclosures and loan mods mean less money for homeowners

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The LA Times has a story today about the accelerating foreclosure process. The bottom is that banks are ramping up their foreclosure activities, after allowing them to lag for various reasons over the past few years. 

There's a day-of-reckoning quality to this. Absent some kind of massive federal assistance program to homeowners who are either losing or about to lose their houses — beyond what's already been enacted — this means that the housing market will soon be hit with a large number of "real estate owned" (REO) properties. 

I blogged recently about a Federal Reserve white paper that proposes a solution to this foreclosure crunch, in the form of investor-owned rentals. The rental market is picking up and there's a need for more single-family residences, which shouldn't be surprising given all the families that are losing their homes to foreclusure. 

But there's a downside. Here's the LA Times:

Connie Der Torossian, co-president of the Orange County Home Ownership Preservation Cooperative, a nonprofit housing counseling agency, said the distressed homeowners she helps are getting loan modifications or sales dates from banks far faster than in the past. The days of troubled borrowers spending two years in foreclosure limbo are at an end, she said.

"We're not seeing people have to wait six or seven months to get an answer," she said. "It's more like six or seven weeks."

For a homeowner headed for default and foreclosure, time is everything. Two years in "foreclosure limbo" might sound like hell, but that episode gives the homeowner the opportunity to effectively shed mortgage debt and get his financial house in order, socking away funds to pay for a move and the initial cost of renting. With periods of unemployment lasting much longer than in the past, limbo for many looks like Nirvana. 

On the plus side, banks are offering homeowners financial incentives to foreclose — a few thousand for relocation. And there's plenty of anecdotal evidence that homeowners who've been under the foreclosure cloud for years can basically demand that the bank pay them to get out of Dodge.

But with the pace of foreclosure picking up, this should all start to change. We're headed back to the good old days, when default and foreclosure was a real threat, not a chance to live rent-free for a few years.

Follow Matthew DeBord and the DeBord Report on Twitter.

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