It’s a very long way from over

by Paul Bellamy, ESOP Director of Research and Development

There’s been a great deal of local and national media recently telling us the housing market is bouncing back and rampant home foreclosures are receding into a collective bad memory.  While this kind of positive housing coverage is understandable (we call it foreclosure fatigue), it misrepresents the actual situation facing residents of Cuyahoga County. In fact, in 2012 home foreclosures increased in Cuyahoga County by more than 5.3%.

2006 2012 Total and Resi Mort FCs

So while the total number of foreclosure filings declined last year (blue bars), residential mortgage foreclosures increased from 9,405 in 2011 to 9,905 (red bars). Foreclosures are not always easy to measure, and few people understand the statistics that get bandied about in the press.

Pie Chart

The home foreclosures that have caused so much pain, wealth destruction and displacement are in shades of blue in the pie chart below.  While they are the predominant type of foreclosure case in any given year, they are joined by tax foreclosures (yellow); commercial foreclosures (green); and “other” residential foreclosures, for example post-decree divorce or probate cases, (red).

Of the 12,847 foreclosure cases filed in Cuyahoga County in 2012,  3 out of 4 were the type of case we associate with the foreclosure crisis: a mortgage lender filing to attach a home and evict a homeowner in default on their loan. These are the cases that actually increased last year, but you are not likely to hear much about them from the mainstream media.

Unfortunately, the foreclosure crisis is still thriving in Cuyahoga County and many years from fully resolving.

Most “rip and read” media won’t point out that housing markets are very local and distinct by nature. California is not Ohio; Cuyahoga County is not Hamilton County; Cleveland is not Solon; and Kamms Corners is not Mt. Pleasant. Given how long this crisis has dragged on, we might have a vague sense that the worst of the foreclosure crisis happened in the city of Cleveland, and to a degree that is true.  Having more vulnerable, credit-starved neighborhoods set up the city to suffer the most damage from the rampant predatory and subprime lending that caused the crisis. However, in terms of the volume of cases filed in the last few years, the suburbs are “out producing” the city by a factor of roughly 2 to 1.

Predicting the next phase of this catastrophe is very problematic.  Students of the foreclosure crisis have noticed a changing mix of variables that have produced separate and distinct foreclosure “periods.”  Initially, it was the Predatory and Subprime loan Period, where the primary cause for loan defaults was the crummy loan itself.  That was followed by the Unemployment Period where the financial crisis devastated the American economy and household income loss was primarily driving defaults. Recently we have been in the Robo-Period.  Much of the industry’s filing volumes are related to the robo-signing scandal and national litigation against the mortgage servicers for the staggering amounts of perjury and forgery they committed pursuing foreclosure actions in the courts.

Long View

What seems evident is that it will take longer to clear the backlog of home defaults and foreclosures than it took to run up to the peak of the crisis. Foreclosures started climbing steadily as early as 1996 until 2003 and 2004. Then they spiked causing the crisis to hit early in Cleveland, and Ohio as well. But since leveling off in 2008, the decline in filings has been only gradual.

There are reasons to expect that it will continue that way. The banking industry has not been forced to account to shareholders for the staggering loss in value to these mortgages. So it’s in the best interest of the banks to stretch out the defaults out as long as possible before they have to recognize the inevitable loss and the hit to their balance sheets. Servicers don’t have strong incentives to move foreclosures quickly and lost notes, mortgages and defective assignments are still plaguing the system. Many filings don’t go to sheriff sale and the family stays in the home after the first foreclosure is dismissed. These households often slide back into serious default. Thus, many of the “new” cases are actually re-defaults and re-filings against the same homeowners.

Until the foreclosures clear, it is important to keep the grim reality of foreclosures front and center on the public agenda, notwithstanding the foreclosure fatigue that causes us to rely on the understandable wish for them to go away. They haven’t and won’t anytime soon and until then, will continue to hurt our communities, drain value from our homes and undermine our tax base.