Is the reducing foreclosure rate a ray of false hope?

• Foreclosures topped-out at the end of 2009
• One months past due are on the rise again
• Are these structural anomalies, or signs of worse to come?

Optimistic American commentators may have been correct in stating that foreclosures topped out finally in the first half of the current year. Notwithstanding that, recent declines in property markets coupled to the generally weak state of the national economy suggest that these gains might be transitory. The number of loans in the repossession pipeline dropped during the period January to June 2010 (the first time since 2006) and other delinquency indicators improved as well, according to a Mortgage Bankers Association report released Thursday.

Chief Economist of the Association Jay Brinkman warned that optimism was premature. “It’s more of a hope than anything at this point,” he cautioned. Now that most of the troubled high-interest sub-prime loans have worked through, the respected economist’s concerns have shifted to prime loans where many delinquencies are the result of unemployment. “It takes a paycheck to make a mortgage payment,” he commented wryly.

The drop in the monthly rate of foreclosures during the second quarter of 2010 was relatively light – 9.11% compared to 9.54% in the previous quarter (and 9.6% in the last quarter of 2009, which was the peak). The rate of loans that moved to final repossession was also lower. This flash of light across a gloomy economic landscape comes at a time when news of sales remains bleak. Pre-owned home sales retreated 26% in July year-on-year, and the corresponding figure for new homes was even worse at 32%. This is the worst month ever for July home sales recorded, and far worse than the pundits had predicted.

A leading economist regards the situation as critical and its implications significant. “Up to four million households could still lose their home,” he is on record as saying. “Aside from the considerable social costs, this does not bode well for consumer spending, bank profits or the housing market itself.”

The percentage of homeowners one month past due appears to be on the rise again, and reached 3.51% in the second quarter of 2010 compared the 3.31% prevailing at the end of 2009. The analyst is warning that the reduction in the number of properties going through foreclosure is a reflection of the determination of banks to clear backlogs, as opposed to a promise of fewer in the pipeline in the future. Evidence of this lies in the fact that almost 280,000 American homes were foreclosed upon in July this year, compared to approximately 225,000 in June.

Every foreclosure causes at least one other American family to lose hope. Are these high numbers going to spur another round of strategic defaults? We shall have to wait and see what happens to the volume of foreclosed houses, apartments, and condominiums listed at www.foreclosureconnections.com.