Q&A: The Outlook for Home Foreclosures

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Home sales and prices seem to be on the mend — but the foreclosure crisis marches on. TIME's Barbara Kiviat spoke with Rick Sharga, vice president of RealtyTrac, a firm that counts foreclosures, to find out what we might expect moving forward.

Where are we in the foreclosure cycle?
To use a baseball analogy, I'd say we're probably in the middle of the sixth inning. We don't see foreclosure activity peaking until sometime in 2010, and we probably won't be down to normal levels of foreclosure inventory until sometime in 2013. Year to date, we've already seen about 2.3 million households receive a foreclosure notice. That's roughly the same amount we had all of last year. We're looking at nearly 7 million households that are past due on their loans or already in foreclosure. There's a pipeline of potential trouble.

But a lot of those homes won't wind up being repossessed, right?
In a normal market, probably a majority of homeowners that wind up being delinquent or even in the early stages of default find a way to cure their loan. Right now the numbers aren't quite as promising. Probably over 50% of the homes that enter foreclosure will wind up going back to the banks. But it is still a fairly large number that either through loan modifications or short sales or refinancing do manage to avoid foreclosure.

Why do you think servicers are still being slow to modify loans?
Foreclosure activity is six times what it was four years ago. Those are numbers that the system really isn't set up to handle. And there are more complications. For example, one of the delays in processing foreclosures right now is that the servicers are trying to make sure that every loan in their portfolio either qualifies or doesn't qualify for HAMP [Home Affordable Modification Program, the Federal Government's attempt to incentivize more modifications]. Even if you've already screened a loan to see if it might qualify for your own modification programs, now you're going to go back and rescreen it. That takes an awful lot of time to work through.

How well do you think HAMP is working overall?
The interim goal of having half a million homeowners in trial modifications has been met. That's a good thing. Unfortunately, for the next couple of waves of foreclosures, the program really isn't optimized to be terribly successful at preventing foreclosures.

Next waves?
Right now we're dealing with a growing number of foreclosures that are being caused by unemployment. If you don't have a steady stream of income, you don't qualify for those loan-modification programs. People with those problems will inevitably wind up going into foreclosure. Secondly, we're going to see a whole slew of option-ARM loans reset next year. In many cases, these properties are going to be upside on the loan amount. In other words, the homes will be worth less than what's owed on the loans. The only way these loans will qualify for modifications is if the lenders took a huge principal-balance write-off, and we just haven't seen any appetite for that so far.

How does all of that fit in with the good news we keep getting about home sales and prices? It seems if the housing market recovers, that should help the foreclosure situation.
It should help. Ironically enough, I think foreclosure sales are contributing to home prices stabilizing. In one way, we have certain markets that may have overcorrected. If you go to a Stockton, Calif., or a Las Vegas or somewhere like that, when there is a bank property on the market, the realtors are getting dozens of offers above asking price. We're seeing bidding wars at the lower end of the market. I think what we're seeing in terms of the home prices may be a little bit of a false positive because of some of these trends. But market psychology being what it is, if the trend stays positive long enough, it could contribute to the market ultimately stabilizing. And that would be a net positive for the foreclosure activity.

Is there any change in the pattern of where houses are falling into foreclosure?
We're seeing two trends. One is we're starting to see an increase in secondary metropolitan markets. It's not just Las Vegas in Nevada anymore, it's Reno. It's not just Phoenix in Arizona, but it's Prescott. I think that's really tracking the buying patterns that we saw a few years ago. The other trend is, if you follow unemployment patterns, you're seeing pretty significant increases in foreclosure in places that have been hit hard by unemployment. So Fayetteville, Ark., and Boise, Idaho, and Portland, Ore. — places that have not traditionally been foreclosure hot spots have all seen foreclosure activity go up pretty significantly.

So what's the big take-away?
We're finally at the point where we can see the light at the end of the tunnel and be reasonably sure it's not an oncoming train. But there is more pain to come. We're not finished with this cycle yet.