U.S. Home Foreclosure Rate Could Spike in 2011

Rising ForeclosuresIn January, RealtyTrac said they expect the number of foreclosure filings to increase by up to 20% this year.

Now we have even more evidence of a foreclosure rate spike in 2011.

At the end of 2010, a record number of mortgages in the U.S. were in some stage of the foreclosure process. Roughly 4.63% of home loans were in foreclosure in the fourth quarter of 2010, an increase from 4.39% in the previous quarter.

As the foreclosure freeze and robo-signing scandal unwind themselves, we will likely see a continued rise in foreclosure rates throughout 2011. It’s all about the pipeline.

Foreclosure Pipeline Bursting at the Seams?

Think of a pipeline with a reservoir on both sides — one for intake and one for output. On the intake side, you have homeowners who are defaulting on their mortgage loans. The pipeline itself represents the foreclosure process, which may take three to six months depending on the state. On the output side, you have foreclosure homes for sale. People default on their loans, the banks foreclose on them, and the foreclosure property eventually goes back on the market.

When banks started to put their foreclosure processing on hold last year, it emptied the pipeline to some extent. This mess began around October of 2010, when the robo-signing scandal burst wide open. The number of foreclosure filings in many areas fell, as a direct result of these foreclosure “freezes.” But the rate of default held steady, and even rose at the end of last year. The banks might have slowed down their rate of repossessions, but homeowners kept falling behind on their mortgage payments at a steady pace. You can see where this is going.

Though lenders are still mired in governmental scrutiny, they will undoubtedly quicken their foreclosure pace in the months ahead. As that happens, there will be a backlog of foreclosure homes to contend with. The pipeline will be even fatter than before. This will contribute to a rise in U.S. foreclosure rates in 2011. How much of an increase? The folks at RealtyTrac believe that the number of foreclosure filings could increase by 20% this year. We’ve seen a one-percent increase already.

Right now, the foreclosure rate is being held in check by the continued drag of moratoriums and legal scrutiny. According to James J. Saccacio, chief  executive officer of RealtyTrac: “lenders have become bogged down in  reviewing procedures, resubmitting paperwork and formulating legal arguments.”

If lenders start moving at something close to full speed again, we could easily see a record number of foreclosures in 2011.

Of course, all of this may come as no surprise. A recent survey on the Home Buying Institute revealed that most consumers expect to see additional foreclosure inventory in 2011. A related survey found that most home buyers are comfortable with the idea of buying a bank-owned home. Still, there probably won’t be enough qualified buyers to absorb the rising number of foreclosures.