Two-thirds of Delinquent Loans Predicted to Be Foreclosed

By:: Kirk Haverkamp | February 16, 2010

An estimated 5 million homes currently behind on their mortgages will be lost to foreclosure or related measures, according to a recent study by a leading real estate data and analysis firm.

The total represents nearly two-thirds of the 7.7 million households that are currently delinquent on their mortgages, according to the study by California-based John Burns Real Estate Consulting. That “shadow inventory” represents approximately 10 months of housing sales at current rates and is predicted to continue to depress housing prices for as long as it takes to clear the surplus out of the pipeline.

The study predicts that efforts to help homeowners avoid foreclosure through loan modifications and other means, such as the administration’s Making Home Affordable Program, will only delay foreclosure and not prevent it in the long run for most homeowners receiving such assistance.

According to the Wall Street Journal, the company’s CEO, John Burns, said that investor demand for foreclosed properties is strong and should keep home prices relatively stable over the next few years despite the additional properties coming on the market. However, a second downturn in the economy could send prices back down again.

A similar study by Standard and Poor’s predicted that 70 percent of homeowners who obtain loan modifications will eventually default again and lose their homes, the paper reported. The S&P study said that mortgage servicers have already given loan modifications to nearly all homeowners who might reasonably be expected to realize a long-term benefit from them.

Instead, S&P reports that servicers are increasingly encouraging delinquent homeowners to pursue short sales instead of loan modifications, according to the paper.

The S&P study said that foreclosure prevention efforts to date have succeeded in delaying many foreclosures and keeping those homes off the market, which contributed to modest gains in home prices over the past 9 months, but expects home values will decline again once those properties come on the market.

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