US Foreclosures Rise 55%, Banks Seizures Climb 184%

New US legislation, effective 1 October, meant to help home owners stay in their home may not be coming soon enough. Today RealtyTrac, an online marketplace for foreclosure properties, announced staggering increases in foreclosure and bank seizure rates. In their July US foreclosure data RealtyTrac reported foreclosure activity up 8% from the previous month and has risen to 55% from last years levels. Perhaps even more alarming is the steep increase of bank repossessions and REOs that surged to 184% year-over-year.

Foreclosures Increase Housing Inventories

Surges in foreclosure activity continues to flood housing inventories, a market already in surplus. Now approximately 17% of existing homes for sale, as reported by the National Association of Realtors in June, foreclosures are a growing percentage of this glut. Adding to the injury the distressed nature of these properties are sure to further depress housing prices.

Despite sinking prices home sales remain sluggish.

Stabilizing this uncertainty in home prices is, according to Alan Greenspan, the precursor to broader economic recovery. In an interview with the Wall Street Journal earlier this week Greenspan predicted home prices "...to start to stabilize or touch bottom sometime in the first half of 2009," while caveating that "prices could continue to drift lower through 2009 and beyond."

Bank Repossessions Cause Uncertainty

Housing prices that continue their free fall, bloated housing inventories, and slow home sales combine to create an even more toxic cocktail for banks--Real Estate Owned (REO). These portfolios of repossessed homes are notoriously expensive for banks to administer and maintain. In addition, with each passing day unsold REO properties historically realize precipitous declines in value.

During a recent conference call Daniel Mudd, chief executive of Fannie Mae, made his position clear stating, "this is not the time to be holding on to [foreclosed homes] and hoping for a better day." A statement that signals more fire sales on these bank held properties.

Uncertainty in the value of this growing class of assets on bank balance sheets is starting to hit their stock prices. However, some industry moderators like Yves Smith, an Investment Banking contributor to the Naked Capitalism blog, are cautioning that the hit to valuation may be even deeper due to a lack of data and insight as to the loss severity inherent to these REO sales. Certainly this equity clarity in homes is crucial to marking to market the collateral support in a myriad of mortgage backed assets.

Will the Housing and Economic Recovery Legislation Help?

This of course brings us back to US government efforts to stem the tide of foreclosures, keeping homeowners in their homes. Significant FHA modernization, increases in conventional loan limits, and government sponsored down payment assistance is on its way.

However, rapid depression in home prices may force home owners into the fabled "put option." This term taken from options trading is not an exact metaphor, but highlights the problem. In a mortgage environment besieged by rapidly declining equity and problematic financing structures, like option ARMs where principle balances can balloon, borrowers may be left with mortgages that exceed the value of the underlying asset--thus inticing the "mailing of the house keys" to the bank despite the consequences.

Unfortunately, the legislation seems unable to cure equity gaps and mortgages that exceed property valuations. More uncertainty.