Fore-Closing In On A Problem

Three important notes on this morning's StupidiNews foreclosure story:

The lion's share of April's filings were ones in the early stages of the process, such as notices of default, according to James Saccacio, RealtyTrac's CEO.

Bank repossessions actually fell 11% for the month, compared with March. That's due, according to Saccacio, to the many legislative and company moratoriums that have prevented the foreclosure process from starting on delinquent loans.

Because fewer loans entered the process in past months, there had been fewer getting all the way to repossession. But now that those moratoriums are over, the volume of foreclosure filings is increasing.

"It's likely that we'll see a corresponding spike in [repossessed properties] as these loans move through the foreclosure process over the next few months," Saccacio said in a prepared statement.

In other words, these foreclosures are new, not just delayed ones from late 2008. These are second-wave foreclosures, ones spawned by rising unemployment and adjusting mortgage options. These will continue to rise. There will not be a recovery in the housing market soon. That V-shaped recovery is a myth.

That's not happening. Numbers both yesterday and today show home prices are continuing to drop sharply and foreclosures continue to rise. There's no bottom in the housing market in sight, let alone one coming in the next six weeks.

On to point two:

Ten states accounted for 75% of all foreclosure activity, and they fell generally into two categories: one-time bubble markets and the rust belt. California, which easily outpaced every other state with with 96,560 filings. Other hard-hit former boom towns were Florida (64,588), Nevada (16,266) and Arizona (16,244).

Those rust belts towns with the most filings were Illinois (13,647), Ohio (12,324) and Michigan (10,830). Georgia (11,521), Texas (11,314) and Virginia (6,254) filled out the rest of the top 10 list.

In other words, there's a lot more foreclosures to come outside California, Nevada, Florida, and Arizona. States that have been rocked by unemployment like Indiana, North and South Carolina, Alaska, and Oregon will be the new source of growing foreclosure numbers in 2009 and well into 2010. That means home prices will be dropping in cities like Charlotte, Indianapolis, Charleston, Portland and Anchorage. While there may be slight improvements in the most ravaged cities like Las Vegas, San Bernardino, Miami and Detroit, there are plenty of other cities that will feel this second wave of foreclosure action.

The final point may be the scariest:

The loss of home values put many more mortgage borrowers underwater, meaning they owe more on their loans than their homes are worth. That increases foreclosure rates in two ways: Underwater borrowers have no home equity to draw on should to pay for unexpected expenses such as big medical bills or major car or home repairs. That's makes them more likely to miss payments. And when home values fall far below mortgage balances, homeowners often walk away from their loans.

"There has been much more 'deed-in-lieu-of foreclosure' activity lately," said Sharga. This is a transaction in which borrowers simply tell their banks that they're not going to pay their mortgage and hand back their keys, and deeds, to their lenders.

"People are making the rational financial decision to walk away from underwater homes," he said.

More and more Americans will mail in their keys to the bank, aka "jingle mail", and walk away from their underwater homes. One in five homeowners are now underwater on their mortgages, and that number will soon reach one in four. This is a disaster for our economy. Back in February 2008, Roubini predicted as many as 10 to 15 million homeowners would take the jingle mail route that would blow up the system. It turned out that there were plenty of other possible triggers that exploded into the economic disaster of 2008, but the jingle mail time bomb is still out there. And the banks, already insolvent, will not survive the detonation when millions of homeowners stick them with the bills.

What that means is the V-shaped recovery that the stock markets are betting on is not only not going to happen, but we're in for another economic disaster period and soon. Don't buy the happy-face recovery talk.

The worst is still to come.