Banks Ignore Delinquent Borrowers - CNBC

By: Diana Olick CNBC Real Estate Reporter May 13, 2010

Repres Foreclosed Home

Some encouraging signs on the foreclosure front may not be as rosy as some are reporting.

RealtyTrac, the online foreclosure sale site, shows a 9 percent dip in the number of properties with foreclosure filings in April, month-to-month.

The driver of that dip is a big drop in new notices of default.

The final stage of foreclosure, that is bank repossessions (REO) shot up to a new record high, up 45 percent from a year ago.

When I first read the report I thought, okay, we knew there was a big pipeline of loans that would not get modified and would have to come out the end at some point; now is that point. The fact that fewer loans are going into the pipeline should be our focus, and that's a positive. That's what I thought until I interviewed RealtyTrac's Rick Sharga.

"People are sitting in their houses not paying their mortgages, and the banks are letting those delinquencies extend longer and longer periods of time before they put them in foreclosure," Sharga told me.

That, he adds, is the main reason we're seeing lower numbers of new defaults.

The borrowers are in default, but the banks aren't paying attention, so they don't show up in the numbers.

He goes on -

"The fact that we have six to six and a half million loans that are either seriously delinquent or in foreclosure also suggests we are not nearly out of the woods. If we just started to absorb that inventory at the pace we're currently seeing new foreclosure proceedings we have about a 50 to 55 month supply of loans that yet have yet to be processed, so we have a way to go before we are out of the mess."

I know you're all going to tell me that Sharga works for a company that makes its money selling foreclosures, so he's going to play the bear side.

Take it for what it's worth.

But Sharga makes a compelling point when it comes to redefaults on loan modifications.

A lot of folks are either falling out of the trial modification period or not qualifying in the first place, and those loans are moving quickly to bank repossession.

California-based mortgage analyst Mark Hanson adds perspective with a look at "cancelled foreclosures."

These are not tracked by RealtyTrac, but they "bite right out of Notices of Default and foreclosures, so to get a real idea of how 'credit' is doing, you have to add a certain percentage back."

That's because Hanson believes the redefault rate on these modifications will be at the very least 50 percent 6-19 months out.

Banks Ignore Delinquent Borrowers - CNBC