Falling Foreclosure Numbers Real or Fake?

Peter Viles over at LA Land recently reported on an interesting item – it seems foreclosure rates in California are dropping rapidly because of a new law that requires lenders to actually contact homeowners before preceding with foreclosure filings. He cites data from another website, Foreclosure Radar, showing the effect this new law is having:

Foreclosure Radar reports that the number of notices of default filed in September dropped 61.8% from August levels, and the number of notices of trustee sale filings — which mark the end of the foreclosure process — dropped 47.3% in a month.

While it sounds like a good thing, Foreclosure Radars’ founder makes the case that requiring the notices just prolongs the inevitable, and thereby slows an overall recovery. He also says it makes foreclosures numbers a waste of time for those seeking to understanding the market.

Sean O’Toole, founder of ForeclosureRadar, says the new law has made month-to-month foreclosure statistics “useless in understanding market conditions.”

More, from O’Toole: “We expect SB 1137 to have no long term impact beyond delaying the foreclosure process for homeowners, and slowing the overall recovery.”

The new California law encourages loan modifications as an alternative to foreclosure, a common goal of various government programs. O’Toole, however, is doubtful that loans can be successfully modified on a broad scale in California:

Given the significant negative equity now occurring in most California foreclosures, modifying loans to affordable levels either requires large principal balance reductions or extending the unsustainable teaser rates that created the foreclosure crisis in the first place. Wide scale adoption of large principal balance reductions also pose significant risks, as they are likely to encourage non-defaulting homeowners to default in the hopes of securing similar reductions. As such, either type of loan modification is likely to result in increased default, and/or foreclosure activity in the future, a consequence clearly not intended.

So be warned: A drop in foreclosures doesn’t mean we’ve hit the bottom of the market…just that paperwork is backing things up.