It’s time to pull the bandage off America’s foreclosure problem. The economy is ready to emerge from its recent dark period, but to make it happen soon we need to speed the resolution of millions of troubled home loans. Six years have passed since the crisis began, yet instead of accelerating, foreclosures have slowed.
Until now this has been fortuitous. Time was needed to make sure struggling homeowners were treated properly, and to let the financial system digest its losses and the housing market absorb the flood of repossessions and short sales. But these objectives have been met, more or less. It is time to move on. House prices won’t rise and the economy won’t fully engage until more distresses properties are resolved and put back into ordinary use.
Loans in delinquency and foreclosure are still high.
The foreclosure crisis has been devastating. During the past six years, approximately 5 million homeowners have lost homes through either foreclosures or short sales. Families and communities have seen significant disruption, and falling prices have wiped out trillions in housing wealth. It is hard to be enthusiastic about the economy’s prospects when house prices are falling: Households spend less, small business owners can’t use homes as collateral for loans and local governments are forced to cut jobs and programs as property-tax revenue disappears.
Millions of problem loans remain to be worked through. Some 3.6 million loans are in foreclosure or headed there, with payments overdue three months or longer. (see Chart). This is a lot of loans, given that fewer than 5 million new and existing homes were sold last year. Progress in this area has been agonizingly slow; the foreclosure pipeline now holds only about a half-million fewer troubled loans than at the peak two years ago. Until the flow of problem loans shrinks markedly, it is hard to see how house prices will rise, allowing the economy to grow in a consistent way.
The key to house prices is the share of foreclosure or short sales in the total housing market. When that share rises, house prices will fall, because distressed properties sell for significantly less—currently around 25 percent below non-distressed houses. House prices won’t rise until the share of distress sales falls, which won’t happen until more homes now in the foreclosure process are resolved.
Encouragingly, the problem is no longer one of homeowners falling behind on their payments. The number of borrowers one or two months late is back to its pre-recession level. The problem is that foreclosures are not being processed on time. On average, it takes a year to push a bad loan through the system—from the first notice of default to the final repossession—about twice as long as before the crisis hit (see Chart). In Florida, where the housing crisis has been especially severe and the courts are actively involved in the process, the time needed for foreclosure has soared from six months before the crisis to 2 1/2 years today. In New York, another judicial state, foreclosure takes nearly three years.