Author Says: “Foreclosure machinery creaks back to life.”

This year, the banks began to once again review unpaid home loans. It takes a while for the creaky, wheezy, inadequate machinery of processing defaulted mortgages to rumble back to life. So it has — and we should expect to see signs of increasing foreclosures and distressed sales any day now.

The first data point supporting this was April’s existing-home sales. That gave us an early clue about what was to come. During the abatement period, distressed home sales, including foreclosures and short sales, had fallen substantially. They were down to 28 percent of existing-home sales for April – significantly less than the 37 percent a year earlier.

Distressed homes tend to sell for about 20 percent less than non-distressed sales.
The voluntary foreclosure abatement not only reduced the number of foreclosures, but also created the appearance of improving home prices. In reality, it was merely temporarily removed low-price, distressed properties from the overall pool of homes for sale.
That fortuitous set of circumstances appears to be over. Current foreclosure filings — default notices, scheduled auctions and bank repossessions — increased in May by 9 percent, according to the RealtyTrac monthly foreclosure report.

This was right on cue. With the abatements over, foreclosure starts are creeping up again. As the foreclosure machinery ramps up, the negative ramifications they bring will expand. More distressed sales, lower prices and increasingly tough comparable appraisals are likely over the next 12 months.

Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. You can follow him on Twitter: @Ritholtz

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