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Robo-Signing Scandal Dampens Housing Recovery Hopes

Recent bank scandals involving robo-signing foreclosure documents and improprieties in the lending process have weakened consumer confidence about housing market recovery prospects.

More than half of adults report that robo-signing disclosures account for less faith in mortgage lenders, banks, and government, according to a recent study by Trulia and RealtyTrac. Thirty-five percent believe the robo-signing issue will delay housing market recovery, and only six percent think the robo-signing issue will have no impact on recovery.

RealtyTrac and Trulia conduct a semi-annual survey about foreclosures and consumer sentiments attached to the housing market.

“More and more, American homeowners, -sellers and -buyers are tamping down their expectations for a swift recovery in the housing market and bracing themselves for a long, slow climb back to a healthy real estate market. Fifty-eight percent believe recovery will happen after 2012 and more than one in five U.S. adults believe recovery won’t happen until 2015 or later,” said Pete Flint, co-founder and CEO, Trulia. “Government incentives have come and gone and historic lows in interest rates have done little to spur recovery. Then, as if prospective buyers and sellers needed more to be concerned about, the robo-signing issue caused a ‘what’s next?’ fear to surface in the minds of consumers who, frankly, have lost faith in banks and their government to make good decisions.

“Twenty four percent of consumers have lost faith in the government following the robo-signing issue,” said Flint. “The scandal leaves a lingering bad taste in the consumer’s mouth.”

Flint said that swift and firm response in states’ attorney general offices could offset the negative consequences of the scandal with faster processing times for short sales and loan modifications.

Consumer expectations parallel sentiments of leading economists and housing experts, who are increasingly cautious about making housing market recovery projections. In the latest 2010 MacroMarkets Home Price Expectations Survey, MacroMarkets co-founder Robert Schiller cites negative overall sentiment attached to recent news concerning foreclosure processing questions and the related possibility of extending the supply pipeline.

“The pipeline exceeds market appetite for these properties,” said Rick Sharga, senior vice-president of RealtyTrac. He said excess REO inventory will continue to depress new home sales, and home prices will not rebound until 2014.

Meeting Negative Equity Challenges

Forty eight percent of homeowners with a mortgage said they would consider “walking away,” a jump from 41% in May 2010. Men (57 percent) are more likely than women (40 percent) to point to strategic default as a constructive solution to negative equity.

If they became unable to pay the mortgage payments on their current primary residence, two-thirds of U.S. adults with mortgages said they would consider calling the lender and trying to modify the terms of the loan as their first option. The next most popular solution is to have a tenant move in to contribute to the mortgage, but only 10 percent of U.S. adults would do this.

Interest in Buying a Foreclosure

Nearly half (49 percent) of U.S. adults are at least somewhat likely to consider purchasing a foreclosed property, up from 45 percent in May 2010. Despite the rising interest in buying a foreclosed home, an increasing number of U.S. adults also recognize negative aspects to buying a foreclosure. Over the past six months, the number of U.S. adults who believe there are downsides to buying foreclosed properties has increased to 81 percent, from 78 percent in May 2010. Among those who think there are negative aspects to purchasing a foreclosed home, the top concerns about purchasing a foreclosed property between November 2010 and May 2010 are shown above.

Consumers Discount Foreclosure Purchases

Two-thirds (67 percent) of U.S. adults would expect to pay at least 30 percent less for a foreclosed home than a similar home that was not in foreclosure and one-third of U.S. adults (35 percent) would expect to pay at least 50 percent less for a foreclosed home. Overall 97 percent of U.S. adults would expect at least some discount on a foreclosed home.

“It seems like consumer expectations and market realities are beginning to align when it comes to foreclosure discounts,” said Sharga. “During the third quarter, foreclosure homes sold for an average of 32 percent less than homes not in foreclosure. It’s also not surprising that we’ve seen an increase in negative sentiment toward foreclosure purchases, where the recent robo-signing controversy has added more confusion to an already complicated process.”

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