Homeowners living in houses worth over $417,000 can live in their homes mortgage-free without fear of foreclosure for more than a year, but those in the less valuable homes are getting thrown out in 300 days or less.
Moreover, those with a second mortgage can stay in their home, on average, longer than those with just one mortgage. Those with a second mortgage currently are staying mortgage-free an average of 393 days compared to those with just one mortgage, who are losing their homes after 291 days.
According to an analysis of more than 150,000 foreclosures over the past three and a half by the CEO of one of the nation’s leading foreclosure sites, ForeclosureRadar, lenders wait as long as they can to put losses from foreclosed properties on their books.
The study found that the deeper underwater you are, the longer you will be able to live in your home without paying a penny on your mortgage. “The truth is that the larger the loan balance you have, the more upside down you are in the home, and the bigger the loss for the lender, the better your chances are of not being foreclosed on for a very long time, said Sean’Toole, CEO of ForeclosureRadar.
O’Toole found that currently, in July 2011, the average loan balance on foreclosures with a loan balance greater than $417,000 is $616,000, and the average current market value is $404,000, resulting in an average loss of more than $250,000 per loan after sales costs. He compared that to loans with a balance less than or equal to $417,000. On those loans the average loss was closer to $115,000 on an average loan balance of $274,000 and with an average current market value of $176,000.
“So while we still think foreclosure roulette is the bank’s game of choice, we now also believe that the number of chambers in their gun, and your likelihood of being quickly foreclosed on, is directly tied to the size of the potential loss that the bank might face. Perversely, this means those who took the biggest loans, on the nicest houses, with the largest lines of credit to buy lots of shiny new toys will also get the most free rent when they strategically default,” he said.
O’Toole analyzed 153,956 foreclosure sales on first mortgages from January 2008 through July 2011 for which ForeclosureRadar had all the necessary data. This includes properties that were sold back to the bank and became REO, as well as properties purchased by investors on the courthouse steps at foreclosure auction. He divided all the loans into two groups: those with balances over $417,000 (the conforming loan limit) and those below.
‘Specifically we were wondering if banks took longer to foreclose on larger loans, where there tend to be larger losses, than on smaller loans. The answer is clear: yes, the size of the potential loss absolutely matters. Not only that, but time to foreclose doesn’t diverge until the government intervened in the foreclosure market in early 2009, with, for example, changes to the Federal Accounting Standards Board rules on mark-to-market,” he said.
“The basic idea behind mark-to-market accounting rules is that if an asset that you have on your books drops in value, you should recognize that loss on your books and write down the value of the asset on your books. When Treasury Secretary Paulson announced TARP in September 2008, he made it clear that he didn’t think banks should have to write down these assets to or be forced to sell them at what he believed were distressed prices. After that announcement, considerable pressure was put on the supposedly independent Federal Accounting Standards Board (which writes the accounting rules these companies must follow) to ease the rules that require companies to mark assets to current market values. I think there is little doubt that the changes to these rules were necessary in order for the banks to pass the stress tests that were undertaken shortly after this accounting change was pushed through,” he said.