Back to normal?
Referring to current mortgage and commercial real estate loan delinquency rates released by the Federal Reserve, Texas Real Estate Center’s Chief Economist, Dr. Mark Dotzour said in a statement, “At the current pace of disposition, it will be many years before the real estate market credit conditions are back to ‘normal.’”
Despite improved delinquency rates for loans overall, real estate continues to under-perform with residential real estate being the worst performing sector of all, not to mention shadow inventories in commercial and residential looming. Dotzour notes that business loan quality is up in recent months which encourages banks to expand loans to businesses which we would note is a positive step toward a housing recovery as jobs and housing health are inseparable.
“The health of real estate loans in the portfolio of our American banks still has a long road to recovery,” Dr. Dotzour said, asserting that the banking system’s “extend and pretend” policy adopted in 2008 has led to “a lot of troubled commercial real estate loans that will have to ultimately be foreclosed and sold to private investors.”
Dr. Dotzour says investors have been waiting for years to purchase these distressed commercial loans as they become “disgorged from the banking system,” but until this takes place, commercial investing will remain low.
According to Dr. Dotzour, bank regulators continue to encourage banks to keep real estate lending tight, as they have a major backlog of distressed real estate loans, so until it is cleared, lending will remain limited. “At the current pace of disposition, it will be many years before the real estate market credit conditions are back to ‘normal,’” he added.
Residential real estate – the worst news of all
“The delinquency rate for residential single-family houses is simply astronomical by historical standards,” Dr. Dotzour reports, pointing to “failed mortgage modification programs and legal challenges to foreclosure,” which has “caused the average time to foreclose on a house to explode to 689 days, up from less than 300 days in earlier years.”
Residential lending is a prime example of regulators’ “extend and pretend” policy, as the backlog of foreclosures looms with servicers short on people to process the volume, which was an early reason for the robo-signature debacle wherein servicers rubber stamped foreclosures without any human review of files, leading to illegal foreclosures. Dr. Dotzour notes that the final chart below “shows the shadow inventory of distressed properties that will ultimately come into the market and sell to investors.”
Dr. Dotzour’s warning to Realtors – “We are already three years into the housing bust, and the troubled loans haven’t been addressed in any significant volume. If you make your living selling houses or in the many industries that depend on home sales volume for profitability, you need to root for the government to speed up the foreclosure process and clear this market. Until they do, homebuyers will be fretful that prices could fall farther when these properties ultimately sell.”