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How Foreclosure Fraud Might Impact Home Prices

Today, RealtyTrac reported foreclosure and home-sale information for September and the third quarter of the year, showing an extraordinarily weak housing market. Here are just a few data points:

  • Banks repossessed a record 102,134 homes in September. That is the highest monthly count ever recorded, and the first time monthly repossessions have surpassed the 100,000 mark.
  • Repossessions also hit a quarterly high. Banks took back 288,345 properties between July 1 and September 30, seven percent more than the previous quarter and 22 percent more year-on-year.
  • During the third quarter of the year, banks scheduled auctions on 372,445 properties. That is a record high, up five percent from the previous quarter.
  • Sales of properties in foreclosure — whether entering foreclosure, or bank-repossessed — accounted for 31 percent of total sales in September.

Banks are repossessing more homes. That is, of course, difficult for families, but ultimately important for the housing market, as banks take the houses back, resell them and clear their books. But the foreclosure fraud crisis is stymieing and slowing that process, in a way that might cause home prices to slide six months or a year from now.

Why? Rather than selling repossessed homes, banks are holding them — and as foreclosures work through the system, that pool of houses will grow. Eventually, though, when the fraud crisis is worked out, banks will start pushing that backlog of houses onto the market. That will flood the housing market with properties, leading to, analysts fear, another nationwide decline in housing prices. (This is, in part, why the White House is resisting a national moratorium on foreclosure: Nobody wants to seize the entire housing market, one-third of which is comprised of foreclosed properties.)

Nobody quite knows how the foreclosure fraud crisis will shake out. But housing analysts and Wall Street are worried that while prices might go up in the short term (with fewer houses on the market), they will drop in the long term.

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