Don't have a cow, man

As if today's post on all the bad news we've been hit with this week wasn't gloomy enough, I neglected to mention the alarming numbers on foreclosure filings released today by RealtyTrac.

Joe Bingham writes with some back-of-the-envelope calculations he did after reading that story -- which noted that foreclosure filings were up 57 percent in January from a year ago, to 233,001 -- in an attempt to deduce whether banks are prepared for the losses they'll see.

Bingham takes the 233,001 foreclosure filings in January, multiplies that by 12, and figures we're on pace for 2.8 million foreclosures this year. If the average loss per foreclosure is $50,000 (a not unreasonable assumption), that's $140 billion in losses.

If FDIC-insured banks have only set aside $68.2 billion in loan loss provisions, as noted today in another Inman News story, they won't be able to cover their losses -- even if they are only in line to take a fraction of the losses from foreclosures, Bingham worries.

The problem here is you can’t simply multiply RealtyTrac’s numbers for January by 12 to come up with an estimate of foreclosures in 2008 (click "continue reading" to see why).

RealtyTrac’s numbers are a little problematic in that one property may be subject to several foreclosure filings as it moves through the foreclosure process.

While the story notes that there were "233,001 foreclosure filings in January," it might be more accurate to say there were 233,001 foreclosure-related filings.

Foreclosure-related filings include default notices, auction sales notices and bank repossessions. Because one home may be subject to several filings – and because not all homes that are hit with foreclosure filings end up being foreclosed on by the lender – the number of “foreclosure-related filings” is much larger than the actual number of foreclosures.

This often gets lost in media reports and RealtyTrac has taken some grief over the issue before it started providing numbers on "unique properties" subject to foreclosure filings.
Nationwide, RealtyTrac says it counted about 2.2 million foreclosure-related filings during 2007 on about 1.3 million homes, up 75 percent from 2006 (see story).

The Mortgage Bankers Association has estimated even more homes entered the foreclosure process in 2007 -- about 1.5 million, up from 960,000 in 2006 and 704,000 in 2005.

The issue is further complicated by the fact that not all homes that enter the foreclosure process actually end up being sold on the courthouse steps or reposessed by the lender.

Often, borrowers are able to arrange short sales, loan modifications, or even get current on their loan payments without accommodations from their lender.

A recent survey of loan servicers responsible for collecting payments on 33.3 million loans found that foreclosure starts outnumbered foreclosure sales about three to one. That survey estimated there were there were about 509,000 completed foreclosure sales in 2007.

Armed with this knowledge, can we use Bingham's projection of 2.8 million foreclosure-related filings in 2008 to make a wild guess about how many foreclosure sales might result?

If RealtyTrac counted 2.2 million foreclosure-related filings in 2007, and that translated into 509,000 foreclosure sales, there were about 4.32 foreclosure related filings for every foreclosure sale. If that ratio were to stay true this year, we'd be looking at something on the order of 648,000 foreclosure sales in 2008.

Yes, there are still plenty of problems with this guestimate -- obviously many of the foreclosure starts initiated in one year aren't resolved until the next, and who knows if the rate of filings seen in January will hold throughout the year. But hopefully it provides some perspective on what foreclosure statistics like those provided by RealtyTrac and the Mortgage Bankers Association do and don't tell us.

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