Lower Home Sales: The Tax Credit Dent - Analyst Blog

So paperwork flaw can be let off the hook, it seems. We had earlier been worried that the chaos in foreclosure documentation would lead to lower home sales.

Data brought out by RealtyTrac, the leading online marketplace for foreclosure properties, discloses that the sale of U.S. foreclosed properties fell 25% sequentially and 31% year over year in the third quarter of 2010. However, the real offender here is the withdrawal of tax credits by the government, or so the site claims.

RealtyTrac has also stated that the average sale price of foreclosed properties in the quarter was $169,523, down 2.5% sequentially and 0.4% year over year.

During the quarter, foreclosed homes accounted for 25% of total U.S. residential property sales. The average sale price of foreclosed properties was more than 32% down from the average sale price of properties not in the foreclosure process. This compares with a 26% discount in the prior quarter and a 29% discount in the year-ago quarter.

What Drove the Lower Sales

Due to the expiry of federal homebuyer tax credits in April, a slowdown in the overall housing market was witnessed. This was primarily responsible for the decline in third quarter sales.

Rampant paperwork lapses in evaluating the authenticity of information provided in the mortgage documents have embroiled major lenders including Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and PNC Financial Services Group Inc. (PNC) in a number of lawsuits by homeowners in September. As a result, these lenders have temporarily suspended foreclosures. Though this was not a momentous factor in the third quarter, there could be a significant impact on fourth quarter sales.

RealtyTrac has already noticed a decline in foreclosure sales in November as a result of the hangover of paperwork mess. Additionally, December is a slow period by tradition, so only a few home sales are expected in the final month of the fourth quarter.

Reaction of Buyers

From the buyers' point of view, a weaker demand for foreclosed properties due to the expiry of homebuyer tax credits and restlessness arising from the paperwork mess has afforded more space to bargain for better prices.

However, in some markets such as Las Vegas, the competition for buying foreclosed properties is still very high and would stop prices from climbing down.

Solution Ahoy?

As a redemptive measure, lawmakers and bank regulators are pushing lenders to modify loans rather than foreclose, which could probably lessen the paperwork flaws.

The Congressional Oversight Panel is also pushing for loan modifications as any more untidiness could damage the Home Affordable Modification Program (HAMP), the main foreclosure prevention effort of the Treasury.

U.S. bank regulators and a task force of Attorneys General (AGs) of all 50 states of the nation are gearing up to settle the foreclosure issue at large financial institutions early next year. This would undoubtedly lessen the threat looming on housing recovery. But the aftermath of faulty paperwork might still make it difficult for the lenders to find home buyers in the years to come. The foreclosure mess would probably cast a long shadow on the U.S. housing.

One of the important approaches of the upcoming settlement is that major lenders would contribute money into a fund that will be used to compensate borrowers who have lost homes due to the foreclosure, if they can prove that they were the victims of the flawed paperwork. The AGs would administer the payment process.

Homes Still at Risk?

Some of the analysts feel that the documentation mess may hinder potential buyers in the short term, but the upshot will not change in the long run and there will be no impact on housing recovery as such. However, after reviewing the foreclosure sales data of the current quarter as well as the expectations for the next quarter, we think the problem is going to persist for a longer period.

Also, there will definitely be a significant stress in housing recovery as lenders could be unable to prove their ownership on mortgage loans due to wrong documentation.

While the negative sentiment about the expiry of the homebuyer tax credits has already been factored in the third quarter, the issue of the paperwork mess will linger. We will have to wait till the settlement to see how strong the initiatives are to fend off the distress.

 
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