Foreclosure Stats: Pick a Number, Any Number

We’ve noted more than once that quite a few government statistics near and dear to analysts and investors, such as GDP, inflation, and employment growth, are pretty iffy.

So you don’t think we are unfairly singling out the government, some measures produced by the private sector are also questionable. A prime example is foreclosure statistics, which are of greater interest than usual, thanks to the soft housing market.

A story in the LA Times, “Getting a Fix on Forclosure Data,” tells us how the two most widely cited sources of foreclosure information, RealtyTrac and DataQuick, are almost certainly incorrect. RealtyTrac counts every step in the foreclosure process as a foreclosure, and is also charged with not correcting its data for multiple liens on the same property, resulting in figures that are almost certainly too high. Experts charge that DataQuick’s results are too low. And the differences are large. For the state of California, RealtyTrac reported 142,149 foreclosure filings in a February news release; DataQuick’s figure was 12,672.

But it is well nigh impossible to arrive at a correct answer due to problems of definition, as the article explains:

[F]oreclosure is really a process, one that can stretch over a year and vary from state to state.

It officially begins when the lender files a notice of default. This signals to investors that there’s trouble with the mortgage, and the beleaguered homeowner is often courted for a private sale. There’s also the possibility the owner can restructure the mortgage with his or her finance company.

If the borrower can’t negotiate a sale or refinance within three months or so, the house is scheduled for a public auction. Many of these homes wind up as the property of the lender. They are labeled REOs, short for “real estate owned.”

Deciding which of these moments constitutes “foreclosure” has become a matter of interpretation and dispute.

“No one can agree,” said Ryan Slack, chief executive of Propertyshark.com, a website that reported 2,453 foreclosure auctions in Los Angeles County in the first quarter.

That doesn’t mean that 2,453 families were forced out on the street, Slack cautioned. He estimated that more than half of the auctions were postponed or canceled.

Or does it? Once the foreclosure ball starts rolling, either the borrower somehow comes up with the money to get current, the property is sold (either by the owner or through the foreclosure process), or the debt is somehow renegotiated or refinanced. If a foreclosure is cancelled because the home was sold by the owner, they have lost their home. The difference between having it sold by the owner versus having it sold at a forced auction as stipulated in the mortgage is that the borrower’s credit record suffers less damage if he sells it himself (see here for a more technical description of the foreclosure process).

So technically, Slack is absolutely correct: no auction, no foreclosure. But the specter is that of people forced to decamp from their homes, and that can happen even in the absence of a foreclosure. From a policy standpoint, one would want to know both the number of foreclosures and sales due to defaults (one could never be 100% certain of the latter, and it would probably take a fair bit of spadework too).

The bottom line: whatever number you read about foreclosures, it is without a doubt wrong.