A Weird Side Effect of Some Very Good Housing News

Earlier this week, CoreLogic came out with some good news on the housing front: Rising home prices during the first quarter of this year have raised values, lifting about 850,000 homeowners out of negative-equity territory. While 9.7 million home loans are still underwater, the number of these troubled mortgages has fallen enough to encompass less than 20% of total loans. At the end of 2012, 10.5 million homes had negative equity.

Hot on the heels of this uplifting announcement comes the news that banks repossessed more homes in May than in the month previous -- 11% more, overall. In some areas of the country, the percentages were eye-popping: North Carolina saw repossessions rise by 60%, and Oregon's rate jumped 57% from April to May.

Banks want to get in on better pricing
While it might seem counterintuitive that fewer homeowners being caught in the negative equity trap would result in a higher number of foreclosures, that is exactly what is happening.


Why are banks suddenly in such a hurry to take possession of more real-estate-owned properties? Several factors are at work, here, but the biggest reason appears to be that banks see values rising, and they perceive a chance to quickly dispense with lots of foreclosures that they otherwise wouldn't have been able to unload.

Additionally, the five top lenders, Ally Financial, Bank of America , Citigroup , JPMorgan Chase , and Wells Fargo , have mostly fulfilled the terms of the National Mortgage Settlement, the $25 billion mortgage-fraud pact signed last February. Without the added requirements of that pact slowing them down, banks are able to process foreclosures more quickly these days. Of the signatories, only Citi did not increase the number of repossessions last month.

A good thing for housing?
Some analysts say this phenomenon should be positive for housing, since the current inventories of for-sale homes are so low. Of course, these houses will still be foreclosures -- and flooding the market with those homes hasn't helped housing much so far -- though it certainly has been a boon to institutional investors, groups that have been able to scarf up repossessed homes in large numbers for a nice discount.

Is this trend really the result of higher home values, or could it be something else? The rise in repossessions seems to have happened very suddenly and quickly -- especially when you consider that, on average, prices rose only around 12% nationwide over the past year.

More likely, I think, is the "second wave" theory that some proffered after the fraudulent foreclosure deal was inked. The idea was that, once the agreement was done, banks would be free to take back and process homes that had been in a sort of foreclosure abeyance during negotiations with all 50 attorneys general.

In a way, I think that's what is happening, just a little bit later. Banks were also slowed as they worked under the terms of the settlement; now that those requirements are nearly fulfilled, they can really get down to business. If so, then the second wave has arrived, and it's going to get bigger -- which will drive prices down, again. The housing corner, I think, is further ahead than many realize.

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The article A Weird Side Effect of Some Very Good Housing News originally appeared on Fool.com.

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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