Foreclosure filings fell dramatically last year, according to a report released Thursday. Several prominent economists said the news was a sign that the housing market could be stumbling toward recovery. "There's light at the end of this very dark tunnel," said Mark Zandi, chief economist at Moody's Analytics.
But don't break out the champagne just yet. Zandi explained that there's still a mountain of foreclosures to work through. And there are millions of Americans living in limbo, reeling from the lingering affects of the housing crisis and waiting to see if they will lose their homes.
The number of homes with foreclosure filings plunged 34 percent to 1.89 million in 2011, according to RealtyTrac, a real estate site that tracks such filings. Total foreclosure activity was at its lowest yearly level since 2007.
"This long, painful correction is not over yet, but probably mostly behind us," said Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and a former Obama administration economic adviser. "There was a time when housing was driving the economy down. We're more in a situation where the economy is driving housing down."
It is difficult to "achieve economic liftoff" until house prices hit bottom, Bernstein added. Though there is still downward pressure on housing prices, "we are getting closer to digging our way out."
The decline in foreclosures was mainly due to banks' hesitance to foreclose on homeowners in the first half of the year, as the so-called robo-signing crisis played itself out, said RealtyTrac chief executive Brandon Moore in a statement. By the end of 2011, he said, that had changed. "There were strong signs in the second half of 2011 that lenders are finally beginning to push through some of the delayed foreclosures in select local markets."
Zandi noted that the number of 30- and 60-day delinquencies has fallen substantially and that demand for homes is starting to grow, but added that it still will take four to five years for the housing market to become "well-functioning" again.
That's a long time for the 1 in 5 homeowners who remain underwater on their mortgages, owing more than their houses are worth. Many homeowners are in limbo as banks try to determine whether to offer modifications on their loans or foreclose on them. Some experts said that the number of foreclosures has declined because there simply are fewer delinquent homeowners.
Banks have been slow to offer loan modifications because the mortgage servicing operations were set up like remote call centers, and banks have to organize the paperwork, said Dean Baker, co-director of the Center for Economic and Policy Research, adding that recently they have become more willing to facilitate modifications, lowering the number of foreclosures. Banks have realized that they may not make much money selling a foreclosed home in a depressed housing market, he said.
It is helpful for families to be able to spend more time in their homes as banks delay foreclosure since they can find decent alternative living arrangements in the meantime, Baker said. "If you're living out of your car, you may end up losing your job," he said. "You come to work not having showered."
Servicers have been slow to foreclose because they are not timely in processing anything, said Diane Thompson, a lawyer at the National Consumer Law Center. There could be a double dip in the foreclosure crisis as banks step up foreclosures in 2012, she said.
For homeowners in limbo, "it's extremely emotionally stressful," Thompson said. "Lots of people lose their jobs, and marriages fail ... The fees will continue to mount ... Delay makes a loan modification harder to get for most homeowners because it makes it more expensive."