Number of Homes in Foreclosure Limbo Triples

Foreclosure rates in the U.S. are big news world wide. The continuing glut of foreclosed and distressed properties on the U.S. market caused home values to drop another 16.8% over this time last year, and in some parts of the U.S. the drop was even steeper.

In Kalamazoo, MI, for instance, home values have fallen an additional 25% over the past year alone, even though Kalamazoo is a university town in one of the western pockets of Michigan where the economy is still 'somewhat' stable. Unemployment in west Michigan is hovering just under 10% (as opposed to 14.7% for the state as a whole).

The sheer volume of foreclosures in the U.S. is approaching some kind of critical threshold.

Lenders are now starting to drag their feet.

In early 2007 the number of homeowners who were more than three months delinquent on their mortgage but who had not yet received a foreclosure notice from their lender was less than 1% of all borrowers. In recent months that percentage has tripled and is rapidly climbing. Some homeowners are now at 12 months behind in their payments and yet the lender has still taken no action to foreclose.

According to a recent report in the Washington Post, the reasons are many but they boil down to one common denominator:

Banks can't afford to own many more homes they can't sell. The losses are too staggering.

In the past, foreclosure proceedings were routinely initiated at 90 days past due. Today foreclosure might not be initiated for 6, 9, 0r even as many as 12 months, and even when foreclosure does finally begin, more and more banks are backing out before the property ever goes to sheriff's sale. That's because often these properties don't sell at sheriff's sale.

Foreclosures are still going forward, but in more and more cases the threat of foreclosure is more of a collection tactic than an actual legal proceeding.

Most lenders have come to the conclusion that at this point almost anything is better than foreclosing on a property and taking yet another big loss. Some of the homes in question cannot be sold at any price in this market, even though they are almost surely worth something. In response, many banks are holding properties longer, waiting for the market to bottom out so they can recoup something closer to true value on the distressed property.

There is no question that many, many U.S. properties in foreclosure limbo are undervalued right now, so holding them longer makes a certain amount of sense, but it's complex. Some parts of the U.S. may not recover economically for decades, and if that is the case, neither will the property values. Right now, local trends are hard to predict.

Most analysts are however predicting increased foreclosures and defaults through the rest of 2009 and into 2010. Home values are unlikely to stabilize until the glut of distressed and foreclosed properties has been cleared.

At the moment, the most optimistic date when that might happen is 2011. Maybe.

Foreign investors interested in buying property in the U.S. now should be forewarned: You might have to hold that property and maintain it for several years before you see appreciation.