Lightstone predicts fewer defaulting homeowners in 2013

Lightstone, a company providing comprehensive data, analytics and systems on property, automotive and business assets explores the current trends around sales in execution notices.Housing markets constantly move through cycles, many of which have been seen to have a direct correlation with that of the general business and economic environment. For example, house price growth seems to be higher in periods of stronger economic growth and lower interest rates. Some of the more common occurrences during economic downturns include increased numbers of home owners who default on their bonds often leading to distressed home owners who have to sell their properties – often, below market value.

Explaining how sales in execution notice’s work

If a homeowner defaults on his/her mortgage and no alternative arrangement with the loan provider is made, the homeowner will receive a ‘sales in execution notice’ (SIE). One of the main features of an SIE notice is that it indicates the date that the relevant property will be auctioned off at.

Lightstone explains that a homeowner that receives a SIE notice has a few options that can be followed when receiving the notice.

  1. An arrangement can be made with the loan provider to continue paying the mortgage. The onus is on the homeowner to make the necessary agreeable arrangement with the loan provider.
  2. The property can be sold at an auction on the date provided in the SIE notice.
  3. The property can be sold to a willing buyer within one month of the auction date (but not on the auction date). This is defined as a distressed sale.
  4. The property can be repossessed by the bank and held to be sold later. This is referred to as a property in possession (PIP).
  5. The property can be sold between 1 and 5 months after the notified SIE auction date.
  6. The property can be sold more than 5 months after the notified SIE auction date.
The number of homeowners who receive SIE notices vary from year to year. Between 2000 and 2012, homeowners who received SIE notices ranged between 10,000 and 30,000 notices per year. The amount of people who received SIE notices decreased during the housing boom of 2005 (12,400 notices) and increased during the subprime mortgage crash in 2009 (33,000 notices). Since the subprime mortgage crash of 2009, the amount of SIE notices per year has decreased to about 17, 000 as recorded the year of 2012.When analysing what people do with their houses once they receive a SIE notice, the following trends are apparent:

  1. The proportion of homeowners that received SIE notices that had to sell their properties in the near future (group 2 -6) decreased dramatically from about 71% in 2000 to 36% in 2012.
  2. The proportion of homeowners whose properties were repossessed by banks (Group 4) decreased from 29% in 2000 to 5% in 2012.
  3. The proportion of homeowners that received SIE notices whose properties were sold at auctions increase from 12% in 2000 to 19% in 2012 (Group 2).
Lightstone feels that this may be an indication that loan providers have been making more arrangements with defaulting homeowners as opposed to repossessing their properties. It is therefore reassuring to see that more people have recently been able to hold onto their homes as this is encouraging for the greater economic wellbeing of South Africa.Proportion of home owners who default of their mortgage payments every year

Are the 10,000 to 30,000 home owners receiving SIE notices a cause for concern?  In order to answer this question the amount of home owners who receive SIE notices relative to the total amount of home owners at the time needs to be analysed.

Even though the number of 30,000 defaulting home owners seems high in absolute terms, the group made up 0.5% of home owners in 2009 during the housing crash and 0.25% during the housing boom of 2005. This small proportion in conjunction with the increasing trend in properties not being sold after a SIE notice has the net effect that the proportion of those who sell their houses have been decreasing from about 0.25% in 2000 to less than 0.1% in 2012.

It seems that even though the recession has placed strain on homeowners, the proportion of home owners who end up having to sell their properties is now lower than what it was in 2000, providing some light at the end of the tunnel for the homeowners expected to receive SIE notices in 2013.

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