Update1 Making Home Affordable’s Impact on Foreclosure Salesby Tim Manni
What do banks do once they foreclose on a property? There has been a lot of controversy recently whether banks are holding onto foreclosed properties in order to keep home prices from dropping even lower. Diana Olick of CNBC wrote an interesting post on her blog “Realty Check” on Monday, in which she reached out to a representative from Bank of America (BofA) to get some answers.
The answers turn out to be quite interesting indeed because BofA highlights some of the exact same reasons we have detailed in past posts why the Making Home Affordable program will likely never generate the type of results the president has hoped for.
Is BofA not releasing foreclosed properties to the market on purpose? BofA says no. The bank says that foreclosure sales have been down recently because as soon as the details surrounding Making Home Affordable (MHA) were released, the bank was committed to give troubled borrowers every opportunity to stay in their homes.
However, BofA says, now that MHA is in full swing, the program’s faults or limitations will likely cause foreclosure sales to once again rise. There are three main factors limiting servicers’ abilities (in this case BofA’s) to modify or refinance loans.
Unemployment: There are just some problems that servicers can’t fix, says BofA. Since the subprime crisis has largely past, the new wave of defaults and foreclosures have been triggered by economic forces, mainly unemployment.
“…some of the leading causes of foreclosure are not ones that will be ameliorated by the Obama plan (at least not enough to change the ultimate outcome),” wrote Randall Wharton in a June 2009 article in Servicing Management Magazine. “According to research performed at Countrywide in 2007, some of the most common reasons for foreclosure are reduced income, illness or other medical expenses, and divorce.
“A recent paper from the Federal Reserve Bank of Boston found a direct correlation between an increase in unemployment rates and an increase in mortgage default rates. The authors estimated that for every 1% increase in unemployment, the probability of a 90-day delinquency increased by 10% to 20%.”
Third-Party Investors: In further defense that BofA hasn’t been purposely keeping foreclosed homes off the market, the bank claims that their obligation to third-party investors is to prepare defaults for foreclosure in order to recoup the investment as swiftly as possible.
Yet, third-party investors are another reason why foreclosure sales have lagged. These investors must decide on a loan-by-loan basis whether it is more economical to foreclose the property or rework the loan for the borrower.
Ramped Up Demand: Servicers are dealing with such an influx of demand that it’s hard for them to keep up. Even with the addition of more employees, banks seem to be failing at making everyone happy.
Despite only hearing from one bank, Olick’s conversation with BofA provides a rebuttal to the accusations that banks are purposely not selling foreclosed properties. While it’s true that falling home prices are a major stumbling block for the real estate market’s recovery, BofA says that’s not the reason foreclosure sales are slumping. The implementation of MHA has created a new playing field for servicers to contend with.
We want to hear more from both borrowers and servicers. Share your stories, leave us a comment.
Update1: The post above was written based off of part one of Diana Olick’s article “What Banks Are Really Doing With Foreclosures.” After you read our post above, be sure to read part two of Olick’s “What Banks Are Really Doing With Foreclosures.”