Update1 Foreclosures: An eventual eventualityby Tim Manni
Disruption in outcomes
As Washington began rolling out their many home preservation efforts, we were critical that these programs and initiatives were going to disrupt the cycle of outcomes for a mortgage. Before the creation of programs like HAMP, lenders knew and prepared for three possible outcomes that their loan might take: 1. It would be paid on time for the life of the loan; 2. It would be refinanced or prepaid; and 3. If it became delinquent, it would be foreclosed.
Now, due to the any number of new modification, refinance, pay down and short sale options available to homeowners, there are just as many possible outcomes that lenders and servicers have to prepare for.
That said, a large majority of troubled mortgage loans, despite being modified or refinanced, have still wound up in foreclosure. So while criticisms such as ours that the mortgage process — from start to finish — is now more complicated, many of the loans that were destined to fail still ended up failing (just not as quickly as they otherwise would have).
Now, the foreclosure process is being dragged out even longer. In the last few weeks, a new wrinkle appeared in the process. Even the most recently-failed mortgages haven’t been able to be processed and previously foreclosed properties haven’t re-entered at the market at the expected pace due to “technical difficulties.”
How should servicers deal with all these foreclosures?
There have been some mixed messages in terms of how servicers should deal with all the country’s foreclosures. First (as mentioned above), servicers feverishly tried to correct failing mortgages through loan modifications, refinances, principal reductions, writedowns, etc.
As it became increasingly clear that these efforts are largely futile — that despite modification, failure was inevitable — the message has changed.
Last month, Fannie Mae gave their servicers an ultimatum: either resolve troubled loans in a timely manner, or pay up. Fannie told servicers that they would be fined if they failed to take swift action on failing loans:
Fees will be applied in various instances, including failure to provide access to records and delays on completing foreclosures and selling foreclosed properties.
The message was clear: servicers were to kick foreclosures into high gear.
Over the past couple of weeks, however, that acceleration process has come under scrutiny. Recently, federal regulators had to force servicers to put some of their foreclosure filings on hold. The loss-mitigation departments at some of the nation’s largest servicers have been accused of signing off on thousands of foreclosure affidavits without giving each one the proper review. The process is called robo-signing, and the scandal has suspended foreclosure proceedings in all 50 states (Update1: Bank of America just announced they’re suspending foreclosures in all 50 states). This is proof that servicers were trying to push as many loans through to foreclosure as fast as possible.
Veto changes the message (again)
According to the Wall Street Journal, President Obama plans to veto a bill today that would have made it easier for banks to move through the foreclosure process:
The move marks the Obama administration’s most direct intervention so far into a growing debacle tied to how banks foreclose on homes, and the first effective veto of Mr. Obama’s presidency. The veto could make it more difficult for banks to complete paperwork and speed the foreclosure process, and could give homeowners more time to rework loans.
While the White House defends that the president’s veto isn’t directly correlated to the robo-signing scandal, there’s no doubt in our mind that it’s certainly related. “Were there not a robo-signing scandal, it’s a fair bet that the president wouldn’t have thought twice about signing the bill,” said HSH VP Keith Gumbinger.
Prolonging the problem
Where do we go from here? Despite the foreclosure suspensions, all of which will require individual review, foreclosed properties will still continue to re-enter the housing market, just at a much more metered pace. The bottom line is that this problem is simply going to be with us for even longer than we originally thought.
A foreclosure is not the optimal conclusion for either the lender or the borrower, but in order to write a new mortgage loan, in order to put a new borrower into a home, a foreclosure must happen in a swift and timely manner; that’s not happening at the moment, and seems unlikely to for a while to come.
The housing market has grown so defunct that even a foreclosure — a structured process with known and predictable timelines — is no longer a certainty.