foreclosure

From Jeff Horwitz and Kate Berry at American Banker: Procrastination on Foreclosures, Now 'Blatant,' May Backfire

ervicers are not initiating or processing foreclosures at the pace they could be.

By postponing the date at which they lock in losses, banks and other investors positioned themselves to benefit from the slow mending of the real estate market. But now industry executives are questioning whether delaying foreclosures — a strategy contrary to the industry adage that "the first loss is the best loss" — is about to backfire. With home prices expected to fall as much as 10% further, the refusal to foreclose quickly on and sell distressed homes at inventory-clearing prices may be contributing to the stall of the overall market seen in July sales data.
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Banks have filed fewer notices of default so far this year in California ... than they did 2009 or 2008, according to data gathered by . Foreclosure default notices are now at their lowest level since the second quarter of 2007, when the percentage of seriously delinquent loans in the state was one-sixth what it is now.

New data from LPS Applied Analytics in Jacksonville, Fla., suggests that the backlog is no longer worsening nationally — but foreclosures are not at the levels needed to clear existing inventory.
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"The industry as a whole got into a panic mode and was worried about all these loans going into foreclosure and driving prices down, so they got all these programs, started Hamp and internal mods and short sales," said John Marecki, vice president of East Coast foreclosure operations for Prommis Solutions ... "Now they're looking at this, how they held off and they're getting to the point where maybe they made a mistake in that realm."
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"The math doesn't bode well for what is ultimately going to occur on the real estate market," said Herb Blecher, a vice president at LPS. "You start asking yourself the question when you look at these numbers whether we are fixing the problem or delaying the inevitable."

There is much more in the article.

Note: The LPS delinquency data for July will be released tomorrow. Here are some of the findings (no link):

• July showed an astounding 24.5% month-over-month increase in foreclosure starts, which dovetails with Treasury's latest report on HAMP cancellations (approx. 50% according to Treasury's numbers)
• Abysmal foreclosure rates in NV, FL and CA have led to much higher level equity loss for homeowners in those states as compared to the rest of the country.
• Cure rates remain steady, but seriously delinquent (6 mos.+) cures have declined significantly, by approximately 25%
• Origination remains depressed due to much stricter underwriting guidelines and low purchase activity, but what is being originated is of good quality.
• Until the deterioration ratio improves from its steady two deteriorations for every one improvement, it's hard to see how we're going to get out of the hole.

The report shows the GSEs are stepping up foreclosures.

Home sales are hitting new lows, the number of homeowners behind on their mortgages is again climbing, as is the number of foreclosures. Housing market misery is widespread -- but particularly intense for the troubled homeowners relying on the Home Affordable Modification Program (HAMP), the federal foreclosure relief program.

Criticized both by those who argue for more aid and those who think the lackluster program only delays a needed bank reckoning, HAMP stumbles along, more often simply prolonging the pain of foreclosure than providing a solution. The dismal new housing numbers -- sales of existing homes are 27% lower than a year ago, new-home sales have fallen even more -- underline just how little demand there is for all the properties that banks are foreclosing on.

Real Estate Mortuary's Waiting Room

In extending the process, foreclosure relief in many cases simply stretches out borrowers' slow bleed of resources. By keeping borrowers in limbo while letting lenders delay repossessing houses they can't sell, foreclosure aid is now benefiting borrowers less than the lenders who created the mortgage mess. For lenders, mortgage modification is the waiting room in the mortuary, a convenient place to hold borrowers while the banks deal with the overflow of houses already repossessed.

Of some 3 million homeowners behind on their mortgages, only about half are eligible for HAMP. Most of the rest, ironically, don't qualify because their income is too low to handle even a modified mortgage. For those that do qualify, HAMP offers little immediate respite: Homeowners have to immediately start making payments on a trial modification plan.

Some 1.3 million borrowers have gotten the trial modifications, which last for at least three or four months (though many banks have stretched this out for longer). But 600,000 of those have already dropped out, unable to make payments in the trial stage. Another quarter-million are in modification limbo, sending checks to the bank as they wait to know if they'll get permanent adjustments. (Detailed numbers are available in the modification program's monthly reports, here.)

What Happens After Gaining Relief Is Worse

If the wait for a modification is trying, though, what happens to homeowners who do manage to get relief is worse. Most borrowers behind on their mortgages are already overburdened with other debts. After the mortgage reduction, the typical modification recipient, despite an average $513 drop in monthly payments, has to devote 63.5% of his or her income to mortgage payments, other debt, and taxes.

It's not clear how many will default a second time. Treasury officials recently had to withdraw the government's numbers on mortgage modification success rates after they were shown to seriously understate re-defaults. One independent estimate from Barclay's Bank is that 60% of homeowners granted loan modifications will eventually default again.

So does HAMP really benefit anyone but the few borrowers who are able to run the foreclosure aid gauntlet, climb out from under their debts against tough odds and get back to making regular payments on their (still-underwater) mortgages? It does. If HAMP fails to make much of a dent in homeowners' troubles, it does mitigate a real problem for the banks: There are many more houses in foreclosure than today's market can absorb.

"Strategic Non-Foreclosure"

One of the foreclosure cascade's not-so-hidden secrets is that the banks and investors who hold millions of busted mortgages are in no hurry to kick debtors out of their homes. The markets hardest hit by the foreclosure crisis are already stuck with an enormous and growing inventory of repossessed houses, now estimated by Lender Processing Services, which tracks foreclosures, at 1 million to 1.2 million bank-owned homes nationwide.

Banks have steadily slowed down the foreclosure process: The average homeowner in foreclosure now is an amazing 461 days behind in his payments. (You can see that last stat in this report, on page 13). Barry Ritholtz of financial blog The Big Picture calls banks' reluctance to take over houses "strategic non-foreclosure." Taking a leisurely path to repossession lets lenders avoid the costs of maintaining properties they can't sell in a market that remains in free fall in much of the country.

However, there's a limit: Lenders must eventually make good on the threat of repossession or face an epidemic of homeowners who stay in their houses without making payments. Many houses have been in foreclosure for so long that the banks have little choice but to act, and repossessions are rising.

Mortgage modification lets banks put a brake on the process, keeping up the pressure on borrowers (most of whom will eventually be foreclosed on anyway) without adding to the banks' inventory of foreclosed properties. As they sit in this antechamber, instead of simply writing off their mortgages, the strapped borrowers, given the gift of reduced payments, are likely to squeeze out whatever they can manage in a last effort to keep their homes. It's a study in what Rortybomb's Mike Konczal trenchantly calls the credit "sweatbox" -- under the guise of foreclosure aid.

Another Cudgel in the Hands of Lenders

The last insult added to this mess comes from Fannie Mae, which has promulgated new rules that lock those who don't make the effort to modify their mortgages out of the Fannie-backed mortgage market for seven years. So ultimately this comes full circle, and what started as an effort to help borrowers has become another cudgel in the hands of lenders.

If we were to conceive a program to persuade borrowers to stick to their obligations and make every effort, no matter how unrealistic, to avoid foreclosure, we could hardly do better than HAMP. The program probably increases what lenders collect before they eventually foreclose -- and may let those lenders slow the process enough to prop up prices as they sell off their inventory.

In this way, it may lead to a more orderly unwinding of the busted housing market. If so, HAMP might accomplish some part of its goal -- just not the part that has to do with helping homeowners.

eric seiger

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