What happens when a borrower gets behind
A new report looking at delinquent subprime mortgages in Maryland and nearby states finds that foreclosure is still the go-to solution for lenders -- or at least it was through the middle of last year, when the report's dataset ends.
Loss mitigation and loan modification were "much less frequently pursued" than foreclosure, says the report, prepared for the Baltimore Homeownership Preservation Coalition.
Why? Much has been written about that. The report's authors, J. Michael Collins of the University of Wisconsin-Madison and Christopher E. Herbert of Abt Associates Inc., note that financial incentives -- and disincentives -- are one of the barriers.
Servicers, they say, "are reimbursed by investors for missed payments and actions taken in pursuit of a foreclosure, but not for costs associated with loss mitigation activities."
In recognition of these costs, Fannie Mae, Freddie Mac, and the Federal Housing Administration have long offered servicers incentive payments to encourage servicers to pursue these remedies, but investors in private label mortgage backed securities do not provide such incentives. The lack of income from loss mitigation activities may also lie behind the fact that many servicers lack the capacity to handle the workload associated with elevated requests for loan workouts. Absent incentive payments, servicers do not have a financial incentive for adding to their organizational capacity for these functions.
You can read the full report here.
So: What about the servicers who signed an agreement with the state to "to create a streamlined and transparent loss mitigation process for distressed Maryland homeowners"?
But whether that's averting foreclosure or just postponing it isn't clear yet. The signs seem to be pointing to the latter.
Categories: Mortgages, The foreclosure mess
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Comments
Jamie, good job assembling the conflict in one still rather short statement. Again, well done!
Addressing the "ongoing operation" aspect behind the decision making of the mortgage servicer companies postponing foreclosures allows them to see their portfolio of distress sale properties sell at higher prices than if ALL of their distress situation borrowers were also forced into foreclosure.
I think it is a wrong approach (rather than just pulling off the band aid and being done) but there isn't much else in the way of bright business decisions shown by them over the last 5 to 10 years.
Get the properties ALL on the market asap, absolutely before the debtors damage the structure, allow qualified buyers to close quickly no BS!, take your losses, move on.
Posted by: MrRational | February 10, 2010 10:42 AM
The fact is about 50% of all loans that are modified end up in re-default. The servicer/investor will go the route where the end result is the cheapest. If it is cheaper to foreclose than modify, they will foreclose. It still can take a year to complete the foreclosure process from start to finish. Sometimes, it can be even longer.
A big problem that many people will have is they can't document the income to qualify. Many homeowners were put in "stated income" loans where they do not document pay stubs, W-2's, tax returns, bank statements, etc. If they couldn't document their income when they got the loan, then chances are they can't do it now.
One of the motivating factors to foreclose is that the lenders can still go after you when they take the property. It is called a deficiency judgment. This is a state law, so it does not apply everywhere. But, Maryland is one of the states that permit lenders to go after homeowners even when the foreclosure process is complete. If the proposed legislation included a repeal for deficiency judgments, then I am sure the lenders would be much more co-operative in modifying loans.
Jamie, is there a way you can find out if the proposed bill will address the deficiency judgment issue? If not, I am afraid many homeowners will have no other options but to file a BK to avoid this disastrous situation. I believe in Maryland, the lender has 3 years from the foreclosure date to file suit? That is a long time to be waiting and not knowing if anything will happen.
Posted by: Frank Rizzo | February 10, 2010 11:28 AM
The more foreclosures the better. Time for the medicine to be taken. The shadow inventory needs to be placed into broad daylight, and the housing bottom (a.k.a 1990's prices) reestablished.
Posted by: Darwin Rules | February 10, 2010 12:01 PM
Frank, I haven't heard that the deficiency judgment is being addressed. But it's a definite issue, one that -- as you say -- can hit borrowers several years after they thought their troubles were over.
Posted by: Jamie Smith Hopkins | February 10, 2010 12:12 PM
Jamie thanks for an excellent summary of a complex report. The Baltimore Homeownership Preservation Coalition (which I co-chair) commissioned the research, and was heartened to learn that the number of loan modifications that lead to lower monthly payments is rising in Maryland.
But as you point out the modification rate is still very low, so it's important that homeowners have reasonable expectations when seeking a modification. There are plenty of scam artists making promises they can't keep about saving people from foreclosure. If it sounds too good to be true, it probably is.
Posted by: Sally Scott | February 10, 2010 2:59 PM
Dear Sally Scott,
The best way to preserve homeownership is to foreclose on those unfit for homeownership, and allow the free market to set the price such that those who are financially fit can purchase homes. Loan Modifications? HA! --You are part of your own problem!
Posted by: Darwin Rules | February 10, 2010 5:24 PM
The lenders are not completing the forclosure process so they will not have to show the loss on their books. A property that sold in 07 for $300k can still be listed as a preforming loan still worth $300k. Once the process is completed the $300k assett on the books is now a hugh liability showing a loss around half ( forclosure process cost the lender $40 to 50k plus loss of property value of around 30%)
Posted by: Don Wilson | February 11, 2010 5:09 PM
You can thank "mark to market" accounting changes for that one, Don. You are right. The banks are still insolvent and don't have to realize the loan loss until the property is through the foreclosure process. This is a big reason why they are being delayed. The banks want to spread out the pain instead of taking it all at once. They know they would have to raise more capital otherwise. Without the TARP funds, there is no way they could cover loan losses. Just wait for the commercial property implosion to happen. That won't be over until 2014. The Pay Option ARM and Alt A also have a few more years before they are taken out of the system. Instead of letting them go down quickly and getting it over with, they want to spread it out over a long period of time and that will delay a true recovery.
Posted by: Frank Rizzo | February 12, 2010 7:32 PM