The Subprime Meltdown, Part 2 - Foreclosures and Prevention Programs
Robert L. Labbé - March 6, 2008More than 1.5 million homeowners will enter the foreclosure process in 2008, according to Rick Sharga, executive vice president for marketing at RealtyTrac Inc. of Irvine, California. The percentage of mortgage loans in the process of foreclosure stood at 1.69 percent of all U.S. homeowners at year end, the highest since the Mortgage Bankers Association began tracking it in 1993. Approximately one half of homeowners in the foreclosure process, 750,000, will have their homes repossessed estimates Mr. Sharga.
The distinction between homeowners in the process of foreclosure and actual foreclosure is an important one that is often overlooked, because it fails to take into account that at some point during the foreclosure process approximately half of the affected properties will not make it through actual foreclosure for one reason or another.
A host of measures are available to homeowners and lenders in order to avoid repossession and REO. These include loan modifications, forbearance agreements, repayment plans, loan assumption by a 3rd party, sale, short sales (a sale for less than the note amount), short payoffs (a note payoff for less than the note amount), and deeds in lieu of foreclosure - all essentially involve a form of compromise reached between lender and borrower to avoid foreclosure. These alternatives are gaining more popularity as the public becomes better informed through a number of foreclosure prevention programs recently put in place by the government and industry groups.
Foreclosure prevention programs abound: As hundreds of millions of dollars pour into foreclosure prevention programs, dozens of public and private entities are promoting products and services to help delinquent borrowers deal with pending foreclosures.
One such measure that did not make it was the Foreclosure Prevention Act of 2008. The U.S. Senate backed off legislation that would enable bankruptcy judges to modify mortgages. The bill sought to change the bankruptcy code so that Chapter 13 bankruptcy judges could modify mortgages on a borrower's primary residence. David G. Kittle, Chairman-elect of the Mortgage Bankers Association welcomed the measure failing largely due to the threat of a White House veto : "We fully concur with the Administration's analysis that this bill would very likely prolong the amount of time it would take for the housing market to recover from the current downturn”.
Notwithstanding the failure of the measure, judges in some states have acted to altogether stop certain foreclosure suits because the lenders, note holders or servicers that collect payments haven't been able to sufficiently prove they own the mortgages they are seeking to foreclose upon according to a recent article by Bob Ivry for Bloomberg. Mr. Ivry cites a Federal District Judge in Cleveland who dismissed 14 foreclosure cases last year due to the inability of the trustee or servicer to prove ownership of the mortgages. He notes that similar cases were dismissed during the past year by judges in California, New York, Massachusetts and Kansas, signaling a potential growing trend by the judiciary towards making it more difficult for mortgage holders to enforce their remedies under the terms of the note, at least in cases where clear evidence of ownership of the note is absent. This stresses the importance of conducting thorough due diligence prior to acquiring a pool of mortgages.
The federal initiatives include the following: HomeSaver Advance is a new program from Fannie Mae that enables loan servicers to offer qualified borrowers unsecured personal loans to bring their mortgages current on a mortgage loan that Fannie Mae owns or has securitized, with fewer up-front costs and generally in less time.
HUD’s FHASecure program has to date enabled 100,000 refinances of subprime loans since September and about 300,000 refinances are expected through FHASecure by the end of 2008. Of the $45 billion in FHA activity from September 2007 to December 2007, HUD indicates that over $13 billion was through FHASecure.
The National Foreclosure Mitigation Counseling Program, administered by NeighborWorks America is a national nonprofit organization created by Congress to provide financial support, technical assistance, and training for community-based revitalization efforts. It is a national network of more than 230 community-based organizations in 50 states which is expected to assist an estimated 350,000-400,000 delinquent U. S. borrowers.
Project Lifeline is the latest program put together by Treasury Secretary Paulson with six of the nation’s largest financial institutions who are all members of the Hope Now Alliance. Together they service almost 50 percent of the nation’s mortgages and the program allows certain homeowners the opportunity to put the foreclosure process on pause for 30 days while lenders try to work out a way to make the mortgage more affordable. Hope Now servicers modified 45,000 subprime loans in January 2008, up 16% from December's level, and Secretary Paulson said he expects the numbers to increase now that all the servicers have adopted the American Securitization Forum's protocol for fast-tracking subprime borrowers into loan modifications and refinancings.
Several state level initiatives have also been put in place to fund nonprofits that specialize in foreclosure mitigation and to inform and assist delinquent homeowners with workout options.
The various initiatives aimed at stemming the rising tide of foreclosures, including the Federal Open Market Committee’s aggressive lowing of the benchmark interest rate, will no doubt help many at risk homeowners avoid foreclosure, especially as adjustable loan rates reset. Moreover, sound business practices clearly favor loan servicers making every effort to achieve a successful work out – not only to the benefit of their borrowers - but in order to mitigate lender losses which are likely to be far greater under almost any foreclosure scenario. On March 4th Federal Reserve Chairman Bernanke made his most aggressive call to action yet to the lending community "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.'' Bernanke's urging goes well beyond previous comments, however one can safely assume that he’s well informed as to the cost analysis of a work out vs. a foreclosure. Altruism aside, this math alone should provide sufficient incentive for most lenders to work with troubled borrowers.
Robert L. Labbé is President of MorCap Fund Advisors, LLC. He can be reached at rlabbe@morcapadvisors.com
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