Industry watchers expecting foreclosure trends to follow a predictable path are destined for surprises, as the recent figures from RealtyTrac demonstrate. March marked a 4-year low in new foreclosures, with actions increasing in judicial states, but surprisingly declining in non-judicial ones. In the aftermath of the AG settlement with the major servicers, this result seems counterintuitive to say the least. However looks may be deceiving on closer examination.
The rate of foreclosure activity does indeed appear to be increasing in the states most directly affected by the robo-signing delays and the negotiations involved in the AG settlement. But why the drop in the non-judicial states when we have a mountain of seriously delinquent loans that should be in the foreclosure pipeline by now, but instead are still waiting in the wings?
The answer may lie in the AG settlement itself. The top servicers control a huge percentage of the loans currently in default, as well as those that are delinquent and on the precipice. The majority of these are in non-judicial states, most notably California, which had a massive number of loans in the Countrywide portfolio alone. Dual-tracking, the practice of working with borrowers on loan modifications at the same time foreclosures are under way, was specifically disallowed because of massive consumer complaints that foreclosures too often happened before mods could be processed. With dual-tracking no longer permitted, and with the affected servicers tasked with writing down at least $20 billion in principal on these loans, it is less of a surprise to find foreclosures declining in those states.
Holding off on new foreclosure actions and standing pat on defaulted loans that would normally already be in the process makes sense, as servicers determine which borrowers are eligible for the principal balance reductions they are required to make under the settlement. By focusing on pools of loans in the states with the most foreclosures and the largest drop in property values, servicers can get to their respective increments of the $20 billion requirement more quickly.
Foreclosure alternatives such as short sales are also ramping up, and we can expect to see a significant increase in them from the major servicers in the coming months. It stands to reason from a servicing perspective to approve a short sale, forgive debt that qualifies toward the servicers' principal balance reduction requirement, and resolve situations quickly to reduce loss severities. This is often more attractive than modifying loans for borrowers who have not made payments for many months (or even years) and hoping they don't redefault. The deed-for-lease concept, such as the program recently announced by Bank of America (BAC), may also gain ground for the same reasons. Servicers other than those named in the AG settlement can be expected to follow suit.
Fast-tracking short sales and other programs are to everyone’s best interests for a variety of reasons, including bringing qualified borrowers to the market, making it possible for departing ones to return years sooner, and stabilizing the real estate inventory to accelerate the housing recovery.
There are also regional issues to consider, notably the "Homeowner Bill of Rights" proposed by California Attorney General Kamala Harris, and Nevada's new law regarding trustees, which makes illegal repossession of homes (including robo-signing) subject to criminal charges. The California legislation consists of six bills that affect all mortgages in the state, not just those covered by the AG settlement. It includes provisions for ending dual-tracking, providing single points of contact, tenant protections after foreclosure, increased law enforcement, anti-blight measures and a special grand jury for mortgage crimes and foreclosure abuse. Expect a flurry of similar responses in state houses across the nation, particularly in an election year.
Additionally, reductions in foreclosure actions might be attributed to the systemic delays most servicers are seeing in their pipelines. Foreclosures are more difficult to complete, making for fewer scheduled trustee sales and fewer assets becoming REO. It all means the number of foreclosure actions will be lower than expected, overall.
The recent foreclosure figures are reminders that statistics are readily misunderstood and often misleading. Examining the stories behind the story reveals that the decline in foreclosure activity, while somewhat unexpected, is no longer unexplainable.
Rick Sharga, formerly senior vice president of RealtyTrac, is executive vice president of Carrington Mortgage Holdings.