Housing MarketMortgageServicing

The housing market outsmarted the foreclosure crisis

Loss mitigation waterfalls, forbearance and whole lot of equity are giving borrowers a fighting chance

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For Jason Vanslette, a lawyer who specializes in foreclosure litigation, everything came to a screeching halt on March 27, 2020. President Donald Trump had just signed the CARES Act into law, and with it, a moratorium on foreclosures and evictions had locked into place.

Vanslette, a partner at Kelley Kronenberg in Fort Lauderdale, said a veritable mountain of foreclosure litigation has piled up on his desk, unable to be processed by the Florida courts. And each and every one of those cases is pre-COVID – with underwater homeowners waiting it out. 

“The courts, especially in Florida, don’t particularly care for cases just sitting,” said Vanslette. “Either you move them or you dismiss them, because they have obligations to ensure that their dockets are moving.”

For many borrowers, the waiting game is going to be their best bet. If a foreclosure is contested, Vanslette said it can take anywhere from one to two years for the loan to make its way through the legal system due to its likelihood of ending up in a nonjury trial. If it goes uncontested, the process is closer to 90 to 120 days.

“Especially now that the dockets have been delayed and the availability of judges being so strict, we’re seeing the earliest trial dates not until 2022, and that’s for the cases that are ongoing, there’s no telling the backlog,” Vanslette said. 

In two weeks, the federal moratorium is expected to sunset, bringing with it a wave of new potential cases. 

Ordered by the former Trump administration, issued by the Centers for Disease Control & Prevention, and extended multiple times following Joe Biden’s election, the moratorium managed to keep foreclosures to rock-bottom lows for nearly a year. 

Despite the moratorium’s success, roughly 2 million borrowers are in forbearance and 1.8 million are seriously delinquent as of the end of April (meaning they haven’t made a payment in 90+ days). Few believe the situation is as dire as it was in 2008, but there will be some fallout.

According to Doug Duncan, Fannie Mae‘s chief economist, there are four scenarios for borrowers at risk of foreclosure. The first three being much more likely, he noted.

The first posits that households will have their income restored as the economy continues to grow at an average of 7%. This will allow them to bring their mortgage current and do away with their forbearance plan.

A second group of people will have their income partially restored so that the mortgage servicer may restructure the loan, and they can then make payments and remain in the house.

The third group may not see any true income recovery and will likely have to exit the home. However, given the number of borrowers in America with solid levels of equity, they are more likely to execute a pre-foreclosure sale. With that, they can pay what’s owed on the mortgage and exit.

Finally, the last group, will have little to no equity in their homes and will face the foreclosure process. Those homes will be absorbed back in to the market.

“We simply don’t see a tsunami of foreclosures, not with everything servicers have put in place and the amount of time left between forbearances going down and the economy on the up,” Duncan said.

When the national moratorium does expire, borrowers’ fates will be in the hands of states and servicers on whether to keep staving the foreclosure process, or begin the inevitable. Luckily for them, the housing market has never been hotter. 

Time is of the essence

A May 2021 report from ATTOM Data Solutions revealed there were a total of 10,821 U.S. properties with foreclosure filings — default notices, scheduled auctions or bank repossessions — down 8% from April but up 23% from a year ago. Foreclosure starts, which represent the initial notice of default, grew by 36% year-over-year.

“While the increase in foreclosure activity is significant, it’s important to keep these numbers in perspective,” said Rick Sharga, executive vice president of RealtyTrac. “Last year’s numbers were extraordinarily low due to the implementation of the foreclosure moratorium and the CARES Act mortgage forbearance program, so the year-over-year numbers look a lot more dramatic than they are. And May foreclosure activity actually declined compared to April.”

There is no doubt that a number of loans will face litigation purgatory – likely through 2023 given the sheer backlog – but many economists won’t even entertain the idea that the foreclosure landscape would resemble that of 2008.

“People want to compare this time to last but look at the numbers, those borrowers were coming out without equity or had simply lost it in the fire,” said Selma Hepp, deputy chief economist at CoreLogic. “But people are gaining equity you see, they’ve already accrued about 10 to 12% additional equity because of the increase in home prices.”

In fact, calculating mark-to-market CLTVs of homeowners in forbearance through February 2021, data giant Black Knight estimated that 96% have at least 10% equity in their homes – typically enough to sell through traditional real estate channels to avoid a default or short sale.

Flush with cash from federal assistance over the past year-and-a-half, borrowers today are better suited than they were following the passage of the Obama administration’s Home Affordable Modification Program, or HAMP, in 2009. When Obama originally signed the program, he promised it would assist three to four million homeowners in modifying their loans to avoid foreclosure. By 2016, the same year the program ended, fewer than one million homeowners had actually received the assistance, and nearly one in three re-defaulted.

Most observers today say that the dearth of overall housing inventory means the market will be able to absorb whatever comes online. Investors have had little success in finding bargains due to soaring home prices across the country, so they’d welcome even a trickle of foreclosures, experts told HousingWire. 

And many homeowners will likely be able to work out a payment plan with their servicers. According to the Mortgage Bankers Association, the number of borrowers in forbearance has fallen for 15 consecutive weeks as of June 6. That’s an average of just 4.04% of mortgage servicers portfolio volume – less than half of the pandemic’s peak.

Nearing the 15-month expiration for many of those plans, about a quarter of exits resulted in a loan deferral or partial claim. Another 25% represented borrowers who continued to make their monthly payments. The remaining is modestly broken in to those who resulted in reinstatements, loan modifications, loans paid off through refinancing or selling the home and those who have exited without choosing a loss mitigation plan yet.

Only 1.5% of exits resulted in repayment plans, short sales or deed-in-lieu.

Who’s in charge here?

The CARES Act caused some confusion among servicers when it was first passed in 2020, however, it was quickly integrated alongside a number of loss mitigation waterfalls that the Federal Housing Finance Agency and the Federal Housing Agency lined up.

“A lot of lenders and servicers were proactive in this go-around,” Hepp said. “Back then people genuinely didn’t know who to call, who was servicing their loan, who could help them when they had an inability to pay. Servicers were just simply prepared this time, and if they weren’t, they brought in the manpower to get them there.”

Hepp also pointed out that prior to the recession, investors and prospective buyers were buying at the top of the market with NINJA loans – a slang term for a loan extended to a borrower with no income, no job and no assets. After the financial crisis, the Fed cracked down on loan requirements giving borrowers “more skin in the game this time around.”

Both the FHFA and FHA have been clear that they want to give homeowners in COVID-related forbearance enough time for a soft landing, kicking the can down the road months at a time to avoid a foreclosure cliff. It already stands as the last option for servicers. The process is both expensive and time consuming.

The problem now being whose jurisdiction will foreclosure legislation fall under when the moratorium is lifted.

“Freddie, Fannie and the FHA can do their own moratoriums because they insure the loans,” Vanslette said. “They’re allowed to propagate their own restrictions on moving forward with foreclosures.”

On April 1 the Consumer Financial Protection Bureau warned servicers “unprepared is unacceptable”. Four days later, it proposed a foreclosure ban until 2022, which sparked an industry wide question of whether the CFPB even can constitutionally do that. The proposal known as Regulation X has not yet been approved.

The CFPB has been adamant in recent months it will be keeping a close watch over how servicers handle the massive influx of forbearance exits – and subsequently avoid foreclosures in the process.

“What they are doing is getting involved in a very complex process and it may be forcing servicers to violate covenants of the investor who bought the loan, and that’s the real challenge,” said Dave Stevens, CEO of Mountain Lake Consulting and former CEO of the Mortgage Bankers Association. “They have a responsibility to protect consumers’ interest, but to now come in and intervene in areas of mortgage lending that have already been pre-litigated with rule-making created under a similar democratic regime creates a lot of confusion and distrust, which is the last thing we need right now.”

According to Vanslette, the foreclosure moratorium should be settled under a state level decision for “safety, welfare and health” though there is a question as to whether this is also too overbearing for states. At the current pace, most states are just mirroring what the Fed is proposing until they can sort out what their best option is.

Though no word of extension beyond the CFPB’s proposal has been announced, large lenders that do a great deal of mortgage business are speaking up. In a meeting with the committee on banking, housing and urban affairs, Wells Fargo CEO Charles Scharf said the bank plans to extend foreclosure protections through the end of the year. Bank of America, on the other hand, said the foreclosure suspension would run out the same time as the federal moratorium given so many loans are performing in forbearance.

According to data from Black Knight, 46% are now reperforming on their loans, and another 17% have paid off their mortgage entirely, either by refinancing or by selling their house into a market that naturally absorbed it.

“Remember these are private contracts with private individuals,” said Vanslette. “Governments should not be getting involved with judicial remedies in a private contract. I mean that just goes back to our founding fathers so it gets really touchy when you start doing moratoriums on such private contractual remedies such as a foreclosure.”

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