Sue Allon is the founder and CEO of Allonhill, a leading financial services firm providing disclosure-quality mortgage due diligence services, credit risk management and consulting. The company offers extensive mortgage capabilities and experience, leading-edge analytics and an independent, investor-oriented approach, to clients including hedge funds, mutual funds, private investors, government agencies, ratings agencies and mortgage originators and service providers.
For this installment of In This Corner, Sue sheds some light on the shadow inventory of foreclosures and the future of securitization.
HW: Is there a "shadow inventory" of foreclosures, and how big is it?
Sue: The overhang of REO [real-estate-owned] properties is very real. I’ve seen some fascinating numbers lately that show that although active defaults are significantly on the rise, REO inventory has declined. The conclusion that has been drawn is that there isn’t a lot of risk from REOs hitting the market now, or that foreclosures are stalling before the properties go to REO. This is true – defaults are increasing, and these loans aren’t moving into foreclosure or out of foreclosure and into REO. That means that there is an increasingly large inventory of loans that will be foreclosed and properties that will hit the market. When those loans do default, we will see hundreds of billions of dollars of residential properties come onto the market. This will obviously have a dampening effect on housing prices.
HW: What's causing the "shadow inventory"? Moratoria, government programs, or the banks themselves?
Sue: Government programs, including HAMP [Home Affordable Modification Program] and various state moratoriums, and private modification programs are having a positive effect. Most large banks and servicers have a fallback program that allows homeowners to get relief if they fail to qualify for a government program. Those programs have kept homes from foreclosing. But for many homeowners who simply took on more house than they can afford, they are only delaying the inevitable. The delay in these foreclosures has been very important to the market’s ability to sustain real estate prices. I believe the delay might be what helps us get houses moving again, with loans to finance them, before those properties reach the market.
HW: Going forward, what due diligence should be done prior to securitization?
Sue: I believe investors should expect to have an independent third-party review firm perform a due diligence review of the loans that go into a securitization. That third party should attest, in writing, to the loans that were reviewed, what factors were reviewed and exactly what was done to resolve discrepancies noted in the review. The investor should receive a complete disclosure of the loans in the pool, their characteristics and the third-party review firm’s findings related to them. Anything short of that fails to bring credibility and transparency to the transaction and merely repeats the mistakes that brought this market down.
HW: How has Allonhill helped its clients bear the winds of the current foreclosure crisis?
Sue: We’ve stepped in and helped servicers dig their way out from under an overwhelming number of modifications. We’ve helped develop parameters for some modification programs and have helped resolve some of the gray areas around the rules, such as what qualifies to be included as income when evaluating a modification application. Our system brings a level of calm to organizations faced with too much work to bear, because it can process millions of loans and is configured to test modifications to make sure that they’ve been properly accepted or declined.