Widespread foreclosure freezes that began in late last year and ran through the first quarter of this year appear to have done little to change the outlook for troubled borrowers -- and may even have made things worse, for everyone involved.
A report released recently by due diligence and surveillance specialist Clayton Holdings, Inc.
highlights the early returns of various moratoria put into place by servicers ahead of the Obama administration's Making Homes Affordable (MHA) modification and refinance programs. A number of the nation's largest servicers had released statements earlier this year announcing their intent to suspend foreclosure sales until details of the program were released, generally until the end of March.
According to Clayton's data, halting foreclosures did little to improve the outlook for most troubled borrowers: of the loans that the firm's analysts estimated would have otherwise had foreclosure sales completed during the "freeze" period, 93% remained in foreclosure or were moved into REO status by April among those servicers that implemented a widespread moratorium on foreclosure activity. In comparison, among servicers that did not implement a large scale freeze on foreclosures, 89% of loans estimated to have progressed to foreclosure sale by the end of March either remained in foreclosure status or had been moved into REO.
The data is featured in Clayton's monthly InFront RMBS report
, which provides an early snapshot of RMBS performance data ahead of traditional monthly remittance reports.
The data seem to illustrate just how little freezing foreclosures really helped matters: Among servicers implementing a moratorium, just 7% of borrowers facing imminent foreclosure were "helped," either in the form of repayment plans, modifications, reinstatements, or short sales. That number actually grew to 11% among servicers that did not
implement a foreclosure freeze -- a result that is clearly at odds with reports in the popular press, which have painted the freezes as a needed step to help troubled borrowers.
Servicing executives that HousingWire
spoke with suggested that the real problem is negative equity, or borrowers who have seen the value of their homes drop precipitously in the most troubled housing markets. "Negative equity puts borrowers into a precarious situation," said one servicing executive, who asked to remain anonymous. "Borrowers are over-leveraged, on homes, cars, and everything else, to begin with."
"Halting foreclosures didn't solve for the leverage problem, or magically make equity appear out of nowhere," he said. "So it really ended up digging a deeper grave for many consumers, in the form of further arrearages and potential fees that get added to the mountain of debt that already must be repaid to bring a loan current. And I hate to see it."
Another executive, who runs a loss mitigation department at a subprime servicer and asked to remain anonymous, said his shop has "gotten really, really creative" with many of the solutions offered to troubled borrowers, but in many cases sees borrowers that are simply beyond help. "Say we've got a borrower that went 100 percent on a $500,000 home in California that's now worth $375,000, using even a more vanilla interest-only loan," he said. "This borrower loses their job and comes calling. Even if we forgive some of the debt, we can't solve long-term for a lack of income."
Servicers also note that a troubling trend is emerging, where borrowers are increasingly refusing to consider repayment plans or offers for a loan modification, believing that Obama administration's modification plan guidelines entitle them to a larger payment reduction than what is actually possible. "It's just misinformation on the part of consumers, but it's certainly not helping anyone address the reality of the situation they're in," said one of the servicing executives.
Both servicing executives HW
spoke with also stressed that their operations are doing all they can to help troubled borrowers, but suggested that details on the Obama administration's modification plans were slow to arrive, which hampered modification efforts during the moratorium period. Analysts at Clayton noted the same point in their own discussions with servicers, noting that many had said they "were given minimal detail up front, and instead relied on their own loss mitigation and loan modification programs to review loans during the moratorium timeframe."
As a result, and perhaps not surprisingly, 60+ day delinquencies for both subprime and Alt-A mortgages are now at one-year highs, according to Clayton's surveillance data. It's a trend that isn't just painful for consumers: it's a trend that is painful for investors, servicers, and lenders alike, too -- all of whom must ultimately bear the cost of carrying a bad loan to some sort of finish line, whatever that finish might eventually look like (and however far away it may be).
Paul Jackson is the editor-in-chief of HousingWire magazine and Housingwire.com.