What started as a clerical issue is beginning to feel more like the apocalypse. The mortgage finance industry survived the debacle of subprime mortgages, the collapse of commercial paper and market-wide liquidity locks only to be equally impacted by simple documentation errors.
And this is why: for all of the different nuances to the next end-of-the-world moment, one thing remains the same — the reaction. As the problems get smaller, the responses seem to be getting larger.
This is predictable. But what is going to happen next, is not. The definition of a market 'hit' is that you can't see it coming.
In the case of robo-signing, what started as a documentation problem that originally seemed simple enough to repair grew into an issue of state-by-state foreclosure regulations adding issues that crop up only during default, resulting in potential buybacks.
Today in a speech, Charles Plosser, CEO of Federal Reserve Bank of Philadelphia,
remarked, "When the next crisis inevitably arises, the cycle will likely repeat itself, with more laws, more stringent regulations and more assurances that — this time — we have eliminated the possibility of bad economic outcomes and have prevented reckless behavior from disrupting the economy."
This is assuming the reckless behavior happened yesterday. But what about reckless behavior happening today? This is what will cause the next hit.
Consider our future without foreclosure — the potential outcome to recent events.
In an effort to end these shameful practices of taking possession of homes from borrowers who don't pay the mortgage, we can't see the forest for the trees.
For example, short sales are already growing in popularity. Before the Foreclosuratoria carnival came to town, REOs represented approximately 30% of all distressed sales — steadily losing market share.
Short sales are expected to be taking market share and will likely fill the gaps once new laws make foreclosures much more difficult.
But nothing is being done industrywide to ensure these short sales are closing cleanly, in an effort to prevent aggravation at a later date.
Just last night, while watching House Hunters on HGTV
, the couple purchasing a short sale seemed to be paying an inflated price. One wonders why the price on a $210,000 valued short sale is being sold for $190,000 or so; 10% below market does not seem to fit HGTV's definition of a short sale where buyers "get a lot of house for not a lot of money," the episode synopsis says
I can't help but wonder if this time next year borrowers Chris and Lali get the feeling they may have been duped and claim the price was artificially high and decide to take the bank (not the agent, of course) to court.
Soon, press reports will follow, citing the hazardous and predatory short sale practices that went unchecked for the second half of 2010 and well into 2011. The banks will then halt short sales, at first voluntarily, then later….
The point is that both foreclosures and short sales, perhaps even all loans, should be reviewed today in an effort to suss out potential problems in the future.Why wait for a default event before getting to that stage?
For example, even though short sales will be booming, the establishment of an arbitration resolution process seems to be considered unnecessary in mortgage finance — which is fine but in a future without foreclosures, the only ones who are going to see continual profits are those involved in litigation.
Meanwhile correcting the flaws in the foreclosure documentation will take time, and this will likely keep everyone focused on this issue while the next big hit begins loading up.
At some point we will have to stop looking at the mistakes we made yesterday or even today, but rather at the mistakes that may surface sometime tomorrow.
Jacob Gaffney is the editor of HousingWire.
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