The press has had a field day with foreclosure difficulties and robosigners in the last couple of weeks. In reality, such problems pale in comparison with the difficulties already existing in the industry.
For the past year or more, mortgage servicers have struggled with selling properties taken back in foreclosures. Such disposition delays have cost the industry dearly, and will continue to do so. In response, some in the industry delayed foreclosures. Some banks allowed greater time for borrowers to affect short sales. Others took more time to modify loans, hoping to avoid foreclosure.
Foreclosure Delays are Common
While foreclosure delays are to some extent the result of backlog and overload, foreclosures have always taken a considerable amount of time. Different states have different rates of foreclosure, whether dictated specifically by law or through myriad time-consuming procedures to which adherence is mandatory. Consider the end points of the distribution, where Texas allows almost immediate foreclosure upon exceeding 120 days past due and New York requires procedures that commonly result in delays of more than 18 months.
As a result, among the more than eighteen million foreclosures recorded for securitized loans in BLIS in approximately the last decade, foreclosures occurred about 220 days after the last mortgage payment, or about 100 days past data-driven eligibility (120 days). Roughly a third of foreclosures occur at the earliest possible date (120 days delinquent) and another third occur within nine months of the missed payment (120 to 270 days delinquent). Ninety percent are complete at 12 months after the missed payment and 97% at eighteen months, with the longest observed foreclosure occurring at 108 months (nine years).
Foreclosure Delays Grew Larger in the Crisis
It was attempts to operate national-level mortgage banks amidst this tangled web of regulations that led to the foreclosure difficulties we are seeing playing out in the industry today. Part of the effect of the mortgage financed bubble, in fact, was a push into states with historically restrictive foreclosure procedures. As a result, we already saw a menacing bulge growing in 90-day delinquencies that was symptomatic of the fact that loans were going to 90-days past due, but the properties were not being foreclosed.
The existing bulge in foreclosure backlogs was well-known before the foreclosure documentation headlines. According to the Mortgage Bankers’ Association National Delinquency Survey, some 12% of delinquent subprime loans are 30 days past due, followed by just under 6% of loans that are 60 days past due. With seeming alarm, many view the fact that, only weeks into the foreclosure documentation problems, more than 21% of delinquent loans are 90 days past due but not yet in foreclosure, and another 22% are already in the foreclosure pipeline, for a seriously delinquent rate (90+ past due and in foreclosure) of just under 43% of delinquent loans.
The situation is worse, however, for securitized loans (and, therefore, their investors). Among current delinquencies reported for all securitized deals in BLIS, some 17% of loans are 30 days past due, followed by just under 8% of loans that are 60 days past due. For securitized loans, however, more than 30% of delinquent loans are 90 days past due but not yet in foreclosure, and another 26% in the foreclosure pipeline, for a seriously delinquent rate of just under 56% of delinquent loans.
But Foreclosure Delays, per se, are not a Problem
In reality, those effects should not be that large. Consider first the cost of an additional month in 90-day delinquency status as a result of foreclosure delays. As of September 30, 2010, the mean original recorded principal balance of delinquent loans was about $242 thousand at an interest rate of about 7%. With about 723 thousand loans in the 90-day bucket, that amounts to about $1 billion per month and with another 612 thousand loans in the foreclosure bucket that adds almost another $1 billion, which servicers have to advance to bondholders until the foreclosed property is sold. That seems big.
But that is not the real number to be concerned with. In truth, many of the foreclosed homes will not be sold immediately, or even in the near future. Moreover, to the extent that a property may lie in a more desirable market, that property’s foreclosure can be rationally expected to be cleaned up in an expedited fashion to avoid a significant loss. Hence, if the extra month or two working out the documentation problems does not delay the calendar date of the final sale, the effect is only the cost of reorganizing the legal department to get it right the first time. While that is not negligible, that is not an additional loss to investors.
In truth, therefore, foreclosure documentation problems have little to do with the delays, and will most likely – on their own – have relatively little effect on the property disposition pipeline. While the composition of the 90 day past due bucket is always somewhat large due to foreclosure delays, that percent will most likely remain stable as banks apply better procedures to new foreclosure cases.
The real wildcard in the situation is whether a legislative or executive foreclosure moratorium will be issued. Such a policy will result in delays out of the control of servicers, preventing them from stopping losses where those are most valuable with little effect on final disposition dates and prices in most real estate markets.
There is no question whether the contracts each party signed were valid. The Borrower owes the money they used to buy the property. The Lender has a claim to that money. Mere delays in providing the right documentation of a perfected collateral claim will not change the situation. Hence, a foreclosure moratorium would only turn an unpleasant inconvenience (albeit one of banks’ own making) into a source of considerable additional loss and unnecessary policy uncertainty for the entire industry.
Joseph Mason is Hermann Moyse, Jr./Louisiana Bankers Association Professor of Finance, Louisiana State University, and Senior Fellow at the Wharton School.
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