A record jump in foreclosure activity in March that occurred just as a voluntary ban on foreclosures ended is raising troubling questions about whether lenders and servicers are genuinely willing and able to do loan modifications on a large scale. And it poses an even more worrisome possibility: That many borrowers can’t be helped at all.
Foreclosure filings reached their highest levels on record in March and during the first quarter of this year, RealtyTrac, an online foreclosure database, reported Thursday. Filings in March alone were up 46 percent from the same time last year. Total filings in the first quarter topped 800,000, a 24 percent increase from the first three months of 2008. Filings include default notices, auction sale notices, and repossessions.
The sharp increase came as a voluntary agreement by major banks to freeze foreclosures and work out loan modification agreements with borrowers came to an end on March 6. Separately, a foreclosure ban by mortgage giants Fannie Mae and Freddie Mac ended on March 31. Like Fannie and Freddie, the banks and lenders taking part in the voluntary freeze said they hoped to use the time to get borrowers into more affordable loans and to avoid foreclosures.
With filings spiking, that goal clearly didn’t get met. The jump in foreclosures leaves some worried that foreclosures also will soar this month, with the end of the Fannie and Freddie ban. The increase also comes just as the Obama administration announced this week that it had signed on six major lenders for its Making Home Affordable plan, a major effort to help as many as 9 million borrowers stay in their homes with loan modifications and refinancings.
A spike in foreclosures coming as lenders ended their voluntary ban means one of two things, said Rick Sharga, RealtyTrac’s vice president for marketing – and neither is particularly encouraging, especially as the Obama plan finally launches. The plan was first announced Feb. 18, but the administration had to develop guidelines for how it would work.
“There are two ways to look at the increase,” Sharga said, in a e-mail. “Either the servicers…were simply saying what they’d like the public to hear and are just back to processing en masse; or they’ve decided that all of these new defaults aren’t salvageable, in which case the numbers are even more distressing.”
As TWI has reported, foreclosures freezes aren’t a quick fix to the mortgage crisis. Foreclosures consistently spiked after temporary stays ended in states from Massachusetts to California. Sharga said the problem has been the lack of a well-designed, streamlined loan modification plan. It remains to be seen, he said, whether the Obama administration’s new approach will be enough.
“I’ve been saying for well over a year now that these delays, absent a well-designed, integrated approach to modifying the loans, were simply delaying the inevitable,” he said. “That’s what’s happened in every state that’s instituted its own moratorium or delay (Massachusetts, , , …): a short-term drop in activity followed by a spike back to the previous levels.”
Sharga called the Obama plan “the best of the bunch so far,” but noted that it will take several months to get it fully in place. He said the framework of the plan is simple, but that managing the details will be “a nightmare for the industry and government to coordinate.” And the plan still might not slow foreclosures significantly, because it isn’t designed for defaulted loans that are seriously upside-down. Plus, it doesn’t protect servicers from lawsuits by their investors if they unilaterally decide to modify loans.
It’s not that moratoriums on foreclosures have been totally useless, however, Sharga said: “I’m sure that all the delays have inevitably helped some homeowners save their homes, and that’s a good thing.” His concern, he said, is how little progress has been made in stopping foreclosures, despite the many announcements of foreclosure freezes.
One reason for that lack of progress, at least in California, could be that lenders finally are going through with foreclosures for homeowners who owed more on their mortgages than their homes were worth and abandoned their properties, said Sean O’Toole, CEO of ForeclosureRadar.com, which compiles California foreclosure data.
“One thing to keep in mind is that many homeowners have literally “walked away” – in those cases there is little reason for the lender not to complete the foreclosure – which may partially explain the pickup,” O’Toole said.
Alan White, a professor at the Valparaiso University Law School who studies loan modifications, thinks that pickup will only continue. White found that servicers are dragging their feet on modifying Pay Option ARMs, which are interest-only loans that allow borrowers to choose the size of their monthly payments. The principal balance, in the meantime, continues to grow, and the loans reset after a few years to much higher payments. Former subprime lender Countrywide Financial specialized in Pay Option ARMs, and defaults on the loans led to its downfall. Some $1 trillion in Pay Option ARMs and Alt-A mortgages, or no-documentation loans, are scheduled to reset in the next year, according to Credit Suisse.
“Where I think the servicers are lagging is in being proactive about the Alt-A mortgages, especially the option ARMs, which need to get modified in much bigger numbers soon,” said White, who examined recent trustee investor data to reach his conclusions.
Foreclosures also may continue to increase because those homeowners who don’t qualify for the Obama administration’s mortgage rescue plan have few options, other than losing their homes, noted Michael Collins, founder of the PolicyLab consulting group, a mortgage research firm in Ithaca, N.Y. Beyond that, a weak economy is putting further pressure on strapped homeowners, with more likely to fall behind on their loans.
“We lost 600,000 jobs last month,” Collins said. “That is huge.”
And while Fannie and Freddie ended their foreclosure ban on March 31, the mortgage rescue plan is just getting underway. The Treasury Department only on Wednesday announced the the first six participants to sign up for the plan, including three of the nation’s largest banks: JPMorgan Chase, Wells Fargo, and Citigroup. The lenders could receive up to $10 billion in incentives. More servicers are expected to participate.
Given the gap between the plan getting up and running and the end of the foreclosure freeze, some homeowners may simply fall through the cracks and lose their homes, said Elizabeth Renuart, an attorney with the National Consumer Law Center who focuses on predatory lending issues. “It certainly could happen,” she said.
As the new foreclosure numbers show, nothing so far seems to be slowing down the foreclosure machine.