On May 24th, The New York Times ran an article in their Opinion section that revealed a nasty, little-known truth about loan servicing that I find outrageous.

As most homeowners know, your mortgage is probably not owned or serviced by the bank or company from whom you originally borrowed.  Not only was your loan probably sold in the secondary market, but it is likely that it is serviced by an entirely different company than the bank or company you actually owe. 

Loan servicing refers to the tasks associated with collecting your monthly payment, paying the investor, and often times, managing payments for insurance and property taxes.  These servicers are also responsible for sending out notices associated with delinquencies, collection activities, and if needed managing defaults.  In return, the servicer is paid a percentage of the principal amount owed, usually 12.5 – 50 basis points (1bp = 0.01%).  Additionally, the flat servicing fee may be augmented with a variety of incentives, all designed to create additional cash flow from each loan on the books.  The total value of these fees and incentives are noted on the servicer’s balance sheet as MSRs – Mortgage Servicing Rights.

Now here is the kicker:  Banks make more from the fees and charges associated with managing a defaulted loan and foreclosure than they can make on a loan modification!  Surprised?  No wonder so few modifications are approved; the servicers have their MSRs to protect! 

The only winners in this game are the servicers.  Not only do the homeowners seeking a modification lose, but so do the banks and investors who will foot the high cost of foreclosures and carrying REOs. 

Luckily, there are others that find this behavior unacceptable.  Democrats Jack Reed and Sheldon Whitehouse of Rhode Island and Sherrod Brown of Ohio have introduced Senate bills to establish standards for the loan servicing industry.  The proposed laws and regulations are designed to prevent banks from putting their financial interests above those of everyone else.

Here are 3 suggested new rules: 

1)      Homeowners would be evaluated for loan modification before ANY foreclosure activity, or related fee is initiated.

2)      Lender analysis used to approve or reject loan modifications would be standardized and public.

3)      Should a lender fail to offer a modification when analysis indicates that one is warranted the lender would be blocked from proceeding with foreclosure.

Whether it is the result of a Senate Bill, or actions by the new Consumer Financial Protection Bureau, someone needs to rein-in the greed of the loan servicing industry and give borrowers a much-needed break.

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First steps are often small and hesitant, but generally precede a more confident stride.  We can hope so.  Apparently U.S.households took a baby step out of financial distress during the first quarter of this year, according to the numbers released yesterday by CredAbility.  The non-profit counseling agency said its Consumer Distress Index hit its highest score in two and a half years, indicating that household financial distress is beginning to ease.

The index measures financial distress in five categories:  employment, housing, credit, household budgets, and net worth.  Average American households are queried and scored on a 100 point scale – the higher the score, the lower the level of financial woes with a score below 70 indicating financial distress.  So a score of 68.15 doesn’t sound like a lot to cheer about, but that is up from a score of 67.2 in the last quarter of 2010.

“I believe a new trend is emerging,” said Mark Cole,COOof the Atlanta-based counseling organization. “Our index has increased by four points in the last five quarters, an indication that the averageU.S.household is getting financially healthier [and] that the majority of consumers are on the right track.”

The positive direction of the index is credited to increased employment rates, but it was no surprise to me that the category dragging down the overall score continues to be housing.  The housing score in fact dropped in the first quarter of this year, indicating that mortgage delinquencies are still a major problem for American households.

So pay attention banks;  if you want us all out there spending money and using credit you’ve got to cut loose the ball and chain holding back our baby steps.  The quicker you cut your mortgage losses, the sooner we’ll all reap the rewards of moving up and out of the distress zone.  Principal reduction, anyone?

During a town hall meeting last Thursday inWashington,D.C. the President took a comment from a woman in the audience who explained that her loan modification expires in January, 2012.   Despite having excellent credit, she can’t refinance because she owes more than the house is worth.  Without a new loan mod, or principal reduction she will not be able to make her payments and could lose her home.

The President agreed that the banks need to take a more aggressive role in protecting homeowners.  He commented to the banks, “We were there for you when you got in trouble, then you’ve got to be there for the American people when they’re having a tough time.”  (I think he just forgot to add the part about the banks creating this problem in the first place.)

“We want to see if we can get longer-term loan modifications. And in some cases, principle reduction, which will be good for the person who owns the home, but it’ll also be good for the banks over the long term,” President Obama said.  “You know what,” Obama continued, “speaking to the banks…you’re going to be better off if somebody’s still paying on their mortgage than if they get foreclosed on and you end up not only having to go through all those legal processes, but you also end up…selling the home at a fire sale price.”

Excuse me, but isn’t that stating the obvious?  Is there anything new here?  Under the current government Home Affordable Modification Program (HAMP), borrowers may receive a modification that is valid for 5 years, and under some non-HAMP programs the modification period is as short as 2 years.  But then what?  Like the woman in the town hall meeting who was fortunate enough to even get a loan mod, what happens when it expires? 

President Obama concluded by adding that his administration is working with banks to expand loan modifications.  “We’re going to be talking to the banks. And I mean, on a regular basis,” he said.

Well, I bet that has the banks shaking in their boots!  “Talking on a regular basis”, what does that mean and how is that going to change anything?  If we are ever going to see an end to the real estate depression that continues to drag down our economy we need an effective plan, not lip-service.  Someone needs to lean on the banks to make permanent, meaningful modifications that include (as I’ve been saying for over a year), principal reduction.  Come on Mr. President….you’ve shown you’ve got the muscle.  Let’s see some action!

For most people, buying a home is the largest purchase we ever make, and chances are it was largely an emotional decision.   There was something about the view, the trees, or the kitchen appliances; something spoke to us and we were ready to buy.  Over time, that emotional attachment increases as we put our personal stamp on the house and make it our home.  No wonder that the idea of losing a home through foreclosure can be emotionally shattering.

Grieving for the loss of a home and what it means to you and your family can be very upsetting.  Too often however, I see people avoid dealing with the reality of their financial situation simply because it is too painful to even contemplate.  These are the folks that ignore the letters and phone calls from their lenders and just pray that somehow it all goes away or that they win the lottery.

If any of this touches a nerve, it might be time to take a hard look at your situation.   Try to put aside the memories of holidays in your home, and ask yourself a few simple questions:

  1. Are you behind on your mortgage payments?  What about your property taxes, insurance and HOA dues?  Are you allowing maintenance items to accumulate because you can’t afford to fix things?
  2. Has your bank notified you and provided options to help?  Have you received a Notice of Default?
  3. Do you owe more than your house is currently worth?  Is the negative equity greater than 20%?
  4. Has your household income dropped in the last two years?  Are you dipping into your savings or other assets to make ends meet?  Do you doubt that your income will improve in the next 3-6 months?

If you answered “Yes” to one or more of these questions, it’s time to take action.  As difficult as it might be to face the reality of your situation, it is far less emotionally stressful to act now while you still have options and are still in control.  As soon as you miss a mortgage payment, the clock starts ticking on a countdown to foreclosure.  Wait too long to act and your options disappear.

If you live in San Diego County and are ready to discuss all the various options available, please give me a call for a no-obligation, confidential consultation.

Marti Kilby

Broker Associate, REALTOR

DRELicense # 01474222

619-846-9249

marti@kilby.com

May got off to an interesting start with the release of several foreclosure reports that frankly, seem a bit contradictory.  There was good news.  There was bad news.  And I’m not quite sure analysts have a handle on what it all really means to the housing market.

Let’s start with the good news:  Mortgage delinquencies are down.  According to data from Lender Processing Services (LPS), delinquencies are down by 20% compared to this time last year.  At the end of March there were 6,333,040 loans nationwide that were past due or in foreclosure.  Sounds like a lot, but that is the lowest level since 2008.  The report would seem to indicate that modifications are helping as 23% of loans that were 90 days past due a year ago are current today.

Now here is where it gets confusing.  The same report showed that at the end of March foreclosure inventory was at an all time high – 2.2 million loans.  This inventory represents loans that have been referred to a foreclosure attorney but have not yet reached foreclosure sale.  The number of new foreclosure actions was 270,681 in March which is a 33% increase over the previous month.  So foreclosures are up but delinquencies are down?

Another piece of bad news was delivered in a HUD report detailing sales of FHA foreclosed homes.  HUD manages the disposition of homes that had FHA loans that were repossessed.  At the end of February there were 68,801 homes in the HUD inventory.  That is a 50% increase over the previous year.  The monthly sale of HUD homes has dropped from ahigh pointof 8,893 last June to a low of just 2,632 in January.  Thus new foreclosures are entering the market at an increased rate while sales have significantly stalled.

One factor not considered in the LPS report was the increase in the number of short sales over the last year.  In addition to loan modifications, which have not been very effective, short sales are presumably impacting the decreased delinquency rate as more homeowners are opting to sell short earlier in the delinquency cycle versus riding out the foreclosure timeline.    If you are a homeowner that owes more than your home is worth and are struggling to make your payments, the bright spot on the horizon might just be a short sale should a loan modification not provide the relief you need.

For the real estate industry overall, this jumble of numbers would seem to indicate that we’re still a long way from recovery.  With foreclosures increasing and sales decreasing, a bloated inventory of homes on the market will likely keep prices fairly stagnant in most markets.

As a result of the foreclosure robo-signing mess uncovered last September, loan servicers are facing new federal and state requirements outlined in a draft settlement proposal last week.  Here are the highlights that could provide greater protection for homeowners:

  • Servicers would agree to stop dual tracking.   Hard to believe, but currently many companies will pursue foreclosure, even while the borrower is trying to get a loan modification.    This new requirement would mean that foreclosure processing would be put on hold during the loan modification process.
  • Servicers would be required to review any loan modification that is denied.  They would also have to implement a system whereby the borrower would have 10 days to appeal a modification denial.
  • Most significant is the provision that would require servicers to “implement processes reasonably designed to ensure that factual assertions made in pleadings, declarations, affidavits, or other sworn statements filed by or on behalf of the servicer are accurate and complete.”  This would help alleviate the problem of minimum wage processors signing-off on foreclosures.
  • The proposal also states that servicers may not develop compensation programs for employees that encourage foreclosure over modification or other options.   And yes, that was in place at some institutions.
  • And lastly, servicers would be required to offer one point of contact to borrowers trying to complete a loan modification, short sale or forbearance agreement.   Finally!  This alone should improve the process, or at least lessen the frustration level of speaking with a different person every time the borrower calls.

Do I think this will improve loss mitigation for borrowers?  Let’s say I’m cautiously optimistic.  At the end of the day of course, any regulation is only as good as the enforcement that backs it.

Once again, Santa forgot to bring me a crystal ball.  So this look into the future of the housing market is based on trends from the past year, projections from those that crunch the numbers, and my gut feelings based on life in the real estate trenches.

Foreclosures continued to be the top story in 2010 with robo-signing and questionable practices making headlines.  In 2011 so-called shadow inventory will be making news as it grows and clogs the pipeline.  This includes borrowers that are 90 days or more delinquent, homes in foreclosure, and bank-owned properties not yet on the market.  S & P estimates that it will take 41 months to clear the backlog, continuing to slow the recovery.

Short sales will increase as the government and lenders try to stem the deluge of foreclosures that add to the shadow inventory.   Right now about 35% of defaults end in a cure or short sale.  I see that number growing as banks and the government iron out the problems with HAFA (Home Affordable Foreclosure Alternatives), and the processing of short sales is streamlined.

Loan modifications will continue to be largely unsuccessful.   There is some hope for small improvement in the numbers if the FHA principal reduction program can be expanded.

Mortgage interest rates jumped this last month, but are gradually heading down.   Frank Nothaft, chief economist for Freddie Mac foresees rates staying below 5.00% throughout the year.  Let’s hope he’s right.

Home sales will increase, especially for first-time buyers, provided interest rates remain low and the economy continues to improve.  If unemployment continues to decrease and incomes increase we should see an increase in home sales over 2010 by the 2nd half of the New Year.

Home values throughout most of the country will reach the bottom by mid-year and many areas, such as San Diego County will see modest gains of 2.00 – 4.00%.  The exception continues to be the luxury home market where home prices in locations such as La Jolla and Rancho Santa Fe will continue to decline.

My advice?  If you own a home and are not terribly upside-down, hang tight.  Looking to buy?  Do it now!  This is a great time to purchase your first home or pick-up an investment property.  Struggling with your payments?  Let’s explore your options, before it’s too late.  Overall, I’m cautiously optimistic.

Best wishes for a happy, healthy and prosperous New Year!