Banks are slowing foreclosure rates yet again, and it isn’t because they are out of borrowers to foreclose on. With the settlement earlier this year, banks began to clear out their existing REO inventory, and they slowed foreclosures in the Southwest in order to modify mortgages to meet their requirements under the settlement (note the uptick in cancellations last month). Ideally, the banks would like to modify loans to keep borrowers in place and complete short sales for those who want to leave. They don’t want to resolve there
legacy toxic loans by foreclosure. Unfortunately, borrowers are not cooperating. Borrowers benefit more by squatting until a foreclosure.
When Bank of America Corp. sent letters to 60,000 struggling homeowners offering to slice an average $150,000 off their loans, the lender got an unusual response from most of them: silence.
I think most people recognize these are bait-and-switch tactics of the banks. Lenders generate big headlines about giving away free money, but when the borrowers apply, they are offered something far less palatable. However, the lack of response goes beyond a basic distrust of the bank’s motives.
Homeowners who fell behind on their payments began receiving the mailings in May, part of the bank’s effort to meet terms of the $25 billion industry settlement over foreclosure abuses. More than half haven’t responded as “borrower fatigue” causes them to tune out the offers, said Dan Frahm, a spokesman for the Charlotte, North Carolina-based bank.
This is more than borrower fatigue. Most people aren’t going to respond because they benefit more by simply squatting until the foreclosure. Underwater borrowers are not completely stupid. Many recognize a loan modification is paying more for their house than it’s worth. Plus, once they complete the loan modification, they have to start paying again. If they do nothing, they can stay payment-free indefinitely while the banks wait for their answers and finally begin foreclosing on the non-responders.
“The number of customers responding is lower than we expected, given the significant assistance available,” Frahm said in an interview. “We are working very hard to determine why response rates are lower than expectations.”
Let me clue you in, Mr. Frahm. Your borrowers are not going to respond to you because it’s in their best interest to ignore you. Another year or two of free housing is preferable to a loan modification that causes them to pay $300,000 for a $200,000 house.
… Previous efforts to bolster the housing market haven’t helped as much as expected. When President Barack Obama announced the Home Affordable Modification Program, or HAMP, in 2009 he set a goal of 3 million to 4 million renewed loans. Fewer than one million have been permanently modified.
And of those one million, more than half will fail again within 18 months. Very few of these loan modifications will be truly “permanently” modified.
Bank of America, the second-biggest U.S. lender by assets, will offer principal reductions to more than 200,000 clients by August, Frahm said. Other steps include cash incentives to sell a delinquent borrower’s home for less than the amount owed and a pilot program to turn owners into renters, he said.
Homeowners are exhausted from fighting foreclosure and may think offers to cut loans by one-third aren’t legitimate, Ron Sturzenegger, head of the lender’s Legacy Assets Servicing unit, said last month at a conference in Denver.
… Initial solicitations went to those who were delinquent for the longest and may have abandoned their homes, Frahm said. The response may improve as the lender reaches those who have been behind for shorter periods, he said, declining to give specific figures.
Most of these people haven’t abandoned their homes, they have merely abandoned paying their mortgages.
The company has about 1 million customers who have missed at least 60 days of payments,
Whoa! Wait a minute. Remember yesterday’s discussion about shadow inventory? CoreLogic says there are only about a million delinquent borrowers nationwide. Bank of America has a million on its books alone! If B of A has a million delinquent borrowers, how many do the other major banks have? And what about the MBS pools they manage? How many people aren’t paying their loans?
about 85 percent of whom were inherited from the 2008 takeover of Countrywide Financial Corp.
The bank, which has posted more than $40 billion of costs tied to faulty home loans and foreclosures, has about 50,000 people working to help distressed homeowners. …
Hassan Fallah, 59, said he has been trying to modify his Countrywide loan on his Brentwood, California home since late 2009. The hotel manager’s tax returns were lost by Bank of America, service representatives didn’t return calls or referred him to people no longer employed by the lender, and he was eventually told he didn’t qualify for the government’s Home Affordable Modification Program.
This year, Bank of America reviewed his case for the settlement’s debt forgiveness program. A May rejection letter overstated his monthly income by $1,400 and left blank inputs that should have stated potential savings, he said.
“It’s been nothing but a horrible experience with Bank of America,” Fallah said in an interview. “I would not want anyone to go through what we went through the last two and a half years.”
Boo hoo. If he were paying the mortgage, and he wouldn’t have those problems. Am I really supposed to feel sorry for a guy squatting in a house in Brentwood?
The lender requires only verification of income for the modifications, he said. Those who qualify must be at least two months behind on payments on a mortgage that’s larger than the value of the property. Bank of America can’t make the offer to most of its delinquent borrowers because loans owned by Fannie Mae or Freddie Mac aren’t included in the settlement.
So the million delinquent loans are only counting the ones on B of A’s books. If that isn’t “most” of their delinquent loans, how many GSE loans that they service are now delinquent? Apparently, it’s more than a million.
The February settlement was hailed by Housing and Urban Development Secretary Shaun Donovan as providing “immediate relief” to distressed homeowners. That could be in jeopardy if servicers fall short and foreclosures aren’t prevented, which may cause the U.S. housing market to dip again, said Mike Calhoun, president of the Center for Responsible Lending.
You can count on the servicers to fail, not because the deals they are offering aren’t good, but because borrowers are committed to squatting until foreclosure.
Here’s what’s going to happen going forward
Based on the current circumstances, let me break out my crystal ball and see what’s ahead.
Lenders will spend the rest of 2012 trying to amend-extend-pretend to meet the terms of the settlement agreement. They will modify a large number of loans which will then transfer the inevitable redefault losses to the US taxpayer. Most of these loan modifications will fail. They will not meet their stated goals for principal reduction, but they will make up the difference on losses on short sales.
I expect to see incentives for delinquent borrowers to complete short sales to increase. If these short sales don’t happen, we won’t have any MLS inventory for the next few years. There will be larger direct cash payments for people who help the bank sell the house without a foreclosure. These cash payments will need to be large to overcome the built-in incentive to simply squat and live for free. The banks will make these large cash payments because the short sale losses will count toward their settlement quotas whereas the foreclosure is just a loss.
Eventually, lenders will give up on the most committed squatters, and they will ramp up their foreclosure machinery one last time, probably in 2013 but perhaps later. It will take another two or three years to process the deadbeats. As the numbers in this article allude to, there are a lot of delinquent mortgage squatters. In the meantime, the redefaults on the bad loan modifications will also add to the foreclosure pipeline. Lenders will not flood the MLS with foreclosures, but instead they will meter them out over time just as they have for the last several years. If lenders are lucky, the super low interest rates will keep prices rising.
Interest rates will remain low, even if it sparks inflation, because lenders need cheap mortgage rates to push prices back up near the peak to allow those who are currently underwater the ability to escape without a short sale. The number of strategic defaults will decline significantly because lenders will approve more short sales, and if house prices keep rising, most will opt to wait to save their credit scores.
All the delays and overhead supply will prevent prices from rising as fast as most hope over the next five years, but in the short term, we may have a price spike caused by the withholding of inventory today. Right now, very few of the delinquent mortgage squatters have their homes for sale, and with lenders slowing their foreclosure processing, very few will enter the MLS as REO. The 2012 low inventory price spike will be a direct result of lenders complying with the settlement agreement. It may cause a nominal price bottom to form, but it won’t be the start of a robust rally. The next three years will be choppy like the last three.
The former owners of today’s featured property were Ponzis of extraordinary prowess. They bought this property with an FHA loan putting just a few thousand dollars down at the bottom of the last cycle, and then they managed to extract about $400,000 out of this crappy little house. They will be anxious to repeat that again on the next cycle. Why wouldn’t they?
- This property was purchased for $135,000 on 11/24/1997. The owners used a $132,958 first mortgage and a $2,042 down payment.
- On 1/31/2000 they extracted their down payment and then some with a refinance of their first mortgage for $139,647. The rest was truly free money.
- On 10/19/2000 they obtained a $50,000 stand-alone second.
- On 1/15/2002 they refinanced with a $191,311 first mortgage.
- On 12/3/2003 they refinanced with a $232,000 first mortgage.
- On 7/9/2004 they obtained a $60,000 HELOC.
- On 3/18/2005 they refinanced with a $330,000 first mortgage.
- On 6/21/2006 they obtained a $53,800 stand-alone second.
- On 11/28/2006 they refinanced with a $423,000 Option ARM with a 1.5% teaser rate.
- On 5/10/2007 they refinanced with a $480,000 Option ARM with a 1% teaser rate.
- On 10/26/2007 they refinanced with a $411,400 first mortgage and a $111,100 stand-alone second.
- Total property debt was $522,500.
- Total mortgage equity withdrawal was $389,542.
That house was an extraordinary cash cow, and these borrowers milked it well.
Median home price is $365,000. Based on a rental parity value of $548,000, this market is under valued.
Monthly payment affordability has been improving over the last 4 month(s). Momentum suggests improving affordability.
Resale prices on a $/SF basis increased to $245/SF to $245/SF.
Resale prices have been weak for 12 month(s). Price momentum suggests weak prices over the next three months.
Median rental rates increased $107 last month from $$2,124 to $$2,231.
Rents have been slowly rising for 5 month(s). Price momentum suggests slowly rising rents over the next three months.
Market rating = 5
$349,900 …….. Asking Price
$135,000 ………. Purchase Price
11/24/1997 ………. Purchase Date
$214,900 ………. Gross Gain (Loss)
($10,800) ………… Commissions and Costs at 8%
$204,100 ………. Net Gain (Loss)
159.2% ………. Gross Percent Change
151.2% ………. Net Percent Change
6.5% ………… Annual Appreciation
Cost of Home Ownership
$349,900 …….. Asking Price
$12,247 ………… 3.5% Down FHA Financing
3.65% …………. Mortgage Interest Rate
30 ……………… Number of Years
$337,654 …….. Mortgage
$88,532 ………. Income Requirement
$1,545 ………… Monthly Mortgage Payment
$303 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$87 ………… Homeowners Insurance at 0.3%
$352 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,287 ………. Monthly Cash Outlays
($233) ………. Tax Savings
($518) ………. Equity Hidden in Payment
$15 ………….. Lost Income to Down Payment
$107 ………….. Maintenance and Replacement Reserves
$1,659 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$4,999 ………… Furnishing and Move In at 1% + $1,500
$4,999 ………… Closing Costs at 1% + $1,500
$3,377 ………… Interest Points
$12,247 ………… Down Payment
$25,621 ………. Total Cash Costs
$25,400 ………. Emergency Cash Reserves
$51,021 ………. Total Savings Needed
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