Great Recession

Foreclosure Is the New Black

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The "real" Amityville Horror house sold last year for $950,000.

Here's a recent surprise from the establishment media. CNN's Tami Luhby dares to make the case for foreclosure as the way out of whatever the national housing hyperpocalypse is now being called: 

While some of the 2.2 million loans in foreclosure can still be saved, many are too far gone, [experts] say. Some 37% have not made a payment in more than two years, while another 34% have not made a payment in 12 to 23 months, according to Lender Processing Services.

"Loans enter into foreclosure, but never come out," said Thomas Lawler, founder of Lawler Economic & Housing Consulting. "If this keeps going on, you have a continual overhang that never goes away."

For years Reason has been making the case that foreclosures are the least-cruel solution to the problem of bad mortgages. It is practically inevitable that foreclosure will ultimately be the solution to most seriously delinquent loans, despite federal efforts to prevent that. In 2008 the Bush administration tried to head off the foreclosure reckoning with the conservatorship for Fannie Mae and Freddie Mac, which continues to drain new billions from the taxpayers every quarter. The Obama Administration in 2009 launched the $75 billion Making Home Affordable program, which also failed to stem the slow-moving foreclosure tide. 

By doing nothing, both administrations could have produced a better outcome. Yet D.C. not only can't kick the intervention habit but, after three years of clear failure, can't even consider a pro-cyclical intervention. CNN doesn't get into the details of what such an intervention would look like, but the great artist Jim the Realtor suggested one back in 2009: 

Klinge is not opposed to government action, and he recommends subsidizing interest rates at 4.5 percent for purchases of foreclosed properties as a means to encourage both banks and delinquent borrowers to wrap up the foreclosure process quickly.

Just a reminder: The idea of a pro-foreclosure or even foreclosure-neutral policy is still considered so heterodox that the CNN article linked above is accompanied by a Foreclosure Freakout video blaming bank-owned property for vaguely defined "gang" activity in New Jersey. And a ratings agency recently shocked the nation's conscience by noting that fewer than 3 percent of loan modifications provided free home value to bad borrowers:

DBRS found that capitalization and rate reduction modifications made up the majority of loan restructurings, while principal reduction modifications accounted for just 2.80 percent of the total mods performed during the January-to-March period.

That figure is up from 1.90 percent of principal-reducing mods over the same timeframe last year, but down sharply from the 5.70 percent reported in the third quarter of 2010.

DBRS says investor reactions to the use of debt forgiveness as a loss mitigation tool continues to be mixed among senior and subordinate bondholders.

Meanwhile, the Comptroller and Office of Thrift Supervision's Mortgage Metrics Report gives a little perspective: 88.6 percent of mortgages in the Report's very large sample were current and performing as of the first quarter [pdf]. (The new report should be out in a few days.) If we allow the foreclosure wave to run its course, and stop giving banks and borrowers incentives to stay in bad deals, it will not be a national or even a regional catastrophe. 

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  1. Are lenders working at all with delinquent borrowers to avoid foreclosure? I simply can’t imagine banks want to end up owning these properties. I don’t see foreclosure being in any way best scenario for the two parties directly involved.

    1. The regulator is the only person who matters.

    2. For institutional investors like FNMA/FHLMC, it doesn’t matter to the banks one way or the other, because they have a fee schedule from the GSEs detailing how much they’ll pay for maint., etc.

      I’ve never worked on the private investor side, so I can’t speak to that aspect of it.

    3. What’s the point in working with a borrower who will then default on the modified loan? That’s what they’re seeing, so they just might as well speed up the process and foreclose right away.

      Anecdotally, my neighbor has now been living in his home for 2 years without making a mortgage payment and still hasn’t been foreclosed. It’s a great deal for him, but naturally he’s let the property go to seed.

    4. The real problem is that part of the reform that ended mark to market put in place requirements that short sales be recorded as a loss when the sale happens while nonperforming mortgages can be held on the books as performing indefinitely.

      So the idea that it’s in a mortgagor’s interest to sell the property and get what they can, aka something is better than nothing, is turned upside down by government accounting standards so that it is better for financial instituions to get nothing and pretend that it is a high value asset than to get fair market value.

      1. Mortgagor in second paragraph should be mortgagee, ie the entity that owns the mortgage.

  2. …the $75 billion Making Home Affordable program…

    The amount of cognitive dissonance here is mind-boggling. We have to prop up house prices, but we have to make houses affordable, so people can buy them, so they can have an asset whose value will skyrocket, but not in a way that will price others out of the market, but house prices need to go back up…

    I’m dizzy now.

  3. I just posted a great comment, but the stupid squirrels said it was spam. Poo on your stupid spam filters.

  4. Oh, baby, this is beautiful. We got a chandelier hanging up here, kids outside playing. It’s a beautiful neighborhood.

    We ain’t got nothing to worry about; I really love it, this is really nice.

    GET OUT!

    Too bad we can’t stay.

  5. Once a homeowner becomes more than some period delinquent (6 months?) and the loan has already been fannie-d or freddy-d the government should impose a fine on the bank who “holds” the title to get their ass moving in foreclosing/selling off the property. I live in a small town and we have far too many empty, decaying, vermin infested “not quite foreclosed” or “foreclosed yet the bank does nothing” houses ….

    1. I live in a good neighborhood, but the house next door to me was abandoned a year ago. It’s in terrible condition inside, and the roof has major problems. The bank refuses to foreclose, and just threw a blue tarp on the roof (WTF?) and has the yard mowed once a month. I cannot tell you how much that pisses me off. Do you think banks would be acting this way without government protection and bailouts? Of course not–they’d have taken their lumps years ago.

      1. A lot of times, it isn’t the banks fault. If it’s in the foreclosure process, depending on if you live in a judicial v. power of sale state (judicial states require court action, power of sale states simply have a trustee auction off the property), it could take years to complete the necessary legal filings and court appearances, and that’s assuming the borrower never even shows up. If you have mandatory mediation, like in some states, it goes on for even longer.

        Case in point: average time to foreclose in Ohio, NY, Florida, etc. is several years. Average time in Texas is just several months (not from default, but from foreclosure referral to sale).

        1. There’s some truth to that, but a lot of the administrative delays are due to the bank having shoddy paperwork. To be fair, a lot of mortgages are in the hands of purchasers in the secondary market, so they didn’t necessarily originate the loan.

          1. There certainly is that, but trust me, try scheduling a judgment hearing in Connecticut or Florida sometime. You don’t even get the initial hearing for at least six months after making the original docket application.

            And then, if the weepy borrower and his 30 orphaned children show up, guess what! He’s granted a continuance for another six months to give him time to “work something out”.

            It really is maddening.

            1. I know someone who is doing that. He’s a total piece of shit human being, not supporting his kids and intentionally underemployed. And he gets to sit in his house, not paying, for months if not years.

              Happy now, America?

          2. In summation, I hate judicial states.

            The worst part is, their mortgage rates aren’t any higher than for those of us in power of sale states. You’d think the market would price them differently, considering the extreme amount of effort needed to foreclose, but it doesn’t. Basically I could live in a state that gives me two full years payment-free before foreclosing, or live in a state that can get the job done in three months…and there’s no difference in what I pay, whatsoever. I have no idea why everyone doesn’t just move to those (mostly blue, with the exception of Florida) states and never make a mortgage payment again. You can literally stall it out almost forever, with very little effort.

  6. Wish I could have skipped two years of rent (fuck them)

  7. The “problem” with going ahead with foreclosures is it gets closer to forcing the banks to mark their assets to their real values.

    I see 1 of 3 possible outcomes:

    1)If FedGov is willing to let the banks hold these still-overvalued REO assets indefinitely then there will be a real problem with neglected properties. That’s a local problem.

    2)If FedGov or other parties force these REO assets to be sold, then there will be real values placed on these assets and the banks won’t be able to hide their capital problems. That’s a pension fund problem.

    3)If FedGov is willing to create some sort of program whereby the banks can offload these overpriced assets onto a government entity, it can bear the losses instead of the banks. That is a voter problem.

    I see #3 happening if Obama loses in November 2012, #1 happening if he wins. #1 will then be rectified halfway through the term with either #2 or #3 depending on how the 2014 Congressional election goes.

  8. Pro-Tip:
    Move to CT, FL, OH, or NY, make a few payments, then simply refuse to ever pay anything again.

    Show up every few months to a court-ordered mediation session, and submit paperwork every once in awhile.

    For this small effort, you too can live payment-free for 3 or 4 years.

    1. Payment-free perhaps, but not consequence-free. Once you stop making the mortgage payment your credit turns to shit. Then each month when you miss yet another payment, another layer of shit is added to your shitty credit history.

      Sure, living is cheap when you have no mortgage to pay but good luck getting a job or a car to get you there with a 400 FICO unless you can pay cash. If and when the sheriff does finally nail the notice to vacate on the front door, good luck finding a landlord to rent from.

      Which all makes sense actually since these types aren’t usually long-term thinkers and planners. They want it all and they want it now. And they’ll continue to vote for messianic leaders who tell them, “That’s OK, it’s not your fault. Blame Wall St. and BofA for your selfishness and stupidity”.

      1. Yes your credit rating will go to shit. Plus many if not most states are “recourse” states, in other words, the lender can sue the borrower for the difference between the balance on the loan and the sale price. (Banks are more likely to do this if the borrower is current on other bills, e.g. it was a strategic default.) So the homeowner has to be prepared to bankrupt.

        1. Eh, we hardly ever use recourse. Not worth the legal expenses when they basically just lost the single most valuable thing they owned (the house).

          And having shitty credit means a lot less to more people than you think. Since they don’t have a house payment, they can easily afford a $5k cash car, and rent at places (later on) that don’t check credit. If it was really that severe, a lot fewer people would be doing it voluntarily.

  9. Fucking. Markets. How. Do. They. WORK?

    Oh, they don’t when they’re precluded from working. Derp!

  10. The point has already been made but I think it is worth repeating: if you can’t trace the actual owners of the mortgage due to bad paperwork what would be the point of foreclosure? To get the bank into a spat with the lawyers guild?

    The game was rigged and now the banks are stuck in the rigging.

  11. it will not be a national or even a regional catastrophe.

    Now you are just twisting my words.

  12. Quack! Quack! Quack!
    When shall I get my money back?

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