Wednesday, April 23, 2008

State FC Prevention Working Group Report

by Tanta on 4/23/2008 10:23:00 AM

The State Foreclosure Prevention Working Group released its second report on loss mitigation efforts yesterday, and frankly it is just as disappointing as the first one. I see our colleague PJ at Housing Wire has already blown his stack over it. Allow me to pile on; someone has to.

The report finds:

Seven out of ten seriously delinquent borrowers are still not on track for any loss mitigation outcome. While the number of borrowers in loss mitigation has increased, it has been matched by an increasing level of delinquent loans. The number of home retention solutions (forbearance, repayment plan, and modification) in process, as compared to the number of seriously-delinquent loans, is unchanged during the four month period. The absolute numbers of loss mitigation efforts and delinquent loans have increased, but the relative percentage between the two has remained the same. [Emphasis in the original.]
This "seven out of ten" statistic comes from measuring all 60+ day ("seriously") delinquent loans against the percentage that have been identified by the servicer as "in process." There is no definition of "in process" in the report; my best guess is that these are loans for which the servicer's loss mit department has made actual contact with a borrower. (That does not mean merely that the servicer has made contact; collections department contacts are not, as far as I know, considered "loss mit contacts.") Even more importantly, the report does not define "closed" in terms of loss mitigation efforts. I cannot tell from this report whether, for example, a loan that has a repayment plan instituted is counted as "closed" when the plan is agreed to, or only when the plan period ends and the loan is either brought current (successful repayment plan) or referred to foreclosure (unsuccessful). If the former is the case, then loans that are still delinquent would fall out of the "loss mit in process" category, but you would hardly say that they are "not on track for any effort." They would simply be part of a delinquent loan pipeline that is not referred to FC, because the repayment plan is still underway. It actually gets worse if "closed" cases for the purpose of this report really mean the latter--loans where the repayment plan ended either successfully or not. Let's go to the further "findings":
Data suggests that loss mitigation departments are severely strained in managing current workload. For example:
a. Almost two-thirds of all loss mitigations efforts started are not completed in the following month. Most loss mitigation efforts do not close quickly. This consistent trend over the last three months suggests that many proposed loss mitigations fail to close, rather than simply take longer than a month to work through the system. Based on anecdotal reports of lost paperwork and busy call centers, we are concerned that servicers overall are not able to manage the sheer numbers of delinquent loans.
b. Seriously delinquent loans are “stacking up” on the way to foreclosure. The primary increases in subprime delinquency rates are occurring in very seriously delinquent loans or in loans starting foreclosure. This suggests that the burgeoning numbers of delinquent loans that do not receive loss mitigation attention are clogging up the system on their way to foreclosure. We fear this will translate to increased levels of vacant foreclosed homes that will further depress property values and increase burdens on government services.
If the expectation is that loss mit cases would reasonably "close" in the month after they were "started," then it sounds as if in fact "closed" refers to the date an agreement was put in place, not the date of final resolution. If that is true, then one could expect closure to occur by the following month. However, that has to mean that there is a pipeline of "closed" but not yet "cured" loans out there, which makes hash of that claim that 7 of 10 are "not on track."

Furthermore, although this summary finding refers to loss mit efforts that are "started," in the remaining detail areas of this report I see no numbers that look clearly like "starts" to me. The tabular data all measures loss mit "in process," not "started." Again, "starts" can be usefully defined only if "completions" can be usefully defined; if there are thousands of loans on repayment plans or forbearance periods that have not yet finished or expired, and they are not counted as "closed," then the "in process" data would include workouts started many months previously that are still underway.

As far as seriously delinquent loans "stacking up," I simply note that nowhere does this report ever address things like a servicer's bankruptcy pipeline. How many delinquent loans are under a BK stay? Once the stay is in place, the servicer can neither initiate foreclosure nor unilaterally offer workouts without court approval; for that reason, all servicers I am familiar with handle those loans in a bankruptcy department that is separate from the loss mitigation group. If, in fact, these servicers reporting here are including BK loans in the loss mit pipeline, I for one would like to know that.

This is the part of the report that sent PJ over the edge:
New approaches are needed to prevent millions of unnecessary foreclosures. Without a substantial increase in loss mitigation staffing and resources, we do not believe that outreach and unsupervised case-by-case loan work-outs, as used by servicers now, will prevent a significant number of unnecessary foreclosures.
That phrase "unnecessary foreclosures" is not simply tendentious in the extreme; it totally misses the whole point of "loss mitigation." Unless you grant that foreclosure can at least in theory be "less loss" to an investor than a workout option--as the converse can be true--then you do not understand that "loss mit" is the process of deciding which action is less expensive to the investor and pursuing it. In such a context no foreclosure is "unnecessary"; it is simply the better or the worse choice in dealing with a severely delinquent loan.

But in the same breath, the report asserts that "case by case" analysis of each loan is a problem. How can anything other than a case by case analysis determine whether a foreclosure is "necessary" or not? Besides the fact, as PJ notes, that the Working Group is entirely ignoring fraudulent loans, what about those loans where the loss mit people discover, after reasonably diligent efforts of analysis, that there's just no way the borrower can afford modified loan terms that remain less expensive to the investor than foreclosure? Or that the borrower is not cooperating in good faith with the servicer? You do not have to assume that all servicers are expending the correct level of diligence to be able to see that they need to, if we are to determine whether foreclosure is necessary or not. This report simply assumes, prima facie, that foreclosures are unnecessary, and then advocates that servicers slap together "New Hope" style one-size-fits-all quickie workouts in order to decrease the "backlog." Dear heavens above, a subcommittee of a conference of state regulators is on record encouraging servicers to cynically reduce their delinquent loan backlogs by just inking some "standard" modification or repayment agreement with the borrower, and call it "closed" after that?

I am not a knee-jerk defender of the mortgage servicing industry by any measure. These are the last people I would encourage to behave any worse than they already do. But even I am troubled by the gross naivete about delinquent loan servicing implied by this report:
Loss mitigation proposals do not close for a variety of reasons; one reason is the level of paperwork required to close a loan modification. Servicers have told us that borrowers simply do not return the required documentation to complete the modification, and borrowers and counselors have reported that servicers lose paperwork they have sent in to the servicer. Regardless of where the problem arises, it appears that the level of paperwork required is a barrier to preventing unnecessary foreclosures.
I am willing to believe that servicers do lose or misplace paperwork, although I'd really like someone to look into these claims rather than just engaging in he said-she said. On the other hand, this is default servicing we're talking about. I mean, the phrase "the check is in the mail" is a culture-wide joke of long lineage; you don't have to have ever worked for a servicer to know that people claim to have sent stuff they never in fact sent all the time. People are given explicit instructions to send things via trackable mail to the Loss Mit department, and they send them via regular mail to the payment address (which is usually just a lockbox, often located ten states away from the loss mit people). And sometimes borrowers do return only some of the paperwork, somehow "forgetting" the items like tax returns, pay stubs, or bank statements requested by the servicer to assure that the borrower qualifies for the deal offered. You know. I am not "blaming the borrower" here; I am pointing out that different stories between servicer and borrower are just like different stories between the two parties to a divorce: it is not wise to take only one version at face value without checking out the other, if for no other reason than this is a situation in which people are not exactly at their best, emotionally, psychologically, or indeed morally. That is a fact of life in default mortgage servicing. Any group affiliated with a state regulator who seems to want to pretend that this is not a fact is not, frankly, competent.

Beyond that, to conclude that "paperwork is the barrier" should strike fear in the hearts of everyone. It isn't just investors and servicers who are put at risk when we decide--you know this is coming--to just skip the part about executing formal agreements and start servicing these loans to "informal" relaxation of terms. It's the borrowers who are at risk as well. I've heard enough lately to last my lifetime about borrowers in FC and BK courts objecting to servicers unable or unwilling to produce the exact mortgage note executed by the borrower, which determines not just "standing" for the servicer, but the exact terms of the indebtedness. What defense does a borrower have if he or she is foreclosed against after failure to perform under an undocumented, unsigned agreement? What defense does the servicer have if it cannot prove failure to perform? What god-awful horrible mess are the courts going to inherit down the road a ways if we just dismiss formal agreements as "barriers" that servicers should dispense with?

The lesson of the "stated" disaster--stated income, stated assets, stated appraised values, oral "promises" of loan originators rather than clear written disclosures, the whole cluster of practices that removed the "barrier" of "paperwork"--is apparently still lost on the Working Group. We started this by being "efficient" about the documentation and casual about the borrower's own statements; we aren't going to get out of it that way. This report just reeks of political grandstanding. I'm sure I know at least one journalist who will love it.