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Tuesday, October 05, 2010

Lawler: Trying to Make Sense of the Mortgage Foreclosure Fiasco

by Calculated Risk on 10/05/2010 06:28:00 PM

CR Note: This is from housing economist Tom Lawler.

Since the GMAC “robo-signer” issue first “broke” last month, the “issue” has catapulted from what some (but not all) industry folks characterized as a “technical” issue in judicial foreclosure states to what the media (who predictably jumped on this story like a ... well, I can’t print that!) now characterizes as a “gigantic mess.” Not too long after the GMAC story came out, both Chase and Bank of America announced that they too were suspending foreclosures in the 23 “judicial” foreclosure states, and while some other big servicers (Wells and Citi) weren’t planning to suspend foreclosures, news reports surfaced suggesting that both companies had some “robo-signers” as well. The media, of course, then searched for individual cases of “foreclosures gone wild,” and found a number of instances where there were some real mistakes made by lenders/servicers that went well beyond “robo-signing.”

Predictably, of course, politicians in many states jumped on this issue, calling for an across the board moratoria on foreclosures “until homeowners can be assured they are treated fairly.” Even California, a non-judicial state, jumped on this bandwagon, with Attorney General Brown arguing that GMAC and Chase should “stop foreclosing” on homes until they can “prove” that they are complying with a state law requiring lenders to “contact” borrowers facing foreclosure to assess their “situation” and discuss “options" before foreclosing on a home. The OCC ordered other large servicers to “review” their foreclosure processes and procedures, and Fannie and Freddie told its servicers to undertake a review of their processes and procedures on foreclosures, and reminded them of their basic duties and responsibilities (including the consequences of “non-compliance”).

Meanwhile, Old Republic National Title stopped writing title insurance on foreclosure sales by GMAC and Chase until “objectionable issues had been resolved,” creating concerns in some camps about the ability of firms to sell foreclosed properties.

I have been inundated with media (and other calls) calls asking what this “all means,” but quite frankly I don’t have enough information to give folks a credible answer – save, of course, is that foreclosure timelines in many states will lengthen yet some more.

However, the whole issue is yet another glaring indictment of the mortgage servicing industry, and its continued attempts to keep costs down during this housing/mortgage market “crisis” in fashions that have been penny-wise/pound foolish. Mega-mortgage servicers, of course, got to be really large by charging little to service loans because of the incredible economies of scale of processing mortgage payments. There are not, of course, similar economies of scales in dealing with problem loans, but servicers as a whole were incredibly slow to increase staff to deal with the surge in delinquent loans, and didn’t actually do so in a meaningful fashion until last year – with the “ramp” goosed in part by “HAMP.” Clearly, however, servicers did not ramp up their staffing sufficiently to deal with the surge in actual foreclosures, despite its predictability, to a large extent because such actions increased expenses without generating revenues!

Amazingly, before the housing bubble burst, there was immense pressure on Fannie and Freddie from large mortgage servicers to reduce their “minimum” servicing fee below 25 basis points, as these servicers didn’t like having to “manage” the “IO-like” value of their mortgage servicing fee. Countrywide even argued that it could profitably service its mortgage servicing portfolio with a ZERO servicing fee, saying that it made enough money just from float, ancillary, and other fees – AND, of course, that they were incredibly efficient mortgage servicers!!!

Below, by the way, are the largest residential mortgage servicers as of Q2/2010, according to National Mortgage News. BoA, of course, acquired Countrywide. These totals include first and second mortgages.

 ServicingServicing % past due
($ mm)(# of loans) 
Bank of America$2,197,662 14,204,95714.10%
Wells Fargo & Company$1,811,969 12,004,6598.20%
Chase $1,353,566 9,434,13311.60%
CitiMortgage, Inc.$677,815 4,859,3049.30%
Ally Bank/Residential Capital, LLC (GMAC)$398,355 2,618,872 
U.S. Bank Home Mortgage$199,575 1,338,154 
SunTrust Bank$175,970 994,02511.40%
PHH Mortgage$155,967 968,6696.30%
PNC Mortgage/National City$149,945 989,2289.90%
OneWest Bank/IndyMac$110,000 517,504 

The current mess, of course, suggests that (1) either loans should be priced differently based on a state’s foreclosure law; or (2) the government should push states to accept a national foreclosure law, with crystal clear rules and adequate borrower and lender safeguards. It also suggests that the “timeline” to reduce the government’s role in the US mortgage market has now been extended even further into the future!

CR Note: This is from housing economist Tom Lawler.