Only 30% of Foreclosures on the Market

Only 30% of foreclosures on market

RealtyTrac Senior Vice President Rick Sharga said major banks currently hold
roughly 1 million REO, or homes repossessed through foreclosure, but only 30%
have actually made it onto the market. According to its year-end report,
foreclosure filings reached a new high in 2010 and should climb even higher this
year, possibly surpassing 4 million filings. And that's not counting the more
than 5 million delinquent loans that have yet to enter the initial stages of the
foreclosure process, Sharga said.

The major kink in the housing market's recovery, and for the macro economy
overall, is the work left to be done on homes currently in the foreclosure
process, those about to enter it and the amount of repossessed homes the banks
must shed. Striking a proper balance on how to mange this shadow inventory of
foreclosures is vital for the banks to show a healthy balance sheet while not
dumping too many distressed properties onto the market, further dragging down
home prices and values.

A recent study from Morgan Stanley showed the shadow inventory, those properties
facing imminent default, evolving from mostly subprime and Alt-A loans to
containing more prime loans as elevated unemployment levels have pushed more
homeowners behind on their mortgage. Analysts said that some 8 million
repossessions would need to be liquidated over the next five years before the
market stabilizes. Adding to the problem are recent issues the banks are having
processing the paperwork. In October, the banks had to hold up foreclosures to
refile affidavits signed improperly in many states, pushing more than 250,000
foreclosure cases into 2011.

Reports recently showed that the problem may have spread to the notices of
default as well. And in the 23 states where lenders must foreclose on a
homeowner through the court system, backlogs of cases have formed month-long
delays. A court clerk in Florida, one of the states with the longest
traffic jams, told him between 500,000 and 600,000 cases are yet to be heard.
Sharga said he's encouraged by the uptick in demand for REO's. "We've seen more
traffic on our site, and even more buyers raising their hand asking for help
from a Realtor," he said. "This means they're getting serious about buying
again." He also said that the most traffic comes from Southwestern states and
Florida.

Olick - what the MA court ruling means

"Now that the Massachusetts Supreme Court has upheld a lower court's ruling that
Wells Fargo and U.S. Bancorp did not have the proper paperwork to foreclose on
two homes, the question is what that means for the broader mortgage market and
the future of millions of foreclosures in or about to be in process? Not only
does this decision affect individual foreclosures, but it throws into question
the entire mortgage securitization process. We've spent a lot of time on this
blog discussing the process of how loans were divided, mixed, bundled and sold
over and over during the heat and height of the housing boom. The issue in
contest over foreclosures now lies with the 'note,' or the IOU on the mortgage.
The mortgage is the security that says the house is the collateral. Ownership of
the note is critical because that note must be transferred when the mortgage is
traded around.

During securitization a process called 'endorsements in blank' are used, so that
mortgages can be transferred quickly. But you still need that note when you
foreclose. 'This is really about endorsed/assigned in blank,' says JT Smith of
Aristar Funding. 'Judges didn’t understand and transfer taxes were not paid.
This is going to get very ugly. The mortgages became like bearer bonds in that
whoever had possession of original wet copy was the owner, and if you didn’t
have that you could not foreclose. Then if you did why didn’t you pay transfer
taxes?' It's exactly what Prof. Adam Levitin told me way back in October: 'The
mortgage is still owed, but there's going to be a problem figuring out who
actually holds the mortgage, and they would be the ones bringing the
foreclosure.

You have a trust that has been getting payments from borrowers for years that it
has no right to receive. So you might see borrowers suing the trusts saying give
me my money back, you're stealing my money. You're going to then have trusts
that don't have any assets that have been issuing securities that say they're
backed by a whole bunch of assets, and you're going to have investors suing the
trustees for failing to inspect the collateral files, which the trustees say
they're going to do, and you're going to have trustees suing the securitization
sponsors for violating their representations and warrantees about what they were
transferring.'"

So now what? 95% of troubled borrowers currently do not contest their
foreclosures, Paul Miller of FBR tells me. He sees this less about the specific
case as the perception of this case: 'If you see more and more of these
headlines, many people might look at this and say 'I can get my house free and
clear if I just contest the foreclosure and get a favorable judge that sides on
my side. All of the sudden I have a free mortgage.' That’s not what’s going to
happen in this case,' Miller said in an interview. He believes these two homes
will eventually go to foreclosure. In fact, this Massachusetts case may not be
exactly as the headlines are screaming. The American Securitization Forum,
immediately after the ruling, put out a statement saying, 'The ASF is pleased
the Court validated the use of the conveyance language in securitization
documents as being sufficient to prove transfers of mortgages under unique
aspects of Massachusetts law. Importantly, unlike the lower co
urt, tithe Court also said assignments of mortgage can be executed in blank, as
long as a complete chain of transfers can be shown through the applicable deal
documents.'

ASF says those documents were not introduced in the lower court and that the
lower court would have ruled otherwise if they had. 'The ASF is confident
securitization transfers are valid and fully enforceable,' concludes the ASF's
Executive Director, Tom Deutsch. That remains to be seen, as lawsuits abound
over this very issue all over the country. Clearly investors didn't like the
ruling, as they sent shares of bank stocks into a despair spiral. This may be
the final Massachusetts court ruling, but it will not be the final word in this
chapter of the foreclosure mess."

Force Short Sales

What could force more short sales?

"Despite a government program designed to streamline and incentivize the process, short sales have not even come close to keeping up with foreclosure sales. That may be about to change. If banks see higher losses from foreclosures than from short sales, they may put more resources into approving these deals, where the borrower is allowed to sell the home for less than the value of the loan. 'Loss severities on distressed U.S. residential mortgage loans are likely to increase an additional 5-10 percent from current levels due to higher loss mitigation and foreclosure expenses and weakening home values,' according to a report from Fitch Ratings. Fitch: The anticipated increases for each sector’s average loss severities are expected to be as follows:

- Prime loans: currently 44%, increasing to 49%-54%
- Alt-A loans: currently 59%, increasing to 64%-69%
- Subprime loans: currently 75%, increasing to 80%-85%.

We are already seeing home prices double dip in many markets, and that is expected to continue at least through the first half of 2011. One way to mitigate the losses is through short sales. 'Short sales generally experience recovery rates about 10 percent higher than foreclosure sales,' according to Fitch. Will this be enough to push the banks? Unclear. Servicers actually rake in a lot of money from fees surrounding foreclosures, and so far the government's 'Home Affordable Foreclosure Alternative,' program, which pays servicers cash incentives for doing short sales, has had pretty poor results, really still in the hundreds of loans. Second liens pose a big problem, but many big bank servicers also hold the second liens. It's all about where the math comes out. If home prices fall far enough, the equation may tip from foreclosure to short sale."

Foreclosure's Froze By Banks

Foreclosure On Temporary Freeze

Like last year, Freddie Mac and Fannie Mae, the two government-controlled mortgage giants, are freezing all foreclosure evictions on mortgage loans they own or back from Dec. 20 through Jan.3. For some of the big private banks, who also usually observe a freeze during the holidays, the situation is a little different this year, thanks to moratoriums they already have in place because of the robo-signing scandal. That freeze was initiated to give the banks time to examine whether they violated any legal procedures in processing foreclosures and to correct and refile questionable documents they uncover. A spokesman for Bank of America, Rick Simon, said that made addressing this year's situation a little awkward but it would still observe its usual holiday policy.

"Bank of America's practice in recent years [is to hold off on] foreclosure sales or evictions from late December through New Year's Day on loans held in our investment portfolio or that are owned by investors who give the bank delegated authority," he said. A spokesman for Chase Mortgage, a division of J.P. Morgan Chase, said its robo-signing-connected moratorium makes an additional holiday freeze moot; it will still be several weeks before it starts to evict borrowers again. Wells Fargo's holiday freeze will run the same two week period as Fannie's and Freddie's and will, like Bank of America's, include all loans it holds in its portfolio. For the other loans it services, it will follow guidelines from investors and from the states where the properties are located. With the number of bank repossessions amounting to around 100,000 a month recently, the temporary reprieve could affect tens of thousands of borrowers in default.

Foreclosure Filings Down

Foreclosures fall 9% :

According to a report released by RealtyTrac, Foreclosure filings of all kinds, including notices of default, notices of auctions and notices of auction sales, dropped 4.4% during October, but it's not because fewer people are losing their homes. Instead, the market is seeing a temporary stay from banks freezing foreclose auctions to review loan documents. The drop in repossessions came after increases in four of the six previous months, topped by an all-time high in September, when 102,000 people lost their homes. In October, 93,246 homes were repossessed.

Rick S., Senior Vice President of RealtyTrac, believes there could be a further drop-off in November, because the impact of the freeze was not fully reflected in the October report. While that may result in further declines in bank repossessions, Rick expects it to take many months before overall foreclosure rates really improve. There is still a very large backlog of borrowers who stopped paying their mortgages long ago but who have not yet been served with a single foreclosure filing and so are not being counted in RealtyTrac's statistics. "Today, servicers are waiting longer and longer to put people in foreclosure," said Rick. "It's not unusual for someone in default go six to nine months without receiving a notice of default."