The lab results continue to be discouraging. While an occasional pulse beats stronger, Michigan's economy continues to struggle.
The reality for the mortgage servicing industry in Michigan is that the number of foreclosures has grown somewhere between 30% and 40% over the last 12 months. Compounding those woes are depressed home values and a glut of homes on the market. Even Oakland County, the nation's third wealthiest, reported a negligible increase in property values last year after years of steady home appreciation.
Overall, Michigan continues to be on all the wrong lists: tepid job growth; one of the nation's most stagnant wage environments; and a March 2007 unemployment rate of 6.5%, as officially reported by the State of Michigan's Department of Labor & Economic Growth. This compares to a national unemployment rate of 4.4% for the same period. This disparity has held for some time now.
Perhaps one of the most telltale signs of trouble in recent days is that Oakland County's assessed value role grew by just 1.17% during the last year. As reported by the Detroit Free Press, this is the smallest increase in nearly 40 years, following decades of double-digit growth. In this most prosperous of metro Detroit counties, 4,855 homes were foreclosed upon in 2006 – an increase of almost 600% since 1998. Next-door neighbor Macomb County reported a 1.6% increase in property values for 2006 – the lowest figure since 1975. Meanwhile, the increase in Wayne County's equalized value for 2007 was 2.68%.
We must further distinguish the prosperity dichotomy apparent in some of the latest national foreclosure reports. For example, as CCNMoney.com reported as recently as late March, Florida was leading the nation in delinquencies, while states like Texas, Arizona and California are also exhibiting foreclosure strain. The difference for Michigan is that these sunshine states, or others like Colorado, are economically sound and are expected to recover in an orderly fashion. The national economy remains strong.
In contrast, Michigan struggles with economic problems that have transpired over many years, including the loss of thousands of good-paying automotive and manufacturing jobs and related spin-off employment. New industries are not replacing these losses quickly enough, if at all. Michigan faces a major budget crisis – to the tune of $3 billion – and now, slowing home values and property tax collections are straining municipal budgets.
There were some promising but short-lived signs this spring, with some stabilization or slight improvement being reported in median sale prices of homes, sales volume and new listings. Still, it was reported in May that Michigan's foreclosure volume, one for every 448 households, ranked eighth in the nation.
Michigan's neighbors share a similar foreclosure picture. In mid-June, the Mortgage Bankers Association (MBA) reported that Michigan, Ohio and Indiana – while comprising 8.7% of outstanding mortgage loans in the nation – account for 19.9% of the nation's loans in foreclosure.
Notwithstanding current issues in Florida and select Western states, Doug Duncan, the MBA's chief economist and senior vice president of research and business development, went so far as to say that "the percentage of loans in foreclosure would be well below the average of the last 10 years were it not for Ohio, Michigan and Indiana." Currently, about 1% of loans are entering foreclosure in each state.
The futures of Ford, GM and Chrysler remain in serious doubt in various ways. However, the recent decision by Daimler Chrysler to sell 80.1% of its Chrysler Group to private equity firm Cerberus Capital Management LP is being viewed locally as a positive development.
The deal, which would effectively undo the 1998 merger between Daimler and Chrysler, is expected to be finalized this fall. Prior to the Cerberus announcement in May, Daimler Chrysler had slated $2 billion in new investments for Michigan.
All things considered, Michigan may be in its worst shape in nearly two decades. In the past, as in the late 1980s when foreclosures spiked, industry observers could attribute the increase to poor decisions on the part of individual borrowers, whether running up high-interest credit card debt or taking on more home than they could afford.
This time around, macroeconomic factors dominate – people losing jobs and unable to find new ones. Home values are not appreciating, and many borrowers have little or no equity left to tap. There is no way to make up for fundamental loss of income.
Therefore, servicing operations' counsel in Michigan remain intensely focused on loss mitigation – a win for servicers, the right thing for the borrower and a good strategy for neighborhoods and communities.
However, when it is obvious that a borrower has no ability to pay a modified lending agreement, attorneys are routinely conserving servicer values by speeding up the foreclosure process. Cash for keys or waivers of redemption rights are common.
At the state level, in an effort to improve the foreclosure process, the Michigan Legislature adopted an amendment to the foreclosure statute in January 2007 that makes the process of shortening the redemption period easier.
The new rules allow the redemption period to be shortened at any time during the foreclosure process, permit the shortening of the redemption period for abandoned properties greater than three acres, and provide that the sending of a notice – not its receipt – is the triggering event for establishing abandonment. These changes allow servicers and their partners in Michigan to secure abandoned homes quicker while helping to preserve neighborhood safety and home values.
David A. Trott is managing partner of Farmington Hills, Mich.-based Trott & Trott PC. The firm represents mortgage servicers in Michigan, as well as banks, credit unions, mortgage bankers, regional property owners, investor groups and individual entrepreneurs. Trott can be contacted at email@example.com.