Foreclosure Case Study: Massachusetts

Following similar trends in other areas of the U.S., home values in Massachusetts and the surrounding region have dropped significantly in recent months – creating far fewer opportunities for troubled borrowers to refinance and resulting in a dramatic rise in foreclosures.

"You have the chronic reasons for default which still remain: domestic divorce, loss of job," explains Julie Taylor Moran, head of the default practice group at AFN member firm Barron & Stadfeld, Boston. The shift, however, is that options for overcoming these financial burdens – readily available in the state's previously strong housing market – are now much more limited.

"For the last few years, Massachusetts and Rhode Island and the region had been experiencing very high highs," says Charles Lovell, a partner at Partridge, Snow & Hahn, a USFN member firm based in Rhode Island and Massachusetts. "The problem is that when the market peaks, then there is no more equity in property and values go down." As a result, the state is now facing the consequences of "the overenthusiastic ability of property to appreciate."

Worsening the current market woes are certain practices popular with lenders and borrowers during the era of high home prices.

Subprime mortgages with terms that positioned borrowers "one paycheck away from not being able to make their mortgage payment" have become extremely problematic now, he says. "It appears that in our state – which is really consistent with most of the country – there is a disproportionate number of foreclosures from the subprime market," agrees Moran.

Yet middle- and upper-income borrowers have not been immune. Moran points to the previously "active and booming real estate market which encouraged people to take 100-percent financing loans, to really pull out equity" as a contributor to widespread delinquency now that home values have dropped.

The tendency for homeowners across the financial spectrum to borrow beyond their means "reflects a lack of fiscal knowledge," according to Lovell. Borrowers and lenders alike may neglect to account for changes when adjustable-rate mortgages reset, for example, or initiate such loans at disadvantageous stages of interest-rate cycles. "It's not just poor neighborhoods that make bad lending decisions," he points out.

Recent local and national government attention – as well as efforts to address the problem – reflect its seriousness but may not present the most effective measures to combat it. Many bills introduced in the state legislature "would offer a so-called cooling-off period, an opportunity to allow borrowers some time to engage in loss mitigation," Moran says. At the same time, Lovell warns that the government should not "over-regulate and spend a lot of taxpayers' dollars on solutions that just might not work."

More dramatically, a recent activist takeover of Massachusetts governor Deval Patrick's office to demand a response to the foreclosure spike ended with a decision by the state Division of Banks to offer – on a case-by-case basis – a voluntary forbearance period of up to 60 days if a homeowner has filed a complaint with the Division of Banks.

In the majority of cases, however, servicers and borrowers must address the problem independent of any government intervention. Lovell recommends early action and examination of individual circumstances, which will dictate the best course of action. In addition, Moran says, it is essential to "publicize what loss mitigation opportunities are available" to borrowers and report all evidence of fraud.

Aggressively pursuing loan workouts and reconfigurations may also alleviate the growing challenges of managing REO volume, which has seen a "significant, quite dramatic" increase in Massachusetts as the foreclosure fallout continues, Moran notes.

Neighborhood depreciation has thus become an even more serious worry. "We are receiving more calls from municipalities who are concerned about abandoned properties," says Moran, adding that in response to these concerns, one city recently passed an ordinance requiring abandoned properties to be registered.

Because servicers also recognize the costly consequences of keeping REO properties long-term, "The temptation is to sell them off at lower prices, and that artificially depresses real estate values all around, which causes part of the cycle of highs and lows," Lovell explains.

Moran stresses that the only way for servicers to avoid perpetuating this cycle is to "reach out to as many borrowers as possible and get them into loss mitigation as soon as possible so that it doesn't end up in REO."

Whether relief from the entire pattern of foreclosures, REO, depreciation and further borrower struggles is predicted to soon arrive appears to depend on how prominent a role one believes the traditional real estate cycle may have played in the first place.

"Basically, the economy up here is very healthy, and this is purely a real estate equity cycle," states Lovell, who believes that Massachusetts is still on the upward slope of foreclosures and may remain there for one to two more years.

Moran maintains that state-specific economic factors such as job growth and population shifts have more of an impact than the real estate cycle, noting that similar foreclosure crises in regions on the West Coast and in the Midwest may not "have a lot of direct implications for us." She also points to a recent "encouraging sign" in a "very slight increase in third-party sales" during the past several weeks


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