As the foreclosure crisis continues to worsen, it is hard to determine how long can it last. This week, MortgageOrb speaks with Catherine Castle, vice president of capital markets at Wingspan Portfolio Advisors, Carrollton, Texas, on the rising level of foreclosed properties and what it means to both the industry and the economy.
Q: How do you see the foreclosure crisis playing out in 2009? Will there be a peak this year, or is it possible that it will continue into 2010?
Castle: I believe the foreclosure crisis will continue to be a headline throughout 2009. Many industry analysts project the peak of subprime foreclosures to occur somewhere in mid-to-late 2009.
Subprime should continue to contribute to a large part of the foreclosure activity through 2009. The option-adjustable-rate mortgage (ARM) product was originally expected to contribute to the mix in 2011-2012, but the estimate has been revised and should last at a steady pace through 2011. However, the option-ARM product will be significantly smaller than what we are currently experiencing with the subprime product.
Q: What positive effects can a moratorium on foreclosures have on the industry?
Castle: A moratorium on foreclosures can positively affect the industry by providing time for the servicers to focus on loan resolution efforts. Typically, servicers strictly follow timelines to initiate foreclosure at 90-day delinquency, which doesn't give much time for the servicer to contact the borrower and initiate appropriate loan resolution or loss mitigation techniques.
The theory behind a moratorium is to provide the needed time for the servicer to properly investigate alternatives to foreclosure, as well as to enable the borrower to adjust personal finances that may lead to the refinancing or restructuring of the loan. A moratorium would also reduce the number of homes for sale and thus mitigate the supply of homes. Economic theory would suggest that this stabilization of the supply would, in turn, help to stabilize pricing.
On the other hand, there are costs associated with a moratorium on foreclosures. A moratorium without a significantly increased workouts may tend to exacerbate the default problem, because more borrowers will increasingly come to believe they are better off going into default. Another cost to a moratorium is the continued tightening of credit, which makes financing more expensive and difficult to obtain for all borrowers. This restricts the number of potential buyers of homes and thus delays stabilization and recovery.
Q: In your professional estimation, how has the industry responded to the foreclosure crisis?
Castle: Specifically, where have there been success stories, and where have efforts been lacking?
I believe that the industry has been somewhat slow in its response to the foreclosure crisis. Many servicers continued with the same processes that they have had in place for years and did not recognize the need for reformed processes.
When servicers did change practices, they tried to enact ‘one-size-fits-all’ modification programs. This included sending out mass mailings of modifications that presented the borrower with preset modification terms without any input from the homeowner. It has been reported that after three months, 36% of modified loans were 30-plus days delinquent and after six months, 53% were 30-plus days delinquent. This cannot be deemed successful.
To add to the confusion, servicers are also under certain legal requirements per the securitization documentation, which has somewhat restricted their actions with respect to modifications. I believe the industry is responding to the crisis, but there is no clear path for the servicers to take that will solve the issue.
A tried and true method for sustainable modification is to seriously review each borrower's situation and determine his or her willingness to stay in the home and his or her financial ability to meet that goal. These two factors will determine the appropriate outcome for the borrower – rehabilitation or foreclosure. However, the sheer magnitude of the crisis is making this process very difficult to achieve.
Q: Are you aware of new inroads by fraudsters to prey on borrowers facing possible foreclosure?
Castle: There are a few different types of scams that have surfaced in the midst of the foreclosure crisis. These include fee-based scams that fraudulently operate as a fee-for-service business, bogus foreclosure rescue operations or title transfer companies and fraudulent loans packaged as refinancing opportunities. There are several states – including Califorina, Colorado, Florida, Georgia, Illinois, Michigan and New York – that have introduced laws surrounding foreclosure counseling in order to mitigate fraudulent behavior.
Q: What effect will the foreclosure crisis have on Fannie Mae's and Freddie Mac's return from conservatorship?
Castle: The ability for Fannie Mae and Freddie Mac to return successfully to shareholder-based companies depends on their ability to stabilize current losses and contain future credit risk through increased capitalization, and the better alignment of incentives amongst originators, servicers and stakeholders. Until they are able to build and maintain meaningful capital cushions, they will need continued support from the federal government.