Foreclosure suspensions merely a smokescreen to real issues

The recent debacle of foreclosures is nothing more than a smokescreen for borrowers who can no longer make the mortgage – normally through no fault of their own. We can freely exonerate the borrower from the ability to pay using the usual suspects: predatory lending, loss of income, onerous medical expenses. But somehow it remains righteous to blame the mortgage servicers in totality for problems that are part and parcel with the borrower? Fair enough, but let me say that I welcome a suspension of foreclosures only because foreclosures don’t happen fast enough anyway. Let me give this clear reminder that foreclosure is an option of last resort. It’s an ugly, awful process. In so many ways it is the least attractive liquidation option. But these properties will still need to be liquidated. “The important point is that everyone would rather have avoided a foreclosure in the first place,” said K&L Gates attorney Paul Hancock, “foreclosures are expensive for banks, destroy a borrower’s credit and damage the community.” I originally called Paul, who is based in Miami and specializes in housing litigation, especially as it relates to civil rights violations. I wanted to ask him if defaulted borrowers affected by the foreclosure affidavit snafu might have a class-action option. To which he replied that looking for plaintiffs is what class-action attorneys do for a living. With that angle dead, the conversation soon turned to the socio-economic impact of foreclosures and the reluctance by lenders to do so. “We are not serving anyone by delaying foreclosures,” Hancock added, “as it delays the transitions the housing market needs to improve.” In most markets, and this will be an unpopular statement, foreclosures already aren’t happening fast enough. Banks, in some cases, are reluctant to take back a property right away and it sits and sits. As Amherst Securities noted in a letter this week to clients, all business decisions tend to be based on economic strategy, so assume the bank forecloses only when it is reasonable to do so, at least, for the housing market. Nonetheless, the recent call to arms against mortgage servicers is proving too much, and strategy is now trumped by public and political sentiment. According to Morgan Stanley insight this week on the American housing market, the worse case scenario to the robo-signer fall-out holds that, “positive short-term impacts on housing from a lack of foreclosures will be offset by a torrent of eventual liquidations.” On the other end of prediction, the Citibank worst-case scenario is stated by analyst Josh Levin as following: “In the worst-case scenario, the issue becomes a ‘systemic problem,’ which causes the mortgage market to grind to a halt as title insurers refuse to insure mortgages involving existing homes.” So either way, foreclosures remain as they’ve always been: a terrible option. But there are other ways to sort out this mortgage mess, such as short sales, deed-in-lieu and cash for keys. The most popular of these, and certain to get a boost, is the short sale. And I’ll tell you why. For one, modification is now off the table once a mortgage reaches more than 60-days delinquent. For mortgages handed out en masse during the boom, principal forgiveness and forbearance are likely to only temporarily assuage the rage of beleaguered homeowners who feel equally trapped and conned. Keeping them in such a property when the ink stinks is of no greater benefit. Therefore, only liquidation is an option. And once again, short sales prove the winner because of structuring. Short sales, like foreclosures, run along the same timeline. Timelines are important in securitizations as any shift in cash flows to the collateral also shifts negatively across the bond waterfall, as I discussed last week. “With the absence or lower volume of foreclosures, liquidation values might increase from higher quality short-sales, which benefit from borrower cooperation in the sales process, resulting in higher recovery values – at least until the moratorium expires,” the Morgan Stanley note concludes. So once the moratoria lift and servicers look for ways to settle these assets, and the economy as a result starts to take one step forward after two steps back, lenders should look again at options and do whatever it takes to liquidate the property without going to foreclosure. Jacob Gaffney is the editor of HousingWire. Write to him.