Foreclosure Flaws May Delay Recovery by Slowing Home-Price Fall
Howard Cohen hasn’t paid the loan on his Tukwila, Washington, home in a year, and when he heard that Ally Financial Inc.’s GMAC Mortgage unit was suspending foreclosure evictions in 23 states, it gave him hope.
“Maybe I’ll stay in my house, too,” said Cohen, a 57- year-old commercial-loan broker.
An employee of Ally’s GMAC unit said in a December 2009 deposition that he signed thousands of foreclosure documents without verifying their accuracy. Attorneys general in Iowa, Illinois and Texas are investigating.
If uncovering such deficiencies halts thousands of pending foreclosures or renders void those that have already taken place, including repossessions of homes that have been resold, it could snarl courts for years and further postpone a recovery that can’t happen until real estate prices find a bottom, said Stuart Saft, a partner at New York-based Dewey & LeBoeuf LLP. Until home values start to rise, buyers will stay away, he said.
“You can’t get the economy moving until this whole situation gets straightened out,” Saft said. “Until we find the actual level of proper pricing, housing problems will persist. Dragging out foreclosures doesn’t help.”
No one can say how widespread the practice has been -- Bank of America Corp., Cohen’s mortgage servicer, hasn’t reported any irregularities -- yet “the suspicion is that there might have been shortcuts taken by every mortgage servicer who had extraordinary numbers of foreclosure documents to go through,” said Rick Sharga, senior vice president at RealtyTrac Inc., a housing data provider in Irvine, California. Dan B. Frahm, a Bank of America spokesman, declined to comment.
A JPMorgan Chase & Co. executive also said she signed thousands of foreclosure documents on the bank’s behalf without personally checking loan records, according to a deposition she made in a court case in Palm Beach, Florida, in May. Thomas Kelly, a JPMorgan spokesman, declined to comment.
Mortgage servicers collect payments from borrowers and handle foreclosures. Adding staff, as GMAC says it’s doing, will raise their costs, and any slowing of the legal process would further pinch them because they’re required to pay property taxes and insurance up front when borrowers stop paying, as well as maintenance costs on uninhabited homes that have been seized. The ultimate cost of the delays may also add to the losses for mortgage-bond investors and companies such as Fannie Mae and Freddie Mac, the government-supported mortgage-financing firms.
Servicers are unprepared for the volume of foreclosures, said Christine Clifford, vice president of Access Mortgage Research & Consulting Inc. in Columbia, Maryland, and a 27-year veteran of the business. In August, lenders took possession of a record 95,364 homes and issued foreclosure filings to 338,836 homeowners, or one out of every 381 U.S. households, according to RealtyTrac. About 2 million houses will be seized by lenders through 2011, according to Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.
GMAC is the fifth-largest U.S. mortgage servicer, with 4.7 percent of the market, according to National Mortgage News, an industry newsletter based in New York. The top four servicers -- Bank of America, Wells Fargo & Co., JPMorgan and Citigroup Inc. -- have a combined 71 percent share of the market.
“Preserving the integrity of the foreclosure process is of the utmost importance,” GMAC said in a Sept. 24 statement. “Regrettably, a procedural error was found to have occurred in certain affidavits required in certain states. The error is not related to the accuracy of the underlying transaction or the ultimate decisions to have exercised the foreclosure proceedings.”
‘Direct Personal Knowledge’
The “error” was the failure to sign the documents in the presence of a notary public or signing them without “direct personal knowledge of all the information,” GMAC said.
The U.S. government, which has been pressing lenders to reduce foreclosures as evictions hit record levels, owns 56 percent of Detroit-based Ally. The company, formerly known as GMAC Inc., has benefited from more than $17 billion of bailouts. Cerberus Capital Management LP, a New York-based buyout firm, holds about 15 percent of Ally.
The troubles started with an increase in originations in the 2000s, especially of riskier loans, as Wall Street devised ways to bundle mortgages into securities it sold to investors around the world. From 2002 to 2007, $18.2 trillion worth of mortgages were originated compared with $7.7 trillion in the previous six years, according to data compiled by Inside Mortgage Finance, an industry newsletter in Bethesda, Maryland.
Postponing Price Declines
Subprime mortgages, given to borrowers with bad or incomplete credit history, accounted for $2.5 trillion of the loans in the latter part of the decade compared with $840 billion from 1996 to 2001, Inside Mortgage Finance said. Those borrowers have defaulted at almost four times the rate as homeowners with prime loans.
It would take almost a year to sell all the homes already on the market, according to the Chicago-based National Association of Realtors. Another three-and-a-half-years’ supply of homes will be up for sale at distressed prices in the next three years as a result of foreclosures, according to RealtyTrac.
If legal delays keep homes off the market, home prices will stay higher in the next two years than they would had foreclosures proceeded, said Zandi of Moody’s Analytics. That would mean postponing the end of the price decline, he said.
Even without delays, home values may have another three years to go before bouncing back up, according to Moody’s Analytics. That’s after a 28 percent decline nationally since 2006, according to the S&P Case-Shiller Home Price Index.
Two senior executives at mortgage servicers said their companies were bracing for more legal action contesting foreclosures because of the press attention. The executives requested anonymity because they weren’t authorized to speak.
“I anticipate some people I know, possibly myself, are going to be involved in reopening these cases to get money for people who can’t get their houses back,” said Richard J. Burton, a Miami attorney who started the Foreclosure Project LLC, which provides legal representation to homeowners facing foreclosure.
Burton said he expects that a class-action suit will be filed against GMAC and other lenders seeking damages and to stop foreclosures. GMAC hasn’t stopped foreclosures, only evictions related to them.
“Anybody who’s foreclosing in a judicial state is going to be dotting their i’s and crossing their t’s, and then checking, double-checking, and triple-checking everything,” Glenn Schultz, head of residential-mortgage bond research at Wells Fargo’s securities unit, said in a telephone interview. In the so-called judicial states, lenders must appear before a judge, who approves foreclosures.
‘Inbox Filled Up’
With mortgage bonds, servicers would continue advancing interest and principal payments to investors, first helping junior-ranked investors and then hurting holders of senior bonds as the servicers recoup those funds out of foreclosure proceeds.
Still, while Schultz says his “inbox filled up immediately” after Ally made the announcement last week that it was suspending evictions, “foreclosure timelines have already gotten so long, I’m not sure how much of an overall impact this is going to have as far as bondholders are concerned,” he said. At the same time, “there’s a new thing on the horizon to watch: Increased judicial activism.”
In judicial states, the average time between borrowers falling behind and sales of their properties has climbed to almost 25 months from less than 18 months at the start of 2007, according to data compiled by Austin, Texas-based Amherst Securities Group.
The timeline grew in other states to 19 months, from 14 months, the data show.
Lack of Staffing
The increasing time between default and foreclosure may embolden more homeowners to stop paying their bills, said Cameron Findlay, chief economist at LendingTree.com in Irvine, California. Overwhelmed lenders are likely to address the worst cases first, leaving many delinquent borrowers in their homes for longer periods of time, he said.
One issue is the lack of staffing all along the mortgage pipeline, said Lucy Griffin, president of Compliance Resources Inc. in Reston, Virginia, which does legal-compliance training for mortgage lenders.
“I see this as a symptom of the emphasis on getting the product in the books, getting the money up front and not having the personnel to support the product,” Griffin said. “They don’t have the necessary personnel.”
Cohen, the homeowner who is 12 months behind on his mortgage payments, said he’s been trying to negotiate a loan modification. He anticipates difficulties down the road.
“Nobody can tell me who owns my mortgage,” he said.