Is a stealth shift in policy afoot, to find the bottom in the housing market by getting banks to start clearing out their foreclosed and “ought to be foreclosed” exposures?
On Tuesday, Fannie Mae announced that it was not longer giving servicers free rein, and was clamping down on multiple fronts, such as procedures and record-handling, mortgage mods. When a group of bloggers met with the Treasury in mid-August, one senior Treasury official commented on how apparent servicer intransigence (my turn of phrase, not his) with Federal programs like HAMP raised credibility issues and Treasury planned to look into it. This move suggests they knew they’d be taking a tougher stance back then.
However, one element of the supposed “get tough” program has gotten comparatively little attention. Mortgage servicers are being directed to speed up foreclosures and sales of foreclosed properties. Per Kate Berry and Jeff Horwitz at American Banker (via e-mail, no online source):
Fannie Mae wants out of its defaulted residential mortgage holdings as quickly as possible and is warning loan servicers not to stand in its way.
The government-sponsored enterprise notified servicers Tuesday that it will begin monitoring them to determine why there are delays in moving delinquent loans into foreclosure. If servicers cannot properly account for the holdups, it will perform on-site reviews and assess fees to give servicers “a financial incentive to comply with Fannie Mae policies and improve the overall quality of their performance.”…
“This is a shot across the bow that servicers have to start paying attention,” said Kevin Kanouff, a founder of Statebridge Co., a Denver special servicer. “Now they’re going to put their feet to the fire and expect to move these loans along as opposed to throwing them in a program and just collecting the fees.”…
…the timing of the guidance suggests the GSE believes the process has grown unaccountably sluggish…
Repossessing a property can be expensive for a servicer, because it then must front property taxes and maintenance expenses until the home is disposed of. Homeowner association dues, grass-cutting and winterizing can run an average of $6,000 a month while a property sits on the market waiting to be sold.
Conventional servicers “are responding to incentives that encourage minimizing servicing costs,” said Steven Horne, the president of Wingspan Portfolio Advisors, a specialty servicer in Carrollton, Texas.
But delays force Fannie to incur bigger losses — the longer it takes to foreclose, the worse shape the property may be in.
The article also notes a second reason banks have reason to delay foreclosures: the biggest servicers are owned by banks that have large second lien portfolios. And quelle surprise, servicers don’t foreclose on borrowers with who has a second lien on the property at the same rate as other first mortgages. Thus, this acceleration ought to force price discovery on how worthless many second mortgages are. And demonstrating that the second mortgage holders in defaults are holding assets worth a big goose egg may break a critical logjam in mortgage mods. The second lien holders, who by virtue of being junior creditors really should have no bargaining leverage with defaults in properties that have negative equity have nevertheless been very effective in blocking mods and short sales. Are those days about to come to an end?