Managing a Potential Flood of Foreclosures
You can talk all you want of renewed interest in housing, slowly increasing sales and supposed stabilization in prices, but the elephant in the room is slowly growing, and banks, Fannie, Freddie and the government know it. I'm talking about foreclosures.
Economist Mark Zandi, often quoted by lawmakers on both sides of the aisle, told the Senate Budget Committee this morning that while he's "optimistic" with regard to the economy's prospects, "At the top of my list of concerns, at least in the near term (6 to 12 months), is the ongoing problem in the housing market and the foreclosure crisis."
REO inventory is rising, he proved through some slides. Four million seriously delinquent loans, out of 50 million first mortgage loans, "so that's a lot." And while he noted that the problems appear to have peaked, there are still over 600,000 properties in REO, which will only put more pressure on prices when they come to market.
Zandi called modification efforts "inadequate," despite the 1.5 to 2 million modifications a year. "In the context of all the problems that we've got, it's still quite small," he noted. Zandi's biggest concern is that 14 million homeowners, according to his calculations, are underwater (owe more on their mortgages than their homes are worth), and 4 million of those are underwater by more than 50 percent. "That's deeply underwater," he elaborated.
This testimony just happened to coincide with a few blurbs of information I've noted over the past few days.
1. Chase announced yesterday that it has plans to add 25 new Chase Homeownership Centers in 19 states this year. "The best way to help borrowers find ways to stay in their homes is to sit down face-to-face and discuss their individual circumstances," writes Chase Home Lending CEO David Lowman in the press release.
2. Wells Fargo is holding 20 mediation events across the country this year, inviting more than 150,000 borrowers who are behind on payments. These will be held at hotels and convention centers, much like the non-profit Boston-based NACA has been doing for years.
3. Fannie Mae is expanding its loss mitigation efforts, trying to modify more borrowers, and if not, trying to find foreclosure alternatives, like short sales or deeds in lieu. They are also testing a program in Florida to negotiate modifications before going to court.
4. Earlier this week, the Hope Now coalition of servicers and investors reported it had done well more than twice the number of loan mods in 2010 than the government's Home Affordable Modification Program.
Bottom line: banks, Fannie, Freddie...they really get it now. Foreclosures are ramping up again and are endangering today's fragile housing recovery. Rick Sharga at RealtyTrac claims we have yet to see the foreclosure peak. Regardless, even if 2011's number is slightly lower than the peak, it is more critical now than ever before to stem the tide because housing is struggling to recover on it's own without government intervention (other than incredibly low mortgage rates, which don't appear to help much). Last year various government incentives helped mitigate the foreclosure losses to the overall market; the market doesn't have that benefit now.
Zandi says one answer is for Fannie and Freddie to stop charging higher refi rates for borrowers with low credit scores and higher LTV's (loan to value ratios) in order to facilitate more refinancing, even when borrowers are underwater. These are loans the GSE's likely already own or back. "It will cost Fannie and Freddie in interest income, but they will benefit in the form of fewer foreclosures," argues Zandi.