As Foreclosures Decline, Federal Government Makes Deal With 49 States

In good news for beleaguered homeowners, the Obama administration announced a $26 billion mortgage settlement, which 49 out of 50 state attorneys general signed on to.  The deal won praise from such groups as the Mortgage Bankers Association, the industry trade group for lenders, and the Center for Responsible Lending, a public interest group advocating for borrowers.

Conservatives suggested that the Obama administration is overreaching, and that the agreement rewards homeowners who haven’t been paying their mortgages.  On the other side, some liberal groups say it falls far short of providing the needed level of help to troubled homeowners hurt by the housing bubble, problems they blame on Wall Street banks and investors.  They would prefer additional relief for homeowners who are underwater on their mortgages.

“It’s a big check with narrow immunity,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and currently an analyst with FBR Capital Markets in Arlington, VA.  “You get the state attorneys general off your back, but you’re not getting immunity from securitizations, which could come with their own steep cost down the road.”

Regulators are “aggressive” on pursuing securities claims and have set up a task force to do so, said Department of Housing and Urban Development Secretary Shaun Donovan.  The $26 billion deal doesn’t protect banks from claims related to faulty loans sold to government-owned Fannie Mae and Freddie Mac, he said.  “It wasn’t the servicing practices that created the bubble, nor caused its collapse,” Donovan said.  “It was the origination and securitization of these horrendous products.”

Writing on Salon, Matt Stoller says that the deal lets the banks down relatively easily.  “Rather than settling anything, this agreement is simply a continuation of the policy framework of both the Bush and the Obama administrations.  So what exactly is that framework?  It is, as Damon Silvers of the Congressional Oversight Panel which monitored the bailouts, once put it, to preserve the capital structures of the largest banks.  ‘We can either have a rational resolution to the foreclosure crisis or we can preserve the capital structure of the banks,’ said Silvers in October, 2010.  “’We can’t do both.’  Writing down debt that cannot be paid back — the approach Franklin Roosevelt took — is off the table, as it would jeopardize the equity keeping those banks afloat.  This policy framework isn’t obvious, because it isn’t admissible in polite company.  Nonetheless, it occasionally gets out.  Back in August 2010, at an ‘on background’ briefing of financial bloggers, Treasury officials admitted that the point of its housing programs were to space out foreclosures so that banks could absorb smaller shocks to their balance sheets.  This is consistent with the president’s own words a few months later.”

Very gradually, the foreclosure crisis seems to be easing. The number of homes in foreclosure declined by 130,000, or 8.4 percent last year to 830,000, according to a report from CoreLogic, an economic research firm.  That compares with 1.1 million homes foreclosed in 2010.  These are homes whose owners had fallen far behind on payments, forcing lenders to put them into the foreclosure process.  The homes remain in the foreclosure inventory until they’re sold — either at auction or in a short sale, which is when a home is sold for less than the mortgage value — or until homeowners are current again on payments

There are two reasons for the decline in the foreclosure inventory, according to Mark Fleming, CoreLogic’s chief economist.  “The pace at which properties are entering foreclosure is slowing,” he said.  “And servicers nationwide stepped up the rate at which they were able to process distressed assets.”

In the last few years, homes have entered foreclosure more slowly because lenders carefully scrutinized applicants; only low-risk borrowers are granted loans.  Along with a measured improvement in the economy, this equals fewer borrowers getting into trouble.  Even borrowers in default are avoiding foreclosure in many instance and are being held up by judicial and regulatory constraints, according to Fleming.

The practice of robo-signing, in which banks filed slapdash and sometimes improper paperwork, made lenders more cautious about getting their paperwork in order before foreclosing.  When a bank does put a home into foreclosure, they are trying to speed the process.  One way they’ve done that is by encouraging short sales.  Another is that they’ve stepped up their foreclosure prevention efforts — often with the aid of government programs such as Home Affordable Modification Program (HAMP), which the government says has helped nearly one million Americans stay in their homes.

After foreclosures are completed and the homes are back in the lenders’ hands, they sell quickly.  “This is the first time in a year that REO sales (those of bank-owned properties) have outpaced completed foreclosures,” Fleming said.  In December, there were 103 sales of bank-owned homes for every 100 homes in the foreclosure inventory.  That was a significant increase from November of 2010, when there were only 94 REO sales for every 100 homes in the foreclosure process.

As of December of 2011, Florida still topped the nation’s foreclosure inventory at 11.9 percent, followed by New Jersey with 6.4 percent and Illinois 5.4 percent.  Nevada, consistently the number one foreclosure state in the nation, has fallen to fourth place with 5.3 percent.