Servicers Contemplate Future Buyers

Insiders warn the rush to process default and foreclosure risk loans is creating a community of borrowers bound to stay out of the market for years to come.

Meanwhile housing inventory, especially the number of real estate-owned homes, remains at an all-time high and investors are not in a hurry to buy.

"We have all of these properties on the market. Where are the buyers coming from?" says Cary Sternberg, president, Excellen REO.

He worries about borrowers who until they tried to do a short sale had perfect credit, but once they contacted their servicing company to apply for a short sale they were told, "I can't discuss it with you until you're behind." So a couple of months in default they got a short sale, the mortgage company found a buyer, the transaction is completed and the seller's FICO score has gone down 200 to 300 points. This way someone who could have been back in the retail market buying a property he/she could afford cannot get a loan because the FICO score went down because of a servicer's mishap. "What sense does this make?" While expressing a mortgage industry concern, Sternberg meets halfway with many consumer advocates' concerns.

The National Foundation for Credit Counseling, a consumer advocate and supporter of the Debt Settlement Consumer Protection Act, expects the legislation will safeguard millions of Americans in need of a workout. In 2009 many of the four million consumers who tried to work with NFCC member agencies to put the pieces of their financial lives back together are "often too late." NFCC president and CEO, Susan Keating, warned that while "there's nothing wrong" with settling debts for less than 100 cents on the dollar as a reasonable option for consumers trying to avoid bankruptcy. "There's a right way and a wrong way to offer any service." According to Keating, too many consumers have lost large sums of money and wound up with higher debt and lower credit scores after working with a debt settlement company.

David Bartels, a consumer-lending advocate and president of loan modification provider US Home Loan Advocates of Westlake Village, Calif., also says misperceptions or irresponsible servicing practices keep leading into situations where consumers are told they have to be late on their mortgage to qualify for a modification. Instead, a more active approach to foreclosure prevention enables servicers to take matters in their hands earlier rather than later. "Seasoned industry professionals" can help educate clients and effectively communicate with lenders to ensure homeowners qualify for a modification before and during foreclosure.

Such changes in both servicer and borrower attitudes are beginning to become more obvious, according to Scott Goldstein, president, National Default Exchange.

When I graduated from college in the '80s, moving around jobs did not look good on one's resume, he recalls. "If you moved around four times, that was not good. Then in the '90s, it changed to 'Oh, no one stays at IBM forever anymore, so if you move around a lot, everything's OK.' Some time in 2012, they're going to say, 'Oh, his credit is bad, he had a foreclosure in 2010, but we'll write over that.'"

Since the number of people whose FICO scores dropped during the crisis is quite high, he expects it to change what is considered "normal" credit history. Otherwise, "a whole universe of potential buyers that are now out of the market" will remain out for years causing all the negative implications that the industry is trying to avoid through government and private market intervention, he says. "I think common sense will prevail" by confining this downturn to this fairly specific period in time that will be looked at very much the same way changing jobs was overlooked in the 1990s.

"That's probably the way it's going to go down for a large percentage of the borrowing community," agrees Steven Horne, president and CEO of Wingspan, but only after several painful years when borrowers may have managed to buy the house next door at a 40% discount.

The GSEs have already started the trend by implementing different underwriting standards in short sales compared to foreclosures. "They're underwriting on a two-year span if there's been a short sale in play vs. a five-year span on a foreclosure. It's already started. It's just we haven't been two years into the short sale cycle yet to really have a significant number," he says.

At the same time borrower attitudes are changing. Commenting on Fannie Mae findings that even underwater Americans think it is not acceptable to stop paying their mortgage, some analysts wondered why and whether upholding their credit scores or prime borrower status vs. subprime borrower may be part of the psychological reasons Americans feel so strongly about paying their mortgage. After all, one's home buying power strongly affects the FICO score. Poor credit was cited as one of the top obstacles to obtaining a home loan by 22% of survey respondents.

"Consumers are still committed to owning a home, but are showing increased cautiousness, regardless of whether they rent, own their homes outright or have a mortgage," said Fannie's vice president and chief economist, Doug Duncan. "They are rebalancing their attitudes toward housing and homeownership by adopting a more realistic, long-term approach, and are less willing to take risks."