Logjam Won’t Break Soon

Thanks to intense national scrutiny on the faulty procedural practices by mortgage servicers, foreclosure logjams are intensifying in several markets with little sign of easing anytime soon. Moreover, sources told Mortgage Servicing News that Fannie Mae is now keeping tabs on how much foreclosure moratoriums have cost the GSE, and plans to pass on that cost to its servicers.

One California-based nonperforming loan investor told MSN that two weeks ago he was ready to foreclose on a Florida loan he bought, but was stopped by the mortgagor who—thanks to the foreclosure-gate mess—suddenly found an attorney willing to take his case. “I modified his loan, cut his payment in half, and he still hasn’t paid in six months,” said the NPL investor, requesting anonymity.

Meanwhile, Freddie Mac is seeing signs of what it calls “operational constraints” in the foreclosure market, noting that an estimated 5 million mortgages are now 90 days or more past due.

Speaking at a recent foreclosure forum sponsored by the FDIC, Freddie director of financial research, Doug McManus, noted that maintaining loss mitigation capacity is expensive and labor intensive. “The operational constraints are a really serious problem,” McManus said.

And the Treasury Department now believes foreclosure delays could go on for months.

“The time required to resolve these recent issues by the servicers and state courts, and the delays due to the related law enforcement investigations, could delay thousands of foreclosures for several months,” said Phyllis Caldwell, chief of Treasury’s Homeownership Preservation Office.

Testifying before Congress, Caldwell warned the delays could have “longer-term consequences” that discourage purchases of foreclosed homes and “drag down” prices on all homes.

The Obama administration continues to oppose a nationwide moratorium on foreclosures although a new poll conducted by The Washington Post shows a majority of Americans favor a moratorium.

However, federal regulators are conducting reviews of servicing shops to see if their procedures for signing affidavits and processing other foreclosure documents need correcting. (Administration officials are threatening to crack down on servicers if they find serious problems.)

“If material violations of law are discovered,” Caldwell said, the Department of Justice will pursue litigation “against servicers, their law firms and third-party providers regarding their foreclosure and bankruptcy processes.”

FDIC chairman Sheila Bair is concerned foreclosure investigations and litigation could lead to a prolonged shutdown in foreclosure sales. She wants all the stakeholders—state attorneys general, state and federal regulators, servicers and mortgage investors—to come to agree that “necessary and justified” foreclosures should be permitted to proceed under a “safe harbor.”

The chairman suggested this safe harbor could cover foreclosure sales involving properties that are vacant or in cases where the homeowners have not stayed current on a modified mortgage that reduced their monthly payments by at least 25%.

Such an approach would provide a sorting-out process or “triage,” she said, that could reduce the damage the foreclosure mess might inflict on the housing market.

“The regrettable truth is that many of the properties in foreclosure are either vacant or occupied by borrowers who cannot make a significantly reduced payment and have been in arrears for an extended time,” the FDIC chair said.

The FDIC chairman also noted the “robo-signing” controversy has exposed how time-consuming and expensive the foreclosure process is. And it raises questions about the decline in servicing fees that has taken place over the past few years.

“We should have been asking how servicers were able to achieve such efficiencies without sacrificing quality.

“Sadly, these types of questions were not asked,” Bair said.

The joint investigation by the 50-state attorneys general is mainly aimed at the robo-signing of affidavits and getting the foreclosure problems fixed.

But a few Attorneys General may be breaking away from the coordinated multistate effort, initiating demands that servicers modify loans for borrowers already in the process of foreclosure.

Andrew Sandler, a co-chairman of BuckleySandler LLP, said servicers will rebuff attempts by individual AGs to make changes to loan terms since they are not related to the issue of robo-signing, the practice of endorsing affidavits without verifying the information or having a notary present. “If the AGs seek loan modifications as a remedy for technical deficiencies, there likely would be litigation,” Sandler said.

On another front, HAMP servicers are facing pressure from Treasury to exhaust all loss mitigation options before proceeding with foreclosure sales.

Paul Muolo contributed to this report