A Foreclosure Drain on the Housing Market
When water stops seeping through a drain and sits in a sink, a plumber typically faces a clogged-up drain. That plumber’s tools include a plunger and a snake pipe. The mortgage industry’s foreclosure situation is a lot like that clogged drain.
The industry, however, must use methods available through regulatory proceedings if they want to unclog foreclosure cases that are backed up with uncertainties and the red tape of the judicial system. Sounds like a task, but the results could lead to underwater homes regaining value through a normal home purchase market.
Foreclosed properties currently comprise one in every four homes sold in the United States, and price recoveries are closely tied to the length of the foreclosure process. Recent reports indicate the foreclosure process already takes an average of 478 days.
The foreclosure process in this country is clogged up in uncertain rules, “robo-signing” controversies and judicial cases as the Administration and Congress hold discussions for national servicing standards.
The conversations within the Administration and Congress are timely and appropriate. They explore loss mitigation alternatives prior to foreclosure proceedings and eliminate “dual track” servicing of loss mitigation and foreclosure actions at the same time.
However, the current regulatory environment for the servicing industry is quite muddled. So much so that it actually serves as an obstacle to the positive evolution that the industry sorely needs.
One of the unintended consequences of the numerous government interventions into the housing crisis to date has been the extensive delays generated by the implementation of changes in government policy.
In addition, as a result of the existing voluntary moratoriums that lenders have imposed, many individuals and families who seek to purchase homes have seen their real estate deals disrupted or frozen and others are no longer considering purchasing foreclosed properties during their search.
The federal government can use the tools at its disposal to start to develop a transparent, rule-based regulatory framework and loosen the foreclosure clog.
A regulatory framework that specifically defines what the various servicing and default resolution tasks are and the acceptable standards for each will promote efficiency in the real estate transfer process, thereby enabling a clearing of the nation’s excess housing inventory, an increase in home prices, and an overall recovery of the housing market.
Let’s go back to our backed up sink for a moment. Before going in with potentially damaging tools, a plumber might use something less forceful to loosen a clog from a drain, perhaps a liquid solution that would do no harm to the pipes.
The federal government’s equivalent to that “liquid solution” would be to use the Consumer Financial Protection Bureau (CFPB) to add much-needed consistency to the servicing industry and meaning to the Dodd-Frank Act. The CFPB could enforce new standards from a consumer protection standpoint and a safety and soundness perspective.
As it stands, banks and investors who own mortgage-backed securities are being forced into uncertainty regarding their ability to collect mortgage payments, which makes them less willing to provide funding to make home financing affordable going forward, which in turn further clogs a normal home purchasing market and a housing recovery.
However, if the CFPB adequately prescribes processes, steps and acceptable standards of default resolution practices, conscientious servicers and their providers will adjust their business practices accordingly and investors in whole loans and mortgage-backed securities will return liquidity to this vitally important but capital-starved industry.
Therefore, the CFPB should regulate the conduct of servicers and their providers in reference to clearly defined, rule-based standards, employing a consistent analysis methodology against published regulations to address shortfalls but loosening the grip of uncertainty among servicers and investors.
The regulatory framework must include safe harbors for the servicers and service providers who operate within the boundaries of that framework so that uncertain liabilities are not a factor.
The CFPB also should provide an administrative dispute resolution process for alleged violations of the standards to push out the lawsuits clogging up the judicial system.
Right now, there is a chaos of endless, expensive, amorphous lawsuits that are pending in various courts around the country.
Exposure to state court litigation threatens to create billions of dollars in losses for Fannie Mae and Freddie Mac, which have purchased many of the loans that are in foreclosure. These losses could impose new costs on taxpayers and homeowners and further delay the recovery of the housing market.
The foreclosure process took time to clog up and it will take time to unclog the system. However, loosening the obstacles and entanglements, including uncertainties among lenders, servicers and investors and an overwhelmed judicial system, will allow a stream of underwater foreclosed homes to properly flow through the pipeline.
There is not just one clog in the system—there are many stopped-up systems.
By draining out these foreclosed homes from the pipeline and allowing credit to flow through the banks, these underwater homes can start to rise above their current values in a normal home purchasing market.
The tools are at our disposal. The question is whether we want to use them.
Tina Jones Vice President of Bankruptcy and Foreclosure Operations Prommis Solutions.