Experts See No Letup in Foreclosure Trend
Executives at RealtyTrac expect foreclosure filings to increase another 20% to 25% this year, on top of a 42% rise in filings posted in 2006 compared with 2005.
"We think that's a pretty conservative estimate," RealtyTrac vice president Rick Sharga said during a panel session at the MBA Mortgage Servicing Conference here.
Not all foreclosure filings result in a foreclosure taking place, as some loan defaults are cured or worked out after the lender has initiated foreclosure actions. However, the rising foreclosure workload and negative publicity associated with foreclosure activities pose a host of challenges for the lending industry.
The rise is not unexpected given the increase of subprime credit quality lending and the slowing of the housing market. But Mr. Sharga said loan servicers need to understand that rising home prices are no longer going to help many borrowers sell their home or refinance out of temporary financial problems. He noted that subprime mortgages make up an estimated 13.6% of outstanding home loans.
"The message that lenders got was to go make mortgages available for everybody," he said. "Well, I've been in business long enough to know that everybody makes a lousy target market."
The headline risk associated with rising foreclosure numbers means that the home loan industry could face the risk of "draconian" legislation that would scale back subprime lending and proscribe restrictions on loss mitigation and default management activities, according to lawyers who spoke during the panel session.
Mr. Sharga said that increasingly, subprime lending is associated with "predatory" lending and foreclosure activity in public discourse. And mounting evidence that the vintage of loans originated in 2006 is showing signs of weak credit is likely to add to the problem.
While lenders are under pressure to implement technology that streamlines default management, Diane Mitchell, senior vice president for default administration at Select Portfolio Servicing, urged lenders to be cautious when referring loans to foreclosure.
"This may be a time when you want to start putting some human intervention into that process," she said, adding that lenders should review files for regulatory compliance before "pulling the trigger" on foreclosure action. In some cases, it may be better to lean on loss mitigation staff to do more deals with troubled borrowers to avoid foreclosure and the costs and legal risks associated with foreclosure.
A number of attorneys said that the rise in foreclosure activities comes at a time when mortgage servicers face added scrutiny of their practices in managing defaulted loans.
"The likelihood of litigation rising in this environment is pretty high," said Michael Feiwell, a partner at Feiwell & Hannoy.
He noted that in a recent ruling, a New Jersey bankruptcy judge said "e-foreclosure" practices are not acceptable.
One area attorneys said lenders need to be particularly mindful of is charging fees to borrowers in default for default management services such as broker price opinions, faxes and other miscellaneous items. They said it is sometimes difficult to determine the legality of these fees in a particular state without taking into consideration language in the loan documents, the "reasonability" of the fees and the disclosures that have been made to the borrower.
"As I see it, this is probably the biggest area of risk for servicers in the year going forward," Mr. Feiwell said.
Snapshot: States with the Highest Rates of Foreclosure Filing
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