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Redefaults expected to head higher as foreclosure bubble continues

DALLAS-While modifications under Hamp and other solutions are seeing positive results, the mortgage industry will continue to see a foreclosure bubble as redefault rates rise and servicers and government entities make adjustments to pull in as many modification opportunities as possible. This is what speakers said at a roundtable at SourceMedia's Mortgage Servicing Conference here.

The participants pointed out that macro economic trends, especially the unemployment rate, will have a big impact on the success or failure of the government's loan modification program.

The overdue rate for mortgages has been tracking the unemployment rate pretty closely (both are right around 10% now), and any significant decrease in unemployment will help more distressed borrowers keep their homes.

Roundtable participants differed over the success or failure of Hamp but seemed to think it has been reasonably effective.

Participants quoted here include Taylor Woods, president of Genpact Mortgage Services; Marc Helm, CEO, Reverse Mortgage Solutions; Gagan Sharma, president and CEO, BSI Financial Services; Alan Paylor, CEO, REO Leasing Solutions; Tara Williams, VP of field services, Altisource; and Bill Garland, SVP at ISGN.

MSN: Why don't we get started by talking about the latest changes to the Home Affordable Modification Program and the principal writedown requirements. Do you think that's a good move? Do you think Hamp is failing or is it producing positive results overall?

Sharma: Let me take a so-so perspective to it. The private investors that we see don't want to do Hamp if they don't have to. Oftentimes they're not doing it because they're usually offering deals, which may be equally good if not more attractive to the borrower. Hamp places a certain number of operational challenges in terms of processes that you have to follow and the private investors' perspective is they'd rather offer that deal with a better degree of flexibility. Hamp may or may not be a perfect program. It did a lot of things that strategically the government wanted to do, which was slow down the process, reduce the number of REOs and foreclosures and such. And now that there seems to be some stability in the market and we are seeing even some uptick in the West Coast markets, it probably did some of the things that it wanted to do.

Helm: I do not think the Hamp program has been a failure. It could have been modified earlier and faster to deliver something better for the industry to use. The principal writedowns are a good addition to that. I look at the modification programs that have been out there and see the success ratios are extremely small, but I think that coming out of the gate, it came out very quickly. It didn't have all the primers built around it probably needed. It's been modified some, it will continue to be modified some, because we're not over the hump yet.

Garland: The program is all about home retention and stabilization of the one-to-four market values and so I think anything that happens in that regard is a positive. Hamp has seen some modifications. We'll see more tweaking of the program, but certainly its effectiveness is probably less than what was anticipated but certainly a step in the right direction because it is allowing people to maintain ownership in their home and to that regard, the principal writedown is a necessary step in the waterfall. We've been talking about it for some time. I'm glad to see it finally come out in the form of program, and there are other things that I think we're still going to need to do.

Williams: We have to take a broader look at what's happening in the economy. Although despite some conflicting reports on unemployment rates over the last week or so, we're continuing to see the economy slowly rebound, and until we actually see consumers being able to increase their disposable income, then the modification efforts, although very positive movements forward, they're not moving us as quickly as we need to move. Ultimately, we're going to see redefault rates continue to increase. So, I think that those who look at this as really delaying a larger foreclosure process, there is some reality or some truth to the fact that we are going to continue to see this foreclosure bubble, because we are continuing to make some enhancements and make some adjustments to pull in as many modification opportunities as possible.

Garland: I would certainly echo that. I don't think some of the positive trends we've seen in some markets are something we need to get lulled to sleep on, because there are still a lot of challenges out there. If we simply look at the analytics and take the 90-plus severe delinquency rates, apply traditional vintage roll-rate analysis, the numbers are stunning as to what potentially could end up in distressed inventory. And we also know that there's a dire need for additional liquidity and funding sources to be able to facilitate the sales of this inventory.

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