Under the Shadow of Court Backlogs
Court backlogs appear to be the venue where mounting numbers of loans pending liquidation are stuck longer and longer feeding into the "shadow" inventory.
Currently as in the past couple of years servicers have been staffing and automating processes to be able to properly examine, monitor and review distressed loans.
After a number of amendments and revisions since its launch, HAMP has taken a more finalized shape. And a stabilized HAMP helps servicers who had to modify processes after every change to be able to comply, says Georgiana Pate, VP of strategic consulting services at Lender Processing Services, it helps that now loans have started to flow through the HAMP pipeline.
Now capacity challenges are passing onto the courts creating a need to expand their processing capacity in order to avoid an even larger shadow inventory.
Some information is in the open. The May 2010 Mortgage Monitor report by Lender Processing Services Inc., Jacksonville, Fla., shows the total U.S. noncurrent loan rate that combines foreclosures and delinquencies as a percent of active loans is 12.38%, "relatively stable" but at historically high levels. The total U.S. foreclosure inventory rate is 3.18% as over 7.3 million loans in some stage of delinquency or bank owned.
Currently the most difficult part of mitigating potential losses is tracking down information about loans still being processed.
The number of loans "sitting in the shadow inventory pending some sort of liquidation action" after they have already been reviewed by a servicer for potential modification, or after the borrower failed to keep the loan current during the modification trial period continues to increase, Pate of LPS told this publication.
After a two-month decline, deterioration ratios increased, with 2.5 loans rolling to a "worse" status for every one that has improved, according to LPS.
For example, the average number of days for a loan to move from 30-days delinquent to foreclosure sale continues to increase reaching an all-time high of 449 days, resulting in an increase in "shadow" foreclosure inventory.
It means right now the servicers "aren't necessarily moving forward," because "there is a lot delay and backlog" in the courts, Pate says. That prospect has an upside and a downside.
It has translated in more thorough servicer reviews of each and every loan file "to make sure they have exhausted every avenue" of a loss mitigation workout opportunity for each borrower. If a borrower does not qualify for a modification or redefaults on it, foreclosing servicers are required to consider other options such as selling the property for less through a short sale or taking the property back through a deed-in-lieu where the mortgage can be the only lien against the property. Or the servicer is waiting for court proceedings to take back the mortgage title, which is when these properties become part of the so-called shadow inventory. Plus some of the courts are requiring additional documentation to prove that they have taken all of those additional steps, which makes the process more work intensive since even if the mortgage industry is using electronic documentation, it still need to file paper documents to the courts.
"During this time it is not clear how to proceed," Pate says, if for instance the borrower's status has changed because they are receiving some income and have the ability to make some payments. It is why servicers have to revisit borrower files time and again to reconsider applicable loss mitigation options such as a loan modification.
Servicers are challenged to give that second look to loan files to ensure that before they actually proceed with foreclosure they have looked at every form of workout opportunity so they are taking a step back to make sure they have done that. "We have seen the timeline to move forward adjust slightly."
Moratoriums add to the shadow inventory challenge. For instance, in certain problematic areas such as the Gulf Coast more foreclosure moratoriums are being granted by servicers because of the BP oil spill. The same as when Hurricane Katrina hit the region, Pate says, it is a disaster and there is not much borrowers or servicers could do. Several states have suspended foreclosure activity in affected areas.
The continued unemployment also weighs on servicers' ability to assist distressed borrowers.
All of the above has changed the way serivcers mitigate losses. The end result is a prolonged loss mitigation process. Since the process is increasingly more time consuming and demands more resources for each and every loan the servicers are hiring may not be significant for the country overall but does have a positive effect on the economy.
Ultimately the nature of capacity pressures has also changed. The courts have put a tighter grip on the volume that can go through. "Yes, there's volume sitting there, but we also need the court systems to start to open up a little bit and allow more of this to start to flush through," Pate says. "But it needs to be done in a very controlled environment."