'Flare-Ups' of Bad Loans Still a Risk to Mortgage Servicers

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Foreclosures and repossessions have subsided from the overwhelming levels of the housing bust, but mortgage servicers cannot afford to grow complacent about the volume of real estate owned.

"I don't think we will have any out-of-control fires as far as REO. But we're going to have some flare-ups and we need to be prepared for those flare-ups," said Roger Beane, the chief executive of LRES, an appraisal and REO asset management company.

During an interview at the Mortgage Bankers Association servicing conference in Orlando this week, Beane pointed to a trend that started in the 1960s: Every 10 years or so there has been a sudden outbreak of loan defaults. That was the case in 1998 and in 2008, in both instances largely due to the nonprime market.

But since the 2008 bust took so long to work through, Beane said he believes that it will take longer than the 10-year time frame to see the next large increase in defaults.

"We're just normalizing now," he said, so he doesn't expect a 2018 REO correction.

His caveat to that prediction is the 2016 presidential election and how it might influence the markets. "What are interest rates going to do? What is that going to do to borrowing power?" he asked rhetorically, pointing out that rising rates reduce purchasing power, which then reduces home prices and in turn homeowner equity. Defaults happen when borrowers can't refinance to pull equity out to help with transient financial problems.

A group that assists distressed borrowers, the Homeownership Preservation Foundation is expecting to be plenty busy dealing with troubled consumers in 2016.

The group is projecting it will receive nearly 400,000 telephone calls and conduct close to 100,000 counseling sessions this year, chief financial officer Ken Duncan said during a panel presentation on communicating with troubled borrowers.

Beane said the large variance in foreclosure case volume between nonjudicial states and judicial states has disappeared. This has given loan servicers an opportunity to right-size their REO staffing, he said, adding that they need to consider outsourcing (a service LRES offers).

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