Hope That U.S. Can Weather New Foreclosure Storm
Like a dark, ominous cloud, the menace of a foreclosure onslaught has loomed portentously over the U.S. real estate market in recent months, threatening to wash away a fledgling recovery.
Now it looks like the storm has hit -- but this time we may be ready for it.
After more than two years of sputtering, the foreclosure machine is kicking back into gear: Foreclosure default notices, which lenders send to borrowers to inform them that they have initiated foreclosure, rose on an annual basis for the first time after 27 months of year-over-year declines, online foreclosure marketplace RealtyTrac says.
"With foreclosure starts increasing 16 percent nationwide for the first time in two years, that's a clear indication that ... we have another wave of foreclosures coming through," RealtyTrac Vice President Daren Blomquist said.
In the past, that has spelled hardship for many Americans: Waves of foreclosures typically erode home prices, pushing throngs of distressed borrowers to the brink of foreclosure themselves -- or out of their homes altogether.
But foreclosure floods hit the market hardest only when they reach completion and become bank-owned properties or sell at auction. Experts say that a recent shift toward foreclosure alternatives by lenders, however, may largely fend off those outcomes.
Underwriters are increasingly turning toward short sales and loan modifications to resolve distressed mortgages, which allow homeowners to avoid losing their homes to foreclosure even after proceedings that may end in repossession have begun.
One obvious reason for the trend, experts say, is the "robo-signing" settlement.
"After the $25 billion fine that the five major servicers had to pay, pretty much the message to them was pretty clear: Stop foreclosing," California realtor Sophia Delacotte says of the February agreement that settled a government investigation into illegal foreclosures. Delacotte often helps distressed homeowners shed their properties -- and underwater mortgages -- through short sales.
In short sales, homeowners sell their homes for less than their mortgages are worth, resulting in losses for lenders. Short sales are preferable to foreclosures for borrowers because they enable them to mitigate damage to their credit scores and dodge the emotional toll of a foreclosure. They are also good for lenders because they help banks avoid the costs of repossession, maintenance and marketing that come hand-in-hand with foreclosures, not to mention legal liabilities. They also bring in more money for banks than foreclosure sales (on average, $27,000 more, RealtyTrac says).
Short Sales Increase
Short sales have already been trending, rising 25 percent year-over-year in the first quarter, RealtyTrac said in May.
"I think these properties that are starting the foreclosure process now are much more likely to end up as short sales.... There is a strong motivation for banks -- an intrinsic motivation for them -- to more aggressively approve short sales rather than foreclose on a property," Blomquist says.
Delacotte helped one family barely escape the clutches of foreclosure by brokering a short sale. She persuaded their lender to postpone their foreclosure auction twice.
"In this case, this family has a real hardship, so that was pretty easy to put together," she said.
Getting your lender to sign off on a short sale isn't always a cakewalk, however. Borrowers usually must be late on their mortgages and/or provide proof of hardship, so the option is off-limits to a wide swath of borrowers who are underwater but current on their mortgages. Zillow recently estimated that nearly a third of American homeowners are underwater.
But many of the beleaguered borrowers whose homes are now sliding into the foreclosure supply are good candidates for short sales.
A Push to Prevent Foreclosure
While banks have shown more interest recently in short sales, the government has taken its own steps to spur them on: Twin mortgage guarantors Fannie Mae and Freddie Mac, which are under government conservatorship, announced timelines in April that require servicers of their mortgages to respond to short sale inquiries from homeowners within a month -- or face penalties.
Lenders could follow suit, experts say. Bank of America, for example, recently said it now intends to approve or reject short sales within 20 days.
"Banks are trying to assist sellers much more," says Columbia, Md.-based Realtor Ariana Loucas. The last six short-sale listings she's handled this year were all encouraged by the homeowners' lenders, she said.
Short sales aren't the only thing that may head off a cascade of foreclosures. Many lenders, nudged by the government, may also ramp up loan modifications, which could cure many distressed mortgages and actually keep hard-pressed borrowers in their homes.
The Obama administration recently tripled the subsidies that are offered under the Home Affordable Modification Program, which should incentivize banks, private investors and even Fannie Mae and Freddie Mac (all of whom have put up some resistance to HAMP modifications in the past) to participate in the program, experts say. And the administration also expanded the Home Affordable Refinance Program to cover more underwater homeowners, instead of just ones whose mortgages are less than 125 percent of the value of their homes. "There is no cap anymore, no matter what," Blomquist said.
[Learn more about foreclosure alternatives.]
Then there's the mammoth sum of principal reductions, which often are a part of loan modifications, that the nation's five biggest servicers are compelled to perform in the next three years: The banks may forgive well over $30 billion in mortgage debt in order to satisfy credits that they agreed to pay -- in the form of principal reduction -- as part of the robo-signing settlement.
"All these programs are taking a bite out of the elephant," Blomquist said. "Not one is completely solving the problem, but each is making a dent."
For now, an adapting market appears poised to head off a flood of foreclosures at risk of spilling onto the market as bank-owned properties. But any sort of foreclosure-prevention buffer has a great deal of volume to absorb: As of April, the number of homes at risk of eventually becoming bank-owned was 1.5 million, a report from analytics firm CoreLogic found. The primary mortgages attached to those homes accounted for about half of all delinquent mortgages, it said.
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