market conditions in regards to short sales, foreclosures and REO
properties, many are not aware of the logistics and the costs involved
in a
foreclosure. Many buyers getting their feet wet in this contemporary
real
estate environment have unrealistic expectations of their negotiating
position and are misinformed of the position that the banks, lender's,
investor's or servicers' are in after the foreclosure process. I
thought
this was some great information on understanding the realities of
foreclosures.
Understanding the Lender's Cost of Foreclosure
(As taken from the current policy paper for Congressional briefing –
Mortgage Bankers Association 2008)
The recent increase in mortgage delinquencies and foreclosures has
brought
significant attention to the costs of foreclosure to homeowners,
communities, and mortgage industry participants. Although the impact of
foreclosure on homeowners and communities is apparent, some confusion
still
exists about the impact on industry participants, particularly lenders,
servicers, and investors.
Foreclosure is a lengthy and extremely costly process and, generally, a
losing financial proposition for lenders and investors. A recent
Congressional Research Service paper, which analyzes current foreclosure
issues, highlights how substantial and far-reaching these losses can be.
While losses can vary widely, several independent studies find them to
be
generally quite significant…
* over $50,000 per foreclosed home or
* as much as 30 to 60 percent of the outstanding loan balance
Background: A Who's Who
When a lender holds a loan in portfolio, it retains the credit risk on
the
loan and typically takes a direct loss if the loan goes to foreclosure.
When a loan has been securitized, the investors in the mortgage
securities
hold the credit risk and take the loss if the loan goes to foreclosure
sale.
Mortgage securities generally are subdivided into groups known as
tranches
with distinct risk and return characteristics. As a result, losses
usually
are not borne evenly by all investors.
The servicer (the one who receives the payments from the borrower on
behalf
of the lender) is contractually responsible for acting on behalf of the
investor, for both portfolio owned and securitized loans. As the agent,
the
servicer collects payments from the borrower and passes payments of
principal and interest on to the investor and, in most instances, makes
tax
and insurance payments to the appropriate entities as well.
Time Frame:
State law dictates the foreclosure process and timeline. As a result,
foreclosure costs vary significantly from state to state. The national
average time between the first missed payment and the foreclosure sale
is
approximately one year. After that, it may take additional time to gain
possession of the property, clear title (if necessary), and prepare and
sell
the REO.
Delinquency Period Costs
Lenders and servicers begin incurring costs as soon as a borrower stops
making timely mortgage payments. Many of these are time-dependent costs
that
continue to grow as long as the loan is delinquent, in foreclosure, or
in
the REO sales process.
These costs include:
• Lost principal and interest payments. In the case of a loan held in a
lender's portfolio, the lender incurs this loss directly. Where a loan
has
been securitized, the servicer incurs costs because transaction
agreements
usually require that they continue forwarding principal and interest
payments to investors, using their own funds or borrowed funds, as long
as
the loan remains in the security.
• Tax and insurance payments. The lender or servicer is responsible for
making these payments, if the terms of the loan call for these items to
be
escrowed, whether or not the borrower is making monthly mortgage
payments.
These obligations continue until the borrower resumes making payments or
the
property is sold.
• Maintaining the property. If the borrower is not properly maintaining
the
home, the lender or servicer is responsible for the ongoing costs of
maintaining the property. This can include paying for lawn maintenance,
securing the property, complying with safety codes, winterizing the
property
(where necessary), and homeowners association or condo fees, if
relevant.
These expenses continue until the property is sold.
• Lost servicing fee income. A servicer loses its servicing fee when a
loan
is delinquent as this fee comes out of the monthly payment received from
the
borrower.
• Costs of collection efforts / servicing. Servicing delinquent loans
requires additional servicer resources, which can be up to three times
the
cost of servicing a current loan.
• Legal costs for handling the foreclosure. The lender or servicer
incurs
legal expenses in all jurisdictions. Additionally, a personal bankruptcy
proceeding often accompanies foreclosure. This further pushes up the
legal
costs the lender or servicer who must also be represented in that
proceeding.
• Administrative fees. Court fees, fees to publicize foreclosure
notices,
auctioneer fees, and title fees must all be paid.
Once the lender has taken possession of and title to the property
through a
foreclosure auction or sale
The lender has to prepare and market the home for sale. These expenses
can
be significant, accounting for over 40 percent of foreclosure-related
gross
losses.
The main expenses during this phase of the process are:
• Costs of restoring the property to saleable condition. Often homes of
borrowers in financial distress fall into disrepair, requiring
significant
repairs and capital improvements (including painting, plumbing repairs,
replacing appliances and carpeting, and repairing water damage).
• Real estate commissions. Lenders typically use real estate agents to
sell
REO, which means commissions are paid upon sale.
The last step that creates a major expense for investors and servicers
is
the loss on the unpaid principal balance that occurs upon the sale of
the
REO.
The Role of Mortgage Insurance
Some loans carry mortgage insurance that can help servicers and lenders
recover some of the costs of foreclosure. Low down payment loans sold to
Freddie Mac or Fannie Mae requires mortgage insurance. Mortgage
insurance
can be in the form of FHA mortgage insurance, a Veterans Administration
or
other federal loan guaranty, or private mortgage insurance (PMI).
Mortgage insurance claims are typically made once the lender or servicer
has
taken title to the property. Mortgage insurance can reimburse a servicer
or
lender for costs including unpaid interest payments, advances of taxes
and
interest, legal fees, and maintenance costs.
All mortgage insurance programs, however, have limits on reimbursements,
whether based on the coverage level of insurance purchased (in the case
of
PMI) or on a percentage of reimbursable costs (in the case of FHA).
Mortgage insurance does not reimburse for some expenses such as capital
improvements needed to bring a foreclosed property to salable condition,
real estate agent commissions, tax and insurance payments made after the
foreclosure sale and before the REO sale, and seller concessions that
the
lender or servicer may offer to effect an REO sale.
I'm Just a Bill, a Lonely ol' Bill and I'm Sitting Here on Capital Hill
How is it that we hear SO MUCH TALK about different solutions to the
current
real estate crisis, yet not much seems to actually HAPPEN? Ugh!
The Mortgage Bankers Association has compiled a side-by-side comparison
of
all the different proposals of these Mortgage Rescue Plans updated to
include the current proposal approved by the Senate Banking Committee on
May
20, as part of "The Federal Housing Finance Regulatory Reform Act of
2008."
The attached document compares and contrasts proposals introduced by
Representative Frank, Senator Dodd, FDIC Chairwoman Sheila Blair, OTS
Director John Reich, National Community Reinvestment Coalition and
others.
Updates to the Opposition of the OFHEO-NY Attorney General Appraisal
Deal
On May 27, John Dugan, from the OCC (Office of the Comptroller) sent a
"strongly worded letter" addressed to OFHEO Director James Lockhart
stating
opposition to the Appraiser Code of Conduct ("Code") agreement among
OFHEO,
the government-sponsored enterprises (GSEs), and New York State Attorney
General Andrew Cuomo. The OCC noted the agreement would: 1) undermine
rather than enhance the reliability of appraisals; 2) raise costs for
lenders and consequently for consumers; and 3) disrupt appraisal
processes,
which are generally functioning well.
Moreover, the OCC cited the agreement as fatally flawed because OFHEO
failed
to follow rulemaking protocol outlined in the Administrative Procedures
Act. In addition, the agreement is inconsistent with well-established
federal regulations and guidance
The current deal is set to be implemented in September of 2008 which
would
impose very restrictive valuation requirements upon lenders who sell
their
loans Fannie Mae and Freddie Mac.
Amy Swaney, CMB
Vice President
Artisan Mortgage
Mobile: 480-529-3008
Direct: 602.714.9719
eFax: 623.889.2408
<mailto:amy@amyswaney.com> amy@amyswaney.com
8937 E Bell Road, #101
Scottsdale, AZ 85260
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