Consumer Research: foreclosure sales

At a press event in North Portland in front of the home of a family struggling to avoid foreclosure, Senator Jeff Merkley unveiled a six-part plan to fix the housing market and rebalance the relationship between borrower and lender. The plan includes what Merkley calls “lifeline bankruptcy,” which is basically the cramdown proposal to allow bankruptcy judges to modify the terms of primary residence loans.

The “colossal disappointment” of the HAMP loan modification program, according to Merkley, necessitates a restart to the national conversation of how to heal the decaying housing market. The confusion in the market, as well as the continued flood of foreclosures, creates uncertainty for working families and the economy. “We’re not going to see a true economic recovery until we do something about the broken housing market,” said Senator Merkley at the event. “I met with Portland homeowners today who dealt with months of confusing instructions to get a mortgage modification, only to be told 10 months later they didn’t qualify and their home was facing foreclosure. My plan will put homeowners first and foreclosures last.”

Here are the six points to the Merkley proposal:

1) A national short refinance program. When a bank sends a home into foreclosure, it becomes an REO property, to be sold at auction at a large loss for the investors. Instead of going through the long process of resale, with the attendant upkeep that has to be spent by the bank on the home, and the disruption to the property values from having a vacant home in their neighborhood, this short refi program would allow qualified families facing eviction to refinance to an FHA-guaranteed mortgage based on current property values and interest rates. In the interim the family could stay in the home during the appraisal, new underwriting and final resolution. Many families would be able to pay a reduced payment if the home was written down to real value. The investor would get a bigger payoff than selling a vacant home in foreclosure. Neighbors would see their communities stabilized without a vacant property in their midst. And the family would get to stay in their home.

2) Ending dual track. The family highlighted at today’s event, Connie and Michael Umphress, were current on their mortgage when they sought a modification with Wells Fargo. The servicer encouraged them to miss a payment to qualify for the private modification, and then reduced the loan in the trial period. But at the same time, they pursued foreclosure actions. So Connie and Michael got foreclosure notices while they negotiated the modification process. Merkley’s plan would end this highly stressful dual track process, and suspend foreclosure actions while families sought a modification. This would reduce incentives for servicers to string along borrowers with a reduced payment for months (in the case of the Umphresses, 10 months), only to reject the modification and demand payment of the balance owed to avoid foreclosure. “This leads to families walking away from their homes or avoiding the modification process altogether,” Merkley said. “There must be a better way.

3) Single point of contact. Borrowers aiming for a modification usually talk to a different person at their servicer every single time they establish contact. This means they have to explain their situation all over again, and increases the possibility for mistakes. Merkley would establish a single point of contact between the borrower and the lender.

4) Third party review. Similar in spirit to Sen. Al Franken’s proposed Office of Homeowner Advocate, this would create an independent third-party review process for families facing foreclosure. It would check to see if the borrower explored every option to avoid foreclosure, and possibly initiate a mediation process with a sit-down between the borrower and the servicer. Mandatory mediation has proven successful in Maine, Connecticut and other states in getting modifications done and avoiding foreclosure. The third-party review would also “ensure that homeowners’ legal rights are protected” by ensuring that existing state laws have been fully enforced. This is the polar opposite of Third Way’s plan to deny due process to foreclosure victims. Merkley would actually have this independent reviewer identify state law where relevant to ensure a firebreak against things like foreclosure fraud.

5) Lifeline bankruptcy reform. This is basically cram-down, the ability for bankruptcy judges to treat primary residence mortgages the same way they treat vacation homes, second homes, boats or virtually any other asset. The result would be that homeowners would have a level playing field and the banks would finally have an incentive to pursue modifications rather than risk how the bankruptcy judge would modify the terms.

6) Homebuyer’s tax credit. I’m not such a fan of this proposal, but as Merkley describes it, he would generally target it toward first-time homebuyers purchasing “modest” homes. Merkley’s plan would give a $5,000 tax credit in the year of purchase (as opposed to the $8,000 tax credit implemented in 2009-10) to first-time homebuyers, “spending money upfront” to help working families become homeowners. I’m not sure that’s such a desirable goal, actually, but if this is capped, so that we’re not giving $5,000 away needlessly to buyers who would have purchased a million-dollar home anyway, it’s at least a bit better than the 2009-10 plan.

Merkley hopes his proposal would spark a conversation in Washington about how to fix the housing market. HAMP has completely failed; as Merkley noted today, less than $1 billion has been spent to mitigate foreclosures, out of a promised $50-75 billion. “We are not through the foreclosure crisis, so we must have a second national conversation,” Merkley said. He invited other proposals from members of Congress.

I asked Merkley if he was putting this together because he thought Congress would be forced to step in to clear up a chaotic situation if more legal rulings call into question the standing of servicers to foreclose. “Possibly,” he answered. “The role is to ensure fairness (in the housing market). The complexities in the system right now can create a challenge to the health of the market. So we have to deal with this.”

Merkley wasn’t familiar with the Third Way proposal to limit due process for foreclosure victims, but I think his plan serves as a nice counterpoint. If the housing market goes haywire, there will be a major need for off-the-shelf solutions to create an equitable situation that doesn’t simply bigfoot on the side of the banks. His proposal mostly does that. “Let’s empower homeowners,” he concluded.

Mortgage loan servicers negotiated 1.76 million permanent loan modifications for homeowners last year, but more than two-thirds of them were completed in-house and not part of the federal government’s Home Affordable Modification Program.

A year-end report Wednesday from Hope Now, a private-sector group of mortgage servicers, investors, insurers and non-profit counselors, showed that mortgage servicers arranged 1.24 million proprietary permanent modifications, compared to the 512,712 modifications begun under the government’s more rigorous HAMP program.

It’s unclear how many of those permanent in-house modifications received during 2010 are still current. On Monday, the Treasury Department said one in five homeowners who received a permanent HAMP modification during 2009’s final quarter was at least 60 days delinquent on their mortgage payments at the end of 2010.

In an indication of the serious difficulties that lie ahead for consumers and the housing market this year, the number of consumers who were at least 60 days behind on their mortgage totaled 2.87 million in December. Still, 60-day loan delinquencies are 30 percent lower than they were at the end of December 2009.

Hope Now’s data also showed a significant fourth-quarter drop in foreclosure starts and sales, compared with the third-quarter, but that is largely the result of mortgage servicers temporarily suspending foreclosure actions while they and states investigated their back-office procedures.

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Consumer Research

Tuesday, February 15, 2011

foreclosure sales

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