Sunday, July 12, 2009
Researchers: "Few Preventable Foreclosures"
by CalculatedRisk on 7/11/2009 07:24:00 PM
From Manuel Adelino, Kristopher Gerardi, and Paul S. Willen writing at the Boston Fed: Why Don’t Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and Securitization
(ht Holden Lewis, Mortgage Matters at Bankrate.com)
One of the key questions these researchers ask is: Why don't lenders renegotiate1 with delinquent borrowers more often?
If a lender makes a concession to a borrower by, for example, reducing the principal balance on the loan, it can prevent a foreclosure. This is clearly a good outcome for the borrower, and possibly good for society as well. But the key to the appeal of renegotiation is the belief that it can also benefit the lender, as the lender loses money only if the reduction in the value of the loan exceeds the loss the lender would sustain in a foreclosure.
all emphasis added
Just last week, Gretchen Morgenson at the NY Times made this argument: So Many Foreclosures, So Little Logic
[T]he most fascinating, and frightening, figures in the [subprime loan] data detail how much money is lost when foreclosed homes are sold. In June, the data show almost 32,000 liquidation sales; the average loss on those was 64.7 percent of the original loan balance.
Here are the numbers: the average loan balance began at almost $223,000. But in the liquidation sale, the property sold for $144,000 less, on average. ...
Given losses like these, [Alan M. White, an assistant professor at the Valparaiso University law school in Indiana] said he was perplexed that lenders and their representatives were resisting reducing principal when they modify loans. His data shows how rare it is for lenders to reduce principal. In June, for example, 3,135 loans — just 17.2 percent of the total modified — involved write-downs of principal, interest or fees. The total loss from these write-downs was just $45 million in June.
And yet, the losses incurred in foreclosure sales involving loans in the securitization trusts were a staggering $4.59 billion in June. “There is 100 times as much money lost in foreclosure sales as there was in writing down balances in modifications,” Mr. White said. “That is not rational economic behavior.”
If banks have written down the value of these loans to the 40 cents on the dollar that they are fetching on foreclosures — the only true value for these homes right now — then why don’t they bite the bullet and reduce the loan amount outstanding for the troubled borrowers?
And the Fed economists respond:
We argue for a very mundane explanation: lenders expect to recover more from foreclosure than from a modified loan. This may seem surprising, given the large losses lenders typically incur in foreclosure, which include both the difference between the value of the loan and the collateral, and the substantial legal expenses associated with the conveyance. The problem is that renegotiation exposes lenders to two types of risks that can dramatically increase its cost. The first is what we will call “self-cure” risk. As we mentioned above, more than 30 percent of seriously delinquent borrowers “cure” without receiving a modification; if taken at face value, this means that, in expectation, 30 percent of the money spent on a given modification is wasted. The second cost comes from borrowers who redefault [30 and 45 percent]; our results show that a large fraction of borrowers who receive modifications end up back in serious delinquency within six months. For them, the lender has simply postponed foreclosure; in a world with rapidly falling house prices, the lender will now recover even less in foreclosure. In addition, a borrower who faces a high likelihood of eventually losing the home will do little or nothing to maintain the house or may even contribute to its deterioration, again reducing the expected recovery by the lender.
I'd argue for a third reason: If it became widely known that lenders routinely reduce the principal balance for delinquent borrowers with negative equity, this would be an incentive for a large number of additional homeowners to stop paying their mortgages.
These economists would argue that the lenders are behaving rationally and that foreclosure - when all costs are considered - is frequently the least costly alternative.
1 The economists define “renegotiation” as "concessionary modifications that serve to reduce a borrower’s monthly payment. These may be reductions in the principal balance or interest rate, extensions of the term, or combinations of all three." Under this definition, they do not include the most common modification: capitalization of late payments and fees.
Posted by CalculatedRisk on 7/11/2009 07:24:00 PM 257 Comments
Labels: Foreclosure, Loan Modifications
Wednesday, July 1, 2009
1. A person not in possession of an instrument is entitled to enforce the instrument if:
(a) The person seeking to enforce the instrument:
(1) Was entitled to enforce the instrument when loss of possession occurred; or
(2) Has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred;
(b) The loss of possession was not the result of a transfer by the person or a lawful seizure; and
(c) The person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.
2. A person seeking enforcement of an instrument under subsection 1 must prove the terms of the instrument and his right to enforce the instrument. If that proof is made, NRS 104.3308 applies to the case as if the person seeking enforcement had produced the instrument. The court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. Adequate protection may be provided by any reasonable means.
(Added to NRS by 1993, 1244; A 2005, 1999)
The Nevada Supreme Court has adopted formal rules governing the Nevada Foreclosure Mediation Program that was established by the passage of Assembly Bill 149 by the 2009 Nevada Legislature. CLICK HERE to read the rules.
On this website is an information brochure announcing the new recording fee for the Notice of Default (CLICK HERE). The Election/Waiver of Mediation Form to be served with the Notice of Default and Election to Sell is included along with instructions for the individuals recording the notices involved in the new foreclosure procedures (CLICK HERE).
Assembly Bill 149, passed shortly before the end of the session, provides for mediations in foreclosures commenced on or after July 1, 2009, as a way to help home owners find alternatives to losing their houses.
A homeowner who receives a foreclosure notice can request an opportunity to sit down with the lenders and a trained mediator and explore whether a mutually agreeable resolution can be reached.
In the legislation, the Supreme Court was tasked with establishing the rules under which the Foreclosure Mediation Program will function.