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REAL ESTATE APRIL 15, 2009
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Banks Ramp Up Foreclosures
Increase Poses Threat to Home Prices; Delinquent Borrowers Face New Scrutiny
By RUTH SIMON
Some of the nation's largest mortgage companies are stepping up foreclosures on delinquent
homeowners. That will likely lead to more Americans losing their homes just as the Obama
administration's housing-rescue plan gets into gear.
J.P. Morgan Chase & Co., Wells Fargo & Co., Fannie Mae and Freddie Mac all say they have increased
foreclosure activity in recent weeks. Those companies say they have lifted internal moratoriums which
temporarily halted foreclosures.
Some mortgage companies had stopped foreclosing on borrowers as they waited for details of the Obama
administration's housing-rescue plan, announced in February, which provides incentives for mortgage
companies and investors to reduce borrowers' payments to affordable levels. Others had temporarily
halted foreclosures while they put their own programs in place, or in response to changes in state laws.
Now, they have begun to determine which troubled borrowers are candidates for help, and to move the
rest through the foreclosure process.
The resulting increase in the supply of foreclosed homes could further depress home prices and put
additional pressure on bank earnings as troubled loans are written off.
Some of the mortgage companies are themselves receiving funds under the government's financialsector
bailout, which could make their actions politically sensitive. But mortgage companies say they are
taking steps to keep borrowers in their homes, and are only resorting to foreclosure when there are no
other options.
Foreclosure sales had dropped in the second half of 2008 as mortgage companies delayed taking action
against delinquent borrowers. But sales have been edging up this year, according to LPS Applied
Analytics, which tracks loan performance. Foreclosure-related filings increased by nearly 6% in
February from the month earlier, and were up almost 30% from February 2008, according to
RealtyTrac. The backlog of seriously delinquent loans has been growing.
In California, notices of trustee sales, which are preludes to foreclosure sales, climbed by more than 80%
to 33,178 in March, from February, according to data from ForeclosureRadar.com and the Field Check
Group. The increase reflects both the expiration of foreclosure moratoriums and a California law enacted
late last year that temporarily delayed default and foreclosure notices, says Mark Hanson, president of
the Field Check Group, a research firm.
Ronald Temple, co-director of research at Lazard Asset Management, expects home prices to fall 22% to
27% from their January levels. More than 2.1 million homes will be lost this year because borrowers can't
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meet their loan payments, up from about 1.7 million in 2008, according to Moody's Economy.com.
Mortgage-servicing companies, such as J.P. Morgan Chase and Wells Fargo, collect mortgage payments
and work with troubled borrowers, both for loans they own and those held by investors.
J.P. Morgan Chase has increased foreclosure actions since the expiration of a moratorium on new
foreclosures that began on Oct. 31, and a later moratorium put in place at President Obama's request.
The Oct. 31 moratorium delayed foreclosures on more than $22 billion of Chase-owned mortgages
involving more than 80,000 homeowners.
"We had stopped putting additional loans into the foreclosure process so we could be sure that
delinquent borrowers would have every opportunity to take advantage of new initiatives that we were
putting in place," a Chase spokesman says. Borrowers who are now receiving foreclosure-sale notices, he
said, "own vacant properties, have not been in contact with us and/or do not qualify for the modification
programs."
Citigroup Inc. says it stopped all foreclosures until March 12, at the Obama administration's request, on
loans serviced for Fannie and Freddie. Since then, says a spokesman, it has "reverted to our previous
business-as-usual moratorium." Under that policy, it will not initiate a foreclosure sale for any borrower
who is working with Citigroup and is a good candidate for a loan modification, provided Citigroup owns
the loan or has investor approval. "For borrowers who do not qualify under these criteria and where no
other options are available, we will move forward with foreclosures," the spokesman says.
Wells Fargo has also increased foreclosure actions since the expiration of its foreclosure moratorium,
put into place while it awaited details on the administration's plan. Wells Fargo "will continue to work
with our customers to find solutions up to the actual point of a foreclosure sale," a Wells Fargo
spokesman says. "But the expiration of foreclosure moratoriums is having an impact."
Both Fannie and Freddie have stepped up sales of foreclosed properties since their moratoriums ended
on March 31. Freddie says it has started to complete some foreclosure sales, such as those involving
investment properties or second homes, though it continues to delay foreclosures on loans that may be
eligible for modification under the Obama plan.
Fannie has told servicers that "a foreclosure sale may not occur on a Fannie Mae loan until the loan
servicer verifies that the borrower is ineligible" for a loan modification under the Obama
administration's plan, "and all other foreclosure prevention alternatives have been exhausted," a Fannie
spokeswoman says.
GMAC's mortgage division, which had temporarily halted foreclosures while awaiting details of the
Obama plan, is now reviewing loans to see which ones will qualify under the program. So far, about 10%
of borrowers in some stage of foreclosure appear to be eligible for the federal program, a company
spokeswoman says. Although GMAC may be able to work with investors who own these loans to come up
with another solution, she says, many borrowers who don't qualify for help under the federal program
are likely to wind up in foreclosure.
Mortgage companies are sorting through loan files to determine which borrowers are candidates for
help. "At the time a moratorium expires, we have a team of folks who will pore through all of those loans
where borrowers have not paid before we will take the next step in the process," says Jim Davis, executive
vice president for American Home Mortgage Servicing Inc. "If there is any borrower contact, we will hold
off on the foreclosure process until we've exhausted every effort to assist that borrower."
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Still, some borrowers who are currently talking to their mortgage companies are also likely to wind up in
foreclosure once their files are reviewed. "We are getting so many of these cases where people don't fit
the new [Obama] program," says Michael Thompson, director of Iowa Mediation Service, which works
with troubled borrowers. Many borrowers are unemployed or underemployed or have credit problems
that go well beyond their mortgage troubles, he says.
Many have been "playing for time" while the moratoriums have been in place, he says. But the delays
have only increased the amount of interest and fees they owe, making their loans "nonviable in the long
run."
Many troubled loans will ultimately wind up in foreclosure because the borrower doesn't have sufficient
income to make even a reduced mortgage payment, or doesn't respond to the mortgage company's
requests for information. "Certainly half of the loans that would have wound up in foreclosure before the
foreclosure moratoriums went in place" will ultimately wind up in foreclosure, says Michael Brauneis,
director of regulatory risk consulting at Protiviti Inc., a consulting firm.
While many troubled loans are held by hedge funds, pension funds and other investors, the expiration of
foreclosure moratoriums could also put a dent in bank profits, says Frederick Cannon, an analyst with
Keefe, Bruyette & Woods. The moratoriums "have to some degree postponed the realization of problems"
and "may help bank earnings in the first quarter" by delaying charge-offs of some troubled loans, he
says.
Write to Ruth Simon at ruth.simon@wsj.com
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Rich MacKanin
Real Estate Consultant
Keller Williams Realty
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