January 16, 2012
Delinquent borrowers are beginning to see a bright side to foreclosure -- they can stay in their homes, often living rent-free as courts and banks bat around their cases for months if not years.
As of last November, it took a mortgage lender an average of 646 days to process a foreclosure and reclaim the property, according to recent data from LPS Applied Analytics, a mortgage and loan processing service firm. That compares with 394 days as of Nov. 2009 and 251 days in January 2008.
Housing analysts and lenders agree that one of the main causes of the hold-up is simply the sheer volume of post-2008 housing crash defaults overwhelming mortgage lenders and servicers—the companies to whom borrowers directly pay their loans. Currently, between 4.5 and 6 million homes are either in foreclosure or 90 days past due on paying their loans, according to estimates from Mark Dotzour, chief economist and director of research at Texas A&M University’s Real Estate Center.
But there are other factors: It’s become much more difficult for lenders to reclaim properties as foreclosed homeowners have become more emboldened. Rather than packing up and leaving their homes, many of these delinquent mortgage holders are seizing on recent legal and marketplace trends to fight back in court while remaining in their homes. According to figures from the law firm Patton Boggs, foreclosure litigation cases rose 26 percent in the second quarter of 2011, more than doubling from one year earlier, and reaching the highest level since the firm began indexing cases in 2007.
“Not only are consumers getting savvier on fighting back and protecting themselves, but in many cases, we actually have people who are sort of gaming the system now,” said Rick Sharga, Executive Vice President of Carrington Mortgage Holdings. Sharga says he has come across increasing numbers of delinquent borrowers intent on defaulting. “These are borrowers who aren’t interested in loan modification, short-sales, or negotiating settlements—they’re mostly interested in not paying until the foreclosure is over,” he said. In many cases, the borrower is completely off the hook on making payments during and after a foreclosure since mortgage loans are non-recourse, meaning the lender is only legally entitled to collect the property, and the borrower has no personal financial liability.
To be sure, not all foreclosed homeowners pursue these bold strategies, and many do in fact want to stay in their homes and make their loan payments, said Jonas Jacobson, a Boston attorney who represents foreclosed homeowners. “These homeowners are not malcontents scrubbing off the man….Everybody I work with says the same thing to me: ‘I want to pay my mortgage, but the banks won’t modify my loan,’” he said.
Jacobson says bank disorganization and inability to follow through on loan modification promises are to blame for the foreclosure lags. “The bottom line is that people are staying in their houses because the banks do not have their crap together and are falling all over themselves.”
What is clear, however, is that the 2010 “robo-signing” scandal did open delinquent homeowners’ eyes to the prospect that banks had taken shortcuts with their mortgages. During 2010, banks nationwide were caught ordering employees sign hundreds of foreclosure documents and affidavits a day without verifying that the information was correct.
The finding led federal regulators to allow millions of foreclosed homeowners to have their cases reviewed in court. To date, very few foreclosure rulings have been reversed, but the exercise has gobbled up mortgage lenders’ time and resources, said Celia Chen, a senior economist with Moody’s Analytics who specializes in housing. “It did slow down new foreclosures because servicers took extra bandwidth to make sure everything was signed perfectly,” she said.
Compounding the problem was the introduction in 1995 of an electronic mortgage loan registry, which has bred clerical confusion over which firms actually lent to homeowners. Before 1995, homeowners logged their mortgage documents at their county clerk’s office, creating an undisputed record.
Once the Mortgage Electronic Registration Systems came onto the scene, there no longer was an initial set of paperwork. Since it was now all done electronically, Wall Street firms could more quickly pool the loans into bundles to be bought and sold on the market—a processcalled securitization. The speedy buying and selling has made it increasingly difficult to track who owned the mortgage loan initially. Bank of America noted in a legal filing last Spring that MERS’ logging can “cloud ownership” of loans. Today, about 60 million, or about half of all mortgage loans, are tracked using MERS.
That phenomenon has meant a new wave of foreclosed homeowners taking their cases to court over the past two years, claiming that mortgage lenders can’t prove they own a delinquent mortgage, Dotzour said. “I make you the loan, you buy your house. Then I turn around and sell that loan to a financial firm, and that firm turns around and pools 1,000 mortgages like yours and sells them to a bondholder, which opens up the loans to 10,000 investors. It gets extremely confusing,” said Dotzour.
These changes have given rise to a sort of legal cottage industry surrounding foreclosure stalling, said Scott Underwood, an attorney based in Tampa, Fla., who represents servicers and lenders in real estate litigation. “There is a niche market [of attorneys] that has popped up in the last few years that exists to cause delay just to allow people to stay in their homes,” he said.
Homeowners’ newfound zeal is only part of the story. Mortgage lenders—the largest of which are currently Bank of America, J.P. Morgan Chase, and Wells Fargo—may be purposely prolonging the foreclosure process, guided by the logic that if they hold out, home prices will rise and they will reap bigger returns on the foreclosed homes.
“You’ll never get a banker to admit that they do that,” but it stands to reason that is part of the thought process, Chen said.
Banks do incur certain fees as they service foreclosed properties, but in the past, many have counted on recouping them once the home is repossessed and resold, Chen said. “They’re not purposely holding back a lot of loans from going into foreclosure, but they aren’t rushing to complete them all either.”
Large mortgage servicers dispute that idea. “If a borrower can’t afford to stay in the house, a servicer moves as quickly and compassionately as possible in working with the borrower,” said Thomas Kelly, a spokesman for J.P. Morgan Chase.