Financial companies aren’t foreclosing on home mortgages nearly as quickly as they used to, and there is a simple, if not immediately obvious, reason why.
Data released last week by the Federal Reserve shows that homeowners who have gone more than three months without paying their mortgage were about half as likely to be put into foreclosure in May (the latest data available) as they were at the beginning of the crisis in 2007.
Servicers, which handle interactions with homeowners, cite various reasons for this slowdown, including state foreclosure moratoriums, overworked servicers and the government’s mortgage modification program. However, part of the reason may be that for servicers with any skin in the game – which would include banks and some independent servicers – now is a terrible time to foreclose.
Aside from the obvious political considerations, it just doesn’t make sense on the bottom line. The Fed’s data also showed that the loss severity – the loss on a foreclosed home with an Alt-A, or non-conventional, mortgage after it is resold – has jumped from the low single digits at the beginning of 2007 to closer to 60%, roughly mirroring the decline in foreclosures.
Faced with those kinds of losses, it might be better for a servicer to just stick its head in the sand.
This might explain some very odd anecdotal servicer behavior.
San Diego lawyer Greg Weston tells the story of a client who bought a single-family home in San Diego in 2005. He lost his job last year and stopped making payments on his home in October 2008.
A few months later he found a new job and moved his family to Colorado – mailing the keys of his San Diego house to the servicer, jingle mail.
The servicer, however, has refused to recognize that anything has changed.
“We offered to reduce the bank’s costs by doing a short sale or deed in lieu of foreclosure, but they will not communicate with me other than sending demands for payment or partial payment,” Weston said. “So the first lender could have taken title to the property months ago, but hasn’t.”
Weston acknowledges this is an extreme example, but the general pattern, he says, is quite common.
