and now the 'flip side' - BANKS are 'walking away' from delinquent mortgages
from
(snip)"About 4 months ago, I claimed that Banks Will Be Forced to Forgo Certain Foreclosures, Even If the Borrower Has Admittedly Defaulted! In summary:
Without an economic incentive to foreclose, it would not be in the bank shareholders best interests to pursue foreclosure even though borrowers clearly defaulted & owe money to the lender. The economics of distressed assets in mortgage and commercial banking are quickly changing. I am quite open to discussing this in the mainstream media if any are interested in hearing the “Truth go Viral!” I want all to keep this in mind when pondering the release of reserves by the banks.
This was taken by many readers as sensationalist and unlikely. As a matter of fact, much of my writing is taken in a similar way, most likely due to the fact that I have an uncommon proclivity to state things exactly as I see them, sans the sucrose patina. This is not a pessimistic (bearish) outlook, nor an optimistic (bullish) outlook. It is simply called, the TRUTH! Realism! Something that is increasingly hard to come by in these days of media for a purpose and embedded agendas.
You see, the United States, much of Europe, and China have severe balance sheet issues that are ravaging their respective economic prospects. The media, analysts, and investors are gingerly mozying along as if this is not the case. Well, no matter how hard you ignore certain problems, no matte how hard you try to kick the can down the road – the issues really do not just “disappear” on their own.
With these points in mind, let’s peruse this piece I picked up from the Chicago Tribune:
More banks walking away from homes, adding to housing crisis blight: the bank walkaway.
Research to be released Thursday, the first of its kind locally, identifies 1,896 “red flag” homes in Chicago — most of them are in distressed African-American neighborhoods — that appear to have been abandoned by mortgage servicers during the foreclosure process, the Woodstock Institute found.
Abandoned foreclosures are increasing as mortgage investors determine that, at sale, they can’t recoup the costs of foreclosing, securing, maintaining and marketing a home, and they sometimes aren’t completing foreclosure actions. The property, by then usually vacant, becomes another eyesore in limbo along blocks where faded signs still announce block clubs.
“The steward relationship between the servicer and the property is broken, particularly in these hard-hit communities,” said Geoff Smith, senior vice president of Woodstock, a Chicago-based research and advocacy group. “The role of the servicer is to be the person in charge of that property’s disposition. You’re seeing situations where servicers are not living up to that standard.” City neighborhoods where 80 percent of the population is African-American account for 71.1 percent of red-flag properties, according to Woodstock.
Don’t fret, this is definitely not an “African American” thing. As a matter of fact, the reason that this is concentrated in this primarily “African American” community is that this is one of the demographic groups that have been heavily targeted by predatory lenders. You will see other demographic “concentrations” start to show similar attributes and behavior from the banks – lower income, lower educated, higher LTV, lower mean rental income, lower property value, higher mean time to disposition from commencement of marketing areas, etc.
In some cases, lenders might be skirting city rules for property upkeep even after they repossessed properties.
This is where, if the cities and municipalities are on their Ps and Qs, local governments can successfully hit the banking industry for revenues. Charge and fine the banks heavily, just keep the charges below the level of what it will take the bank to maintain the property. Then use the properties for public housing facilities and/or raze the properties.
Woodstock found that as of the end of September, 57.1 percent of the estimated 4,468 single-family, likely vacant homes that became bank-owned from Jan. 1, 2006, to June 30, 2010, were not registered with the city as vacant, as they are supposed to be. “The whole concept of charging off creates this limbo land,” said Dan Lindsey, an attorney at the Legal Assistance Foundation of Metropolitan Chicago. “There’s still a lien that can follow the borrower.”
In November, a U.S. Government Accountability Office report on the frequency and impact of abandoned foreclosures noted that Midwestern industrial cities, including Chicago, seem to bear the brunt of bank walkaways, leaving neighborhoods in deeper distress and cities left to shoulder the associated costs of dealing with unsafe, often unsecured homes. The GAO report, derived from information provided by six loan servicers, found that servicers nationally charged off loans on 46,000 properties from January 2008 to March 2010, with 60 percent of the charge-offs occurring before an initial foreclosure filing was made. That report listed Chicago as having the second-highest number of servicer-abandoned foreclosures nationally, behind Detroit, with 499 properties charged off during the foreclosure process. An additional 361 properties were charged off without a foreclosure filing.
For its report, Woodstock culled data from the city’s vacant properties registry, as well as buildings identified to the city as vacant by municipal departments, foreclosure court filings made from 2006 to the first half of 2010, foreclosure auctions and property transfers. Some of the 1,896 properties flagged by Woodstock as likely walkaways could, in fact, still work toward a resolution in the foreclosure process, but 40 percent of those homes had been in the foreclosure process for more than 18 months. Woodstock believes its projections are conservative because lenders also decide to write off their investments in properties before filing initial foreclosure actions. For only those 1,896 homes, Woodstock pegs the cost to the city, if it needed to seize, secure and demolish them, at $36 million.
And here is a list of the favored banks…
In Chicago, the mortgage servicers and trustees most often associated with the properties flagged by Woodstock are Bank of America, with 314 properties; Wells Fargo (234); U.S. Bank (185); Deutsche Bank (178 ); and JPMorgan Chase (165). When asked to comment generally on bank walkaways, several banks either declined to comment or did not return phone calls.
Why should they comment? The banks are reporting record [accounting] profit increases as release their bad credit reserves back into the net earnings category. Good times are hear to stay. See As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. and After a Careful Review of JP Morgan’s Earnings Release, I Must Ask – “What the Hell Are Those Boys Over at JP Morgan Thinking????
Neighborhoods on the city’s West and South sides seem to be most at risk of bank walkaways. The city’s Roseland neighborhood, on the city’s far South Side, is one example. In 2007, some of the pictures of the homes taken by the Cook County assessor’s office showed properties that were reasonably well cared for by homeowners.
A little more than three years later, the number of eyesores has grown. Windows are broken, fences are missing and plywood covers some of the broken windows. Even if the houses look secure from the front, back doors are sometimes missing or open. Public records show that foreclosure actions initiated were never completed and titles to properties never transferred.
Now, let’s run through this Chicago nightmare scenario from the BoomBustBlog analytical perspective, excerpting Banks Will Be Forced to Forgo Certain Foreclosures, Even If the Borrower Has Admittedly Defaulted!
About a week or so ago, I posed a controversial question, Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two! In that missive I warned that the recovery rate on many of the repossessed properties was not only at a historic low, but actually approaching zero, save a few blips from .gov bubble blowing and shenanigans by banks in the form of kicking cans down the road. I also said that the time may very well come when there may be no economic incentive for banks to foreclose on certain properties, and that pool of properties may grow larger than many could imagine. I know it is difficult for many to come to grips with this, but the math really ain’t that hard.
Even Tyler Durden, whose controversial ZeroHedge site I read and contribute to with a passion, is being too optimistic. Yeah, that’s right! You know things are bad when ZeroHedge is too optimistic! In his post “Quantifying The Full Impact Of Foreclosure Gate: Hundreds Of Billions To Start“, he assumes there WILL be something to foreclose upon. I assert that in increasingly more common instances, there will be no economic interest to foreclose upon. It is starting at the fringes and the margin, but it is moving closer to the center faster than many think. And the longer, and deeper “Fraudclosure” investigations continue, the closer and faster to the center it will get.
Well, since I penned this piece, new developments have arisen. In particular, the likelihood that banks will be set back even further as they face additional legal pressures and foreclosures are judicially rolled back and undone. See Less Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking Industry, The Massachusetts Supreme Court Drops THE BOMB!
This is, of course, not even considering the fact that all of this investigating and shining the light in dark corners will reveal the true elephant in the room (and it is not hastily signed affidavits that can be quickly fixed) which is that many, if not most, high LTV mortgage originations were fraudulent to begin with. That means that not only would it not be cost effective to foreclose, but everybody and their momma will be scrambling to put the fraudulent loans back to the originating banks – see The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008! for my realistic take on the situation and the expenses that it entails. Yes, the elusive recovery rate is going to be pushed that much lower. Long story short, bank expenses will skyrocket, along with efficiency ratios, which were already increasing to begin with at the same time housing sales economic activity and prices will drop and credit losses will spike. Oh, what fun we have in store."(snip)
The gist of this article seems to be that, as a result of various court rulings re foreclosure rights that now greatly increase bank litigation costs necessary to actually obtain a clear title ( thus making a foreclosed property actually sellable and allowing the bank to recover a portion of it's loan value ), as well as the institution of official foreclosure proceedings making banks legally responsible for 'property upkeep' costs for the foreclosed property as mandated by local gov't's, as well as the 'time value of money' increasingly favoring banks choosing to take an early but nearly complete loan loss 'write off' on delinquent mortgages which in turn frees up bank money held as reserves against loan loss for productive investment ( like prop desk purchases of Apple stock or copper futures ), banks are increasingly choosing NOT to pursue foreclosures of certain properties. Instead they find it cheaper in the long run to simply 'walk away' and book the loss ... thus allowing the delinquent homeowner to reside in the property 'rent free' forever but leaving the property title in 'limbo' forever. Well actually, until local gov'ts go through the effort and expense of foreclosing on the properties themselves in order to recoup unpaid property taxes. Or worse, the property simply sits there abandoned for years, becoming less valuable and more and more dangerous with every vandalization or squatter.
Obviously, there are lots of unintended side effects stemming from this main unintended side effect - with the most obvious being the rapid conversion of inner city low priced housing neighborhoods into virtual wastelands.
~
Re: and now the 'flip side' - BANKS are 'walking away' from delinquent mortgages
I am finding this funny.
The reason why? Loan modifications. The government made available loan modifications that could be done thru the bank that held the loan. The idea was to rework these loans into something more resonable so foreclosure could be avoided. Banks got pissy and basically refused to do it. They put on a good show of sorts. But they would loose paper work drag their feet so that it would go into forclosure.
Now they will wish they had done the loan mods to begin with. This is going to get crazy fast.
Re: and now the 'flip side' - BANKS are 'walking away' from delinquent mortgages
^^^ was it actually a 'strategic refusal' on the part of the banks to follow through on gov't backed mortgage modifications, or was it more of a practical business decision based on ...
(snip)"Barclays Capital released a report soon after charging the Treasury of misleading the public by ignoring HAMP-modified loans 90 or more days delinquent in the report. A footnote the table provided by the Treasury read, “a HAMP permanent modification is canceled for non payment if it is more than 90 days delinquent.” Barclays analysts interpreted this to mean that the Treasury removed these loans from the delinquent numbers.
In place of that table the Treasury responded in a revised June report:
“Since the Making Home Affordable report was posted on July 20th, Fannie Mae, which administers the program, has reported to Treasury an issue in its implementation of the delinquency statistic methodology used to report performance of permanent modifications. Fannie Mae is now revising the data, and Treasury has retained a third‐party consultant to provide additional review and validation. Upon completion of that independent review, a revised table will be provided.”
A report released in June by the Office of Thrift Supervision (OTC) and the Office of the Comptroller of the Currency (OCC) reported a different view of the HAMP redefaults.
At three months after a HAMP modification, 7.7% of were 60 or more days delinquent, compared to 11.3% overall. At three months, 16.7% of HAMP modifications were 30 or more days delinquent, compared to 24.6% of all modifications, according to the report."(snip)
from
In other words, once the gov't was 'caught' white-washing the actual 'repeat' delinquency rate data on HAMP modified mortgages, bank bean counters quickly concluded that the direct and indirect costs associated with the HAMP program were costing them MORE money than they were recovering from HAMP loans that did not fall right back into delinquency ! Also, arguably, the time delays of the HAMP loan investigation process requirements and net actual loss analysis stemming from HAMP loan (non) performance actually served as catalyst to get the mortgage banks thinking 'outside the box' re delinquent mortgage recovery costs versus actual recovered value.
Thus, arguably, HAMP was the direct pre-cursor of this new bank 'walk away' policy i.e. it's now less expensive overall to quickly book a total loss and move forward than it is to keep a delinquent mortgage on an 'unsalable' property on the banks' books that is still subject to the bank incurring future maintenance costs, future legal costs, future loan loss reserve costs, future property tax and insurance costs etc. !!! The main economic point here is that, where the banks are concerned, the number of willing and qualified buyers for foreclosed properties in many inner city neighborhoods is negligible ... thus the real world 'recoverable asset value' from a successful foreclosure and resale of properties in these neighborhoods is also negligible.
Banks already have a dearth of REO foreclosed properties on their books ... properties in more marketable suburban neighborhoods ... that they already cannot liquidate at any reasonable degree of 'asset recovery' due to continuing softness in the local real estate market. It's a sure bet that REO properties in inner city neighborhoods are even less salable due to falling neighborhood occupancy rates, rising neighborhood crime rates, falling levels of police and fire protection, etc.
(snip)"CAMDEN (AP) — In a solemn display, laid-off firefighters and police officers lined up Tuesday to turn in their helmets and badges — symbols of deep budget cuts that were destined to further erode the quality of life in one of the nation's most impoverished and crime-ridden cities.
Nearly half the Camden police force, including civilians, and about one-third of its firefighters lost their jobs as city leaders sought to balance the budget amid falling tax revenue and diminishing aid from the state."(snip)
The 'gold foil hat' crowd will undoubtedly point out that this is simply a case of a gov't promoted / subsidized but economically untenable low income housing ownership paradigm falling on it's collective ass as soon as the gov't subsidies are reduced ... due to a basic inadequacy on the part of low income mortgage borrowers to actually repay their mortgages, to actually pay property and school taxes at levels necessary to keep their inner city neighborhoods 'under control' etc.
~