Foreclosure Science

Over the next two and a half years, more than 2 million borrowers are expected to fall into foreclosure — the highest number since the U.S. Savings and Loan Fraud scandal, according to a forecast by Housing Predictor. The housing market news provider, which says its forecast is based on analysis of the nation’s largest 100 metropolitan real estate markets by researchers and journalists conducted over the last month, claims its site has maintained an accuracy rating of 85 percent.

The report noted 76 percent of foreclosures are subprime mortgages, although local real estate markets in 18 states’ are appreciating and an additional 10 states’ markets appear to be stabilizing, the statement said. Another 15 percent of the foreclosures were on prime mortgages, and the remaining 9 percent were other types of conventional loans, including “liar loans.”

The latest forecast follows research from the Center for Responsible Lending that estimated 2.2 million subprime borrowers originated between 1998 and 2006 have or will wind up in foreclosure.

Michael D. Calhoun, president of the Center for Responsible Lending, recently issued a statement standing by data in the report which was disputed by the chairman of the Mortgage Bankers Association, John Robbins.

Contrary to Robbins’ suggestion that the worst is over for subprime foreclosures and that such lending has benefited homeownership, Calhoun’s statement said the “worst is yet to come” and that the “subprime market has been a net drain on homeownership” and has instead benefited the short-term financial interests of many mortgage brokers, lenders and investors.

With only 9 percent of subprime loans in the eight years through 2006 being for home purchases, and 15 percent to 20 percent of all subprime borrowers expected to go through foreclosure, “subprime lending decreases our national homeownership rate and therefore hurts, rather than helps, the goal of making more American families homeowners,” the responsible lending group added.

Housing Predictor.com said California, Alabama, Indiana and Mississippi had the highest numbers of foreclosures, while Michigan, Ohio, Minnesota, Nevada and Colorado had record levels of foreclosures.

A bill that would have created a public-private fund to help troubled California subprime borrowers avoid foreclosure, AB1538, died in the state’s Assembly Appropriations committee Thursday, an employee for the 53rd Assembly District confirmed to MortgageDaily.com. The legislation was by Assembly member Ted Lieu, D-Torrance.

In Colorado, however, where the number of residential-property foreclosures were up 30 percent last year and are expected to increase another 30 percent this year to 37,000, Governor Bill Ritter signed into law five consumer-protection bills aimed at stemming those “staggering” numbers by cracking down on loan originators, according to an announcement.

Among Colorado’s signed bills were H.B. 1322, the Mortgage Fraud Prevention Act, which establishes that brokers and other mortgage insiders’ act in the borrower’s best interest, the governor’s office reported. Another of the bills, S.B. 85, or Protect Consumer Real Estate Transactions, prohibits brokers from trying to influence the judgment of appraisers. S.B. 203, the Mortgage Broker Licensing Act, requires brokers to be licensed by the Division of Real Estate and avoid fraudulent activities. S.B. 203 calls for brokers who were denied licenses to make full restitution to harmed individuals before having licenses reinstated.

“The next step will be educating consumers about how best to use the mortgage products available on the market,” Denver City Council President Michael Hancock said in the governor’s announcement.

Minnesota’s Governor recently signed legislation that, along with another bill, will provide the strongest protections in the nation against predatory lending, the Association for Community Organization for Reform Now announced. The bills prohibit lenders from making mortgages that the borrower is not able to repay, either from the very beginning or after the interest rate increases; ban prepayment penalties on subprime loans; require that brokers act in the consumer’s best interest; and place a 5 percent cap on the points and fees that can be charged, including yield spread premiums.

“These reforms are the first state legislative response to the current foreclosure crisis,” ACORN stated in the announcement.

To help combat foreclosures, ACORN also recently announced plans nationally to conduct a large scale outreach program to find borrowers at risk of foreclosure due to a predatory loan and organize them to “fight back to save their homes and win major policy changes” presented in a 10-point platform that includes a request for a 1-year moratorium on predatory loan foreclosures.

ACORN Housing provides mortgage counseling and education, and last year helped more than 4,800 borrowers work out repayment or forbearance plans, loan modifications, refinances and partial claims, according to the announcement.

In Massachusetts, Attorney General Martha Coakley issued emergency regulations banning foreclosure “rescue” schemes. The regulations, under the Consumer Protection Act, are effective immediately and are valid for 90 days, at which point they may be permanently promulgated after public hearings, according to a press release Friday.

Foreclosure rescue scammers convince troubled borrowers to convey their property to straw purchasers under the promise that they will later be able to reacquire their homes. The purchasers obtain mortgage loans and permit the troubled individuals to continue living in their property for a limited time but eventually any remaining equity is liquidated to the advantage of the scammer, the release explained.

“Our office has brought cases against several lenders, brokers, and lawyers who have carried out foreclosure rescue schemes, involving several versions of foreclosure rescue transactions,” Coakley said in the announcement. “All are rife with fraud, and prey on vulnerable homeowners.”

“This practice has become widespread, and a new regulation under our Consumer Protection Act is the best way to quickly and proactively combat this problem and to prevent further harm to distressed homeowners,” the Coakley added.

Coakley’s office is additionally seeking comment on proposed amendments to current regulations for mortgage brokers and lenders to address widespread unfair and deceptive tactics used by these insiders, including inflating borrower income on applications. Additionally, the office is in the process of establishing a group of private attorneys who are willing to work pro bono to assist homeowners who are facing foreclosure.

But borrowers are being urged to take the first step to avoid losing their home — call for help — a step more than half of borrowers do not take when they start falling behind on payments, NeighborWorks America announced, suggesting this may be among the factors contributing to the rate of mortgage foreclosures increasing by more than 50 percent since 2000. Embarrassment, fear, or lack of trust may be reasons why borrowers hesitate to call.

“The earlier financially distressed homeowners reach out for assistance, the more options they have to address their mortgage issues and potentially avoid foreclosure,” NeighborWorks added, noting that studies show borrowers who are one or two payments behind are more likely to keep their homes than those who have fallen further behind on their payment schedule.

While many may not call, Fitch Ratings said increasing numbers of stressed mortgage borrowers are turning to servicers of residential mortgage-backed securities for help to keep their homes or in selling the property when unaffordable to keep.

Fitch says research has indicated that subprime servicers have historically used payment plans to resolve defaults in approximately 50 percent to 75 percent of cases, but the effectiveness of repayment and forbearance plans is decreasing and payment plans are not expected to work for some borrowers facing rate resets. Additionally, short sales and deeds-in-lieu are being used more frequently.

Loan modifications, which changes the terms of a mortgage to make payments more affordable, are steadily becoming more prevalent as a viable alternative but can directly affect an RMBS pool’s cash flow and potentially result in rating downgrades if not used in a controlled manner and reported properly. Based on projections from servicers, Fitch believes that over the next 12 to 18 months, modifications could be used on as many as 5 percent to 10 percent of loans with an original outstanding balance and could be the only viable loss mitigation strategy for up to 40 percent to 50 percent of loans in or expected to be in default.

To reflect the increased use of loan modifications, Fitch announced amendments to its rating criteria for U.S. subprime RMBS/HEL ABS that will go into effect for new transactions closing in August 2007.

“Increased usage of loan modifications as a loss mitigation tool may cause larger numbers of poorly performing loans to be reported as not delinquent, which could allow for early overcollateralization release,” Fitch explained in the announcement. The new rating criteria “will reflect the risk of early [overcollateralization] release followed by high levels of borrower re-default, where such risk is deemed to be substantial.”

Analysis of various loss timing and cash flow scenarios will be incorporated into rating opinions and any structural features within a securitization that may reduce the risk of OC release as a function of modification practices will also be considered, Fitch said.

Among the announced changes for new securitizations is that, if a trigger event’s performance test definition effectively counts modified loans as part of the “60+ day” delinquency calculation, Fitch will continue to assume that trigger events will be in effect in its rating stress scenarios. Effective inclusion of modified loans in performance tests could be achieved through reporting mortgage delinquency status on an original contractual basis, or adding new terms to trigger definitions.

“For example, recent transactions from one issuer have featured the following amendment to the definition of 60+ day delinquency: ‘each Mortgage Loan modified within 12 months of the related Distribution Date,'” which has the benefits of addresses risk by including modified loans in the trigger definition and limits the inclusion to a 12-month period, thereby transactions containing performing modified loans are not unduly penalized under the performance test, Fitch said.