Phoenix Real Estate-What is the Lender’s Cost of Foreclosure and What is Going on in Congress?
May 31st, 2008 categories: Phoenix Foreclosures, Real Estate News
This article came to me via email, and with permission of the author, Amy Swaney, CMB
Vice President Artisan Mortgage, I am posting, as I thought there is some great information for Phoenix home buyers and home sellers and tips if you are interested in buying a Phoenix foreclosure.
“When speaking with prospective buyers and educating them on the current market conditions in regards to short sales, foreclosures and REO properties, many are not aware of the logistics and the costs involved in a foreclosure. Many buyers getting their feet wet in this contemporary real estate environment have unrealistic expectations of their negotiating position and are misinformed of the position that the banks, lender’s, investor’s or servicers’ are in after the foreclosure process. I thought this was some great information on understanding the realities of foreclosures.
Understanding the Lender’s Cost of Foreclosure (As taken from the current policy paper for Congressional briefing – Mortgage Bankers Association 2008)
The recent increase in mortgage delinquencies and foreclosures has brought significant attention to the costs of foreclosure to homeowners, communities, and mortgage industry participants. Although the impact of foreclosure on homeowners and communities is apparent, some confusion still exists about the impact on industry participants, particularly lenders, servicers, and investors.
Foreclosure is a lengthy and extremely costly process and, generally, a losing financial proposition for lenders and investors. A recent Congressional Research Service paper, which analyzes current foreclosure issues, highlights how substantial and far-reaching these losses can be.
While losses can vary widely, several independent studies find them to be generally quite significant…
* over $50,000 per foreclosed home or
* as much as 30 to 60 percent of the outstanding loan balanceBackground: A Who’s Who
When a lender holds a loan in portfolio, it retains the credit risk on the loan and typically takes a direct loss if the loan goes to foreclosure. When a loan has been securitized, the investors in the mortgage securities hold the credit risk and take the loss if the loan goes to foreclosure sale.
Mortgage securities generally are subdivided into groups known as tranches with distinct risk and return characteristics. As a result, losses usually are not borne evenly by all investors.The servicer (the one who receives the payments from the borrower on behalf of the lender) is contractually responsible for acting on behalf of the investor, for both portfolio owned and securitized loans. As the agent, the servicer collects payments from the borrower and passes payments of principal and interest on to the investor and, in most instances, makes tax and insurance payments to the appropriate entities as well.
Time Frame:
State law dictates the foreclosure process and timeline. As a result, foreclosure costs vary significantly from state to state. The national average time between the first missed payment and the foreclosure sale is approximately one year. After that, it may take additional time to gain possession of the property, clear title (if necessary), and prepare and sell the REO.Delinquency Period Costs
Lenders and servicers begin incurring costs as soon as a borrower stops making timely mortgage payments. Many of these are time-dependent costs that continue to grow as long as the loan is delinquent, in foreclosure, or in the REO sales process.These costs include:
• Lost principal and interest payments. In the case of a loan held in a lender’s portfolio, the lender incurs this loss directly. Where a loan has been securitized, the servicer incurs costs because transaction agreements usually require that they continue forwarding principal and interest payments to investors, using their own funds or borrowed funds, as long as the loan remains in the security.• Tax and insurance payments. The lender or servicer is responsible for making these payments, if the terms of the loan call for these items to be escrowed, whether or not the borrower is making monthly mortgage payments.
These obligations continue until the borrower resumes making payments or the property is sold.• Maintaining the property. If the borrower is not properly maintaining the home, the lender or servicer is responsible for the ongoing costs of maintaining the property. This can include paying for lawn maintenance, securing the property, complying with safety codes, winterizing the property (where necessary), and homeowners association or condo fees, if relevant.
These expenses continue until the property is sold.• Lost servicing fee income. A servicer loses its servicing fee when a loan is delinquent as this fee comes out of the monthly payment received from the borrower.
• Costs of collection efforts / servicing. Servicing delinquent loans requires additional servicer resources, which can be up to three times the cost of servicing a current loan.
• Legal costs for handling the foreclosure. The lender or servicer incurs legal expenses in all jurisdictions. Additionally, a personal bankruptcy proceeding often accompanies foreclosure. This further pushes up the legal costs the lender or servicer who must also be represented in that proceeding.
• Administrative fees. Court fees, fees to publicize foreclosure notices, auctioneer fees, and title fees must all be paid.
Once the lender has taken possession of and title to the property through a foreclosure auction or sale The lender has to prepare and market the home for sale. These expenses can be significant, accounting for over 40 percent of foreclosure-related gross losses.
The main expenses during this phase of the process are:
• Costs of restoring the property to saleable condition. Often homes of borrowers in financial distress fall into disrepair, requiring significant repairs and capital improvements (including painting, plumbing repairs, replacing appliances and carpeting, and repairing water damage).• Real estate commissions. Lenders typically use real estate agents to sell REO, which means commissions are paid upon sale.
The last step that creates a major expense for investors and servicers is the loss on the unpaid principal balance that occurs upon the sale of the REO.
The Role of Mortgage Insurance
Some loans carry mortgage insurance that can help servicers and lenders recover some of the costs of foreclosure. Low down payment loans sold to Freddie Mac or Fannie Mae requires mortgage insurance. Mortgage insurance can be in the form of FHA mortgage insurance, a Veterans Administration or other federal loan guaranty, or private mortgage insurance (PMI).Mortgage insurance claims are typically made once the lender or servicer has taken title to the property. Mortgage insurance can reimburse a servicer or lender for costs including unpaid interest payments, advances of taxes and interest, legal fees, and maintenance costs.
All mortgage insurance programs, however, have limits on reimbursements, whether based on the coverage level of insurance purchased (in the case of
PMI) or on a percentage of reimbursable costs (in the case of FHA).Mortgage insurance does not reimburse for some expenses such as capital improvements needed to bring a foreclosed property to salable condition, real estate agent commissions, tax and insurance payments made after the foreclosure sale and before the REO sale, and seller concessions that the lender or servicer may offer to effect an REO sale.
I’m Just a Bill, a Lonely ol’ Bill and I’m Sitting Here on Capital Hill How is it that we hear SO MUCH TALK about different solutions to the current real estate crisis, yet not much seems to actually HAPPEN? Ugh!
The Mortgage Bankers Association has compiled a side-by-side comparison of all the different proposals of these Mortgage Rescue Plans updated to include the current proposal approved by the Senate Banking Committee on May 20, as part of “The Federal Housing Finance Regulatory Reform Act of 2008.” The attached document compares and contrasts proposals introduced by Representative Frank, Senator Dodd, FDIC Chairwoman Sheila Blair, OTS Director John Reich, National Community Reinvestment Coalition and others. Updates to the Opposition of the OFHEO-NY Attorney General Appraisal Deal On May 27, John Dugan, from the OCC (Office of the Comptroller) sent a “strongly worded letter” addressed to OFHEO Director James Lockhart stating opposition to the Appraiser Code of Conduct (”Code”) agreement among OFHEO, the government-sponsored enterprises (GSEs), and New York State Attorney General Andrew Cuomo. The OCC noted the agreement would: 1) undermine rather than enhance the reliability of appraisals; 2) raise costs for lenders and consequently for consumers; and 3) disrupt appraisal processes, which are generally functioning well.Moreover, the OCC cited the agreement as fatally flawed because OFHEO failed to follow rulemaking protocol outlined in the Administrative Procedures Act. In addition, the agreement is inconsistent with well-established federal regulations and guidance
The current deal is set to be implemented in September of 2008 which would impose very restrictive valuation requirements upon lenders who sell their loans Fannie Mae and Freddie Mac.
If you would like a copy of the Mortgage Bankers Association’s side-by-side comparison just email me and I will be happy to send you the PDF file- When I figure out how to link to it in this post, it will be freely available.
Thank you Amy for allowing me to post this article. You can reach Amy via phone or email
Mobile: 480-529-3008
Direct: 602.714.9719
eFax: 623.889.2408
Email: amy@amyswaney.com
[…] I am hearing and reading more stories about neighbors in subdivisions throughout the Phoenix area- banding together to try and combat the problems of the foreclosure crisis. […]