At this week’s hearings on mortgage servicing and robosigning, featuring the able testimony of Credit Slips’ Adam Levitin, members of Congress asked the usual unimaginative question, “aren’t all these borrowers delinquent, so that foreclosure is inevitable?” The answer to this question comes in two parts:
2) Even homeowners who are indeed delinquent should not be foreclosed in the current housing market if any reasonable workout is possible.
Erroneous foreclosures thus come in two flavors. Foreclosing someone who is not actually behind, or whose default was precipitated by junk fees, unnecessary or overpriced forced-place insurance, or payment application errors (common in bankruptcy cases) is obviously wrong. Equally wrong, however, are foreclosures of homeowners who have sufficient income to fund a modified loan that will produce significantly higher investor returns than a distressed foreclosure sale. Contrary to the pronouncements of servicers and Treasury officials, modification and workout consideration is not happening before foreclosure starts, it runs on a parallel track with foreclosure processes. Frequently, the foreclosure train wins the race.
There is no way to count the number of foreclosures involving homeowners who are current or have bona fide payment disputes. It is reasonable, however, to look at servicer performance and error rates in other areas where data are available to make some inferences.
The clearest evidence of widespread errors and poor performance in mortgage servicing comes from data on HAMP and other modification programs. The modification and robosigning issues intersect most clearly in the frequent cases (now the subject of several class actions) where borrowers making payments under temporary or permanent HAMP mods are foreclosed. In those cases, affidavits of default are necessarily false.
A February 2010 HAMP Call Center report of complaints lists more than 36,000 complaints of lost documents, inability to get a servicer response to an application, inappropriate requests for modification fees, and similar problems. An October 2010 ProPublica survey of HAMP applicants found that the average length of time homeowners had been seeking a HAMP modification was 14 months. Treasury guidelines call for a response within 30 days. Given those delays, it is highly likely there are affidavits of default being filed that allege default while the servicer is considering pending trial modification of mortgage terms. In cases where payments are being made on a temporary modification agreement, there are good contracts-based arguments that there is no default.
We can also infer high error rates from the fact that by any reasonable measure some banks and servicers are doing far more than others, given their numbers of defaulted mortgages, to work out and modify mortgages. In other words, some servicers are likely engaging in unnecessary foreclosures, and have NOT exhausted all alternatives before proceeding. For example, conversion rates from temporary mods to permanent mods vary from 60% to 24% (BankofAmerica). The percentage of 3-month trial mods more than four months old is as high as 50% (BankofAmerica).
Similar disparities are reported by Treasury in the rate at which servicers offer alternative workouts to homeowners rejected or bounced out of HAMP. If servicers were doing the triage between inevitable and preventable foreclosures properly, there would not be such huge variances from one servicer to another, even accounting for differences in the underlying loans and borrowers.
The most compelling evidence of erroneous foreclosures comes from early reports on court-based foreclosure mediation programs. These programs vary in their success at getting homeowners to show up, but the best programs are able to turn up more than half of all foreclosure defendants at meetings or telephone conferences. Programs in Connecticut, New York, Philadelphia, and my own state of Indiana consistently report that they are able to prevent 50% or more of foreclosures for homeowners who show up. In other words, when servicers and their lawyers are compelled to focus on a case, and cannot foreclose without fully considering alternatives, they are able to find alternatives in as many as half of the cases that would otherwise have gone to foreclosure. This necessarily means that in counties and states without mediation programs, or with lower response rates (which vary based on the form of mediation notice and the opt-in or opt-out design), preventable foreclosures are happening in large numbers.