Forecast On Foreclosures & Loan Modifications

Usually I don’t repeat foreclosure numbers, for a variety of reasons. But the latest numbers were so bad I had to say something: the number of notices of default jumps 25.9% from the second quarter. An estimated 71,275 notices of default were filed against California properties during the three months that ended Sept. 30, with some properties receiving multiple notices because they had more than one loan, according to DataQuick.

Experts say a backlog of distressed properties built up because of the numerous investigations into foreclosure and mortgage-servicing practices. And all of this in the middle of the negotiations between the state attorneys general and the large servicers.

Besides California, New York, Delaware, Nevada, Massachusetts, Kentucky and Minnesota have signaled that they were unhappy with the direction of negotiations because, they say, the legal release from liability being offered to banks is too broad. New York and Delaware have been cooperating in their own probes separate from the coalition.

Federal officials have been trying to broker a settlement with the five largest mortgage servicers: Ally, BofA, Citi, Chase, and Wells. There was a flurry of GOV.REFI news yesterday in the press, mostly centered on a plan to help some “underwater” borrowers get refinancing assistance. Apparently it sprang forth from the loins of a meeting last week between government negotiators and lenders as part of an effort to settle allegations of questionable foreclosure practices. Reports noted that:

“The plan under consideration would make refinancing available to some borrowers whose houses are worth less than their loans, so long as they are current on mortgage payments. The plan would apply only to mortgages owned by the banks. It isn’t clear how many of those borrowers would qualify for help. Around 20% of all U.S. mortgages are owned by U.S.-chartered commercial banks; the majority is held by investors in mortgage-backed securities.”

So now borrowers will become directly involved in knowing if their loan was placed into a security or not?

I can just hear someone in the servicing department explaining that to an underwater borrower! One report noted that there seemed to be nothing “progressive” out of the administration yet, just more “can kicking” strategies. And another noted that the FHFA wants nothing to do with additional credit risk or a larger portfolio. That won’t change until after the 2012 elections. That puts the onus on banks and investors to take a hair-cut.

The WSJ has the latest mortgage-settlement trial balloon: if (a) you’re underwater on your mortgage, and (b) you’re current on your mortgage payments, and (c) your mortgage is owned by the bank outright, rather than having been securitized, then you would be given the opportunity to refinance your mortgage at prevailing market rates.

But of course any refinance program would be particularly costly for banks because they would be forced to give up expected interest income on loans for which borrowers are current on their loan payments and, given their payment histories, unlikely to default. Banks can’t reduce rates on loans they don’t own because the result would be a net loss to the investor. Under the new proposal, banks would refinance certain borrowers who are current on their loan payments, but can’t qualify for a traditional refinance because they owe more than their homes are worth. And of course there are all the issues with existing reps & warrants, along with MI questions.