Banking Law

The More Things Change, The More They Really Change

What difference a decade (or two) makes. This time around, while other parts of the country are being hit by declining prices and increasing foreclosures, Texas looks comparatively peachy.

Texas is bucking the national trend of rising property foreclosure rates, according to a California-based research company.

A total of 10,700 Texas properties entered the foreclosure process during March, down more than 16 percent from the volume of filings recorded in March 2007, a recent report by Calif.-based RealtyTrac shows. The March foreclosure figure also represents a decrease of almost 13 percent from filings reported this past February.

Nationally, foreclosures are up 57% annually and 5% from the previous month. Texans ought to be absolutely giddy. Well, somewhat relieved, anyway. It could be worse. We could live in California, Florida or Ohio. Then again, a friend of mine in Colorado (fifth in foreclosures, by the way) observes that "you still have to live in Texas." He thinks that is the ultimate downside, while "we'all" think it's the cherry on top of the sundae.

The recently released national figures also show an increasing trend of deeds-in-lieu-of-foreclosure being used by borrowers who default on their loans.

James J. Saccacio, CEO of RealtyTRAC, points out that on a year-over-year basis as of the end of March, default notices and bank repossessions nationwide were up nearly 57 percent and 129 percent, respectively -- an indication "that more defaulting homeowners are simply walking away and deeding their properties back to the foreclosing lender," Saccacio says.

Auction notices, by comparison, jumped by 32 percent during the period.

"This deed-in-lieu-of-foreclosure process allows the lender to take possession of a property without putting it up for public foreclosure auction," Saccacio adds.

At first blush, the number of borrowers who are willing to "walk away" (a highly charged term to use, by the way) from their home-sweet-home seems to call into question all the previous hand-wringing about the need for foreclosure moratoriums and similar measures designed to force lenders to change their evil ways and to prevent them from seizing borrowers' homes through the foreclosure process and then kicking the borrowers, bawling their eyes out, into the streets. Increasingly, it appears, more and more borrowers are willing to cough up the keys without going through the foreclosure process.

In a customary deed-in-lieu situation, the consideration for the deed is the release of the borrower from liability for any deficiency (with some protections to the lender for such things as fraud, waste and bankruptcy within a certain period). Apparently, a rapidly increasing proportion of borrowers who can't afford the loans believe that's a fair trade, and it's hard to argue with them if the lender's willing to forgive the loan balance and either (a) the borrowers can't afford the loan or (b) the collateral is underwater and they simply don't want to pay the loan back even if they could do so. Emotionally, these may not be homes to some of them, but rather merely an investment in real estate that simply didn't work out. It's impossible to generalize, and RealtyTrack doesn't give us much insight into why borrowers are increasingly willing to give lenders a deed-in-lieu.

Lenders apparently have decided that in many cases they'll take the entire risk of a declining home price if it saves them the cost and time of foreclosure. They must also be deciding either that the borrowers don't have the financial resources to satisfy a deficiency (in those states where a deficiency is permitted) or that the cost of the struggle to collect it outweighs the benefit. Perhaps the moratorium bills and other strong-arm tactics are achieving a purpose, after all, albeit not the announced purpose of keeping delinquent homeowners in their homes.

Interesting. I wish we had more data about this phenomenon that gave us the percentage of defaulting borrowers who have given a deed-in-lieu-of foreclosure and that broke that group down further according to the different reasons for that decision. Without that information, we're guessing, and, in some cases, letting our personal prejudices factor into our use of the limited information we do have available.

Full post as published by Bank Lawyers Blog on April 15, 2008 (boomark / email).