Banking Law

Paul Jackson, editor-in-chief of HousingWire Magazine and Housingwire.com, is not shocked by the results of report releases recently by Clayton Holdings, Inc.

Widespread foreclosure freezes that began in late last year and ran through the first quarter of this year appear to have done little to change the outlook for troubled borrowers ? and may even have made things worse, for everyone involved.

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According to Clayton?s data, halting foreclosures did little to improve the outlook for most troubled borrowers: of the loans that the firm?s analysts estimated would have otherwise had foreclosure sales completed during the ?freeze? period, 93% remained in foreclosure or were moved into REO status by April among those servicers that implemented a widespread moratorium on foreclosure activity. In comparison, among servicers that did not implement a large scale freeze on foreclosures, 89% of loans estimated to have progressed to foreclosure sale by the end of March either remained in foreclosure status or had been moved into REO.

It's not only that foreclosure moratoriums are not helping borrowers to avoid losing their homes,it's that more loans that were subject to a moratorium-caused delay eventually proceeded to complete foreclosure than loans that were not subject to such a moratorium.

The data seem to illustrate just how little freezing foreclosures really helped matters: Among servicers implementing a moratorium, just 7% of borrowers facing imminent foreclosure were ?helped,? either in the form of repayment plans, modifications, reinstatements, or short sales. That number actually grew to 11% among servicers that did not implement a foreclosure freeze ? a result that is clearly at odds with reports in the popular press, which have painted the freezes as a needed step to help troubled borrowers.

According to HW's sources, the basic problem is that so many borrowers have "negative equity," with respect to their homes and with respect to their overall net worth, that no "moratorium" will miraculously make them suddenly solvent. According to one servicer, all the moratoriums have done is to dig a deeper grave for many consumers "in the form of further arrearages and potential fees that get added to the mountain of debt that already must be repaid to bring a loan current." Another servicer pointed out another obvious problem: many borrowers have lost their jobs or otherwise had their incomes severely reduced. "Even if we forgive some of the debt, we can?t solve long-term for a lack of income."

Other servicers claim that a number of borrowers seem to believe that they are entitled to much larger payment reductions under the Obama administration's guidelines than those guidelines actually provide. I suppose that if a person wasn't savvy enough to originally appreciate the risks of the loan he or she had agreed to repay, he or she isn't going to suddenly become well-informed about their modification options. Plus, folks like Sheila Bair are constantly on the boob-tube pushing the "necessity" of "affordable" loan modifications, so I imagine many delinquent borrowers believe that the government has mandated that private lenders give them whatever loan modification they want. After all, we do live in a nation whose inhabitants believe that they're entitled to have the government make their lives as pain-free as possible, regardless of the ill-advised decisions they make.

In the end, of course, it's the lenders who ultimately take the loss caused by the delays. As Paul puts it, it's the lenders, servicers, and investors who "bear the cost of carrying a bad loan to some sort of finish line." All the moratoriums have accomplished is to increase those carrying costs and the ultimate loss.