Foreclosure Prevention Programs Often Do More Harm Than Good

Foreclosure Prevention Programs Often Do More Harm Than Good

by Jim Banford, CEO, Real Estate Asset Disposition Corp

www.foreclosurehotspot.com

 

West Palm Beach, FL -- Conventional wisdom holds that foreclosure is “bad”, an event to be avoided at almost all costs. It says that government should intervene between borrowers and lenders to create programs that keep people in homes that they cannot otherwise afford.  Conventional wisdom, in this case, is wrong! While I have 17 years experience in many aspects of the distressed loan and real estate industry, I think that I could come to this conclusion without my body of knowledge. I would simply apply common sense.

Consider the many costs and responsibilities of home ownership.  Obviously there is the mortgage payment that has been the point of greatest focus. But there are also real estate taxes, hazard insurance, property repairs and maintenance and in many types of ownership, Home Owners Association fees.  When a home owner stops paying on his mortgage, he is also not likely to pay the other costs associated with ownership. These costs often exceed the principal and interest payment but are rarely addressed in foreclosure prevention programs.
      
Loan modifications typically involve an interest rate reduction. More recently, there has been an outcry to reduce the loan principal balance to below the market value of the home.  To those unemployed or underemployed, how will they pay for the other aspects of owning their homes? Will the real estate taxes go down? No. Will the insurance policy premium go down? No. In fact, it will likely have risen dramatically as a result of the default and replacement policy. Will association fees go down? No. They are rising too, as fewer are paying the rest have to make up the shortfall.  How about the cost to repair and maintain the home?  Again no. The expense will be greater given the deferred maintenance associated with default.    All of these cost will stay the same, (too high to afford), or rise.
   
Ocwen Financial Corp.  is using a novel approach to loan modification involving a tiered principal reduction with the lender recapturing a quarter of the reduction if the property is sold for more than the new loan balance.  However, the program does not reduce the other larger costs associated with owning a home.
   
Foreclosure activity and the resulting bank owned property (aka REO) levels are down.  Again, this may sound like a good thing. Is it because more people are paying their mortgage? No, not even close.  Lenders are waiting longer to start foreclosure. It’s not unusual today to have missed 12 mortgage payments and still not be in foreclosure.  Once a suit begins, the average time to complete a foreclosure in Florida, for example, is 650 + days, up from 180 days four years ago.  It’s interesting to hear the complaints that banks are not lending. Given the current climate and inability to collect on too many defaulted loans, it makes sense that lenders are not in a rush to put more capital at risk.  

In my opinion, the system should not delay the real flushing out of all the bad loans into the future. The housing recovery can and will occur when the necessary correction is allowed to take place. Let the economy take its course, get people back to work, allow the stock market to stabilize.  Buyer demand exists for these foreclosed homes and affordability is higher than it’s been in years.  In simple common sense terms – put people in homes who can afford to own them.    

 

 

5 comments • Jim Banford • August 17 2011 12:46PM

Jupiter Farms Florida Bank Owned Restaurant

$925,000

17905 Jupiter Farms Rd, Jupiter Fl

Bank Owned Restaurant built in 2007 for sale

Bank Owned Restaurant for sale in Jupiter Fl

Rare opportunity to own almost new free standing restaurant in Publix anchored shopping center.
Space is approx 5200 sqft with occupancy limit of 287. Approx. 70 parking spaces.
Lot size is 1.74 acres and boarders a large beautiful pond.

Contact Jim Banford @ 561-655-6605

http://www.foreclosurehotspot.com

4 comments • Jim Banford • June 14 2011 02:42PM

The “Big Bad Bank” Mentality

Have you ever made a loan? Perhaps to a family member or a friend, or as an investment to small business or a colleague. When you made the loan, you likely had an understanding – an agreement – as to how the loan would be repaid. Now imagine that loan was not repaid . . . what would you do? Would you try to get repaid? Now imagine that after losing money due to non payment, YOU became the bad guy. How could this make sense? Well, it probably doesn’t. But this is exactly what’s happening in this time of the “Big, Bad Bank” mentality. In the rush to vilify the Big Bad Banks, much is made of the practices that result in throwing “innocent homeowners” out of their properties. Consider this: the average foreclosure timeline in Florida was 180 days in the middle part of the decade (up to 2007). Now, it takes roughly 2 years to complete the average foreclosure and lenders are waiting longer to initiate the suits. So where’s the rush? There isn’t one. I am not without compassion for hardship cases. If one cannot make payments due to illness, underemployment or unemployment, programs such as loan modification, short sale or deed in lieu of foreclosure should be made available. This is distinguished from defaults as a result of mortgage fraud, strategic default (having the ability to pay but choose not to) and reckless real estate investment. I realize that everyone has to make a living but I have yet to hear from a foreclosure defense attorney that his client did not default on their mortgage and was foreclosed on anyway. Most will readily admit that absent the borrower making loan payments as agreed, they can only delay the inevitable through stall tactics such as “show me the note” or lately, the uproar about “Robo” signers. Rarely is it disputed that the borrower did not repay the loan according to the agreed upon terms. The reality is that there are very few valid defenses to loan default. Cities, towns and even HOAs are also piling onto the Big Bad Bank mentality. Once a home is foreclosed upon, the banks are left to clean up a litany of code violations, fines and assessments that result from property neglect and unpaid association dues. Although the banks did not cause these issues, they are held financially responsible for them. Many local governments are charging $150.00 ($54,750 a year!) or more per day in fines for tall grass and unkempt properties to lenders who did not own nor had the legal ability to correct the violations prior to foreclosure. Some HOAs are gauging the lenders for thousands of dollars for frivolous “violations” such as trash cans being left out or the color of the curtains facing the outside.These supposed violations occur prior to foreclosure but the bank is left with the bill. Who else loses with the Big Bad Bank mentality? If you are among the roughly 90% of borrowers who pay their loans on time, you lose as well. The greater the losses incurred, the less likely they are to make future loans at favorable terms. Without the government propping up the mortgage markets, interest rates will surely rise and availability of loans will be reduced.
5 comments • Jim Banford • November 05 2010 09:50AM

Good News and Bad News for Foreclosing Lenders

Good News and Bad News for Foreclosing Lenders

This week brought good news and bad news for bank clients of Real Estate Asset Disposition Corp, Florida's largest broker of Bank Owned Properties.    Actually, the news is mixed for any lender foreclosing on a defaulted mortgage in Florida.

SB 1196 passed in the State Senate and is on its way to the Florida House for a final vote. The Bill has, among other provisions, a requirement that institutions taking title via foreclosure pay delinquent condo fees for 12 months prior to the date of foreclosure. Currently, condo associations can collect just 6 months or 1% of the mortgage balance while Homeowner Associations can collect 12 months.   This is part of a growing public and political sentiment that banks are bad and "we" should stick it to them at every chance.  What many fail to realize is that as lien holders, condo associations have the option to foreclose on unit owners not paying monthly or quarterly assessments but often rely on the lender to do the dirty work.

As a former bank employee and current service provider to more than 45 financial institutions, I know first hand that the idea that all banks are bad and should be punished via new laws and regulation (like SB 1196) is flawed and short sighted.  In the simplest of terms, higher costs put upon the lenders, result in greater losses on the bad loans and this will lead to lower availability and higher cost loans for future borrowers. 

Okay, I promised good news as well. Part of Florida's 2010-2011 budget that was passed on April 30th provides for $6 million to hire additional judges and $3.6 for County Clerk's offices to address the estimated backlog of 500,000 to 550,000 pending foreclosure cases.  This is a good thing for those who seek more efficient foreclosure case processing. Florida foreclosure cases can now take more than 14 months to complete up from an average of just 6 months in 2006. 

One of the most common delays in my REO business pertains to Certificates of Title (CT) not being recorded in a timely manner by the Clerk of the Court.  Contributing to this a lack of follow up from the foreclosing law firms to ensure that the court has everything it needs to complete the process.  It is not uncommon for the final step (recording of the CT) to be on hold waiting for a motion from the foreclosing attorney in response to something the homeowner filed. The lawfirm needs to stay on the case until the CT is issued.   

Traditionally, the foreclosure deed (CT) would be recorded within 10 days after the foreclosure sale was held.  Delays in the recording now run in months, not days or weeks. As a result, lenders are unable to resell bank owned property until title properly vests in their name.  And again, the more costs that are put upon the lenders (in the form of timeline delays in this case), the greater the losses on the bad loans will be and this will result in lower availability of loans and higher costs for future borrowers.  Yes, there is a recurring theme. 

More of Jim's articles can be seen at his blog www.floridabankowned.net   

Jim Banford

Founder, CEO Real Estate Asset Disposition Corp

561.655.6605

 www.foreclosurehotspot.com

 

5 comments • Jim Banford • May 03 2010 10:50AM

Bitter Medicine Prescribed As Cure for Housing Market

Everyone agrees that the housing market has been a pretty sick patient for a long time now. But not all agree on a cure.

Go to certain economic doctors and they will tell you that the cure for ailing home sales is job creation. Their prescription is that when enough people are employed again, the housing market will recover. But job growth has been practically non-existent with unemployment still near 10%, underemployment much higher and some forecasting a jobless recovery. Foreclosures continue glut the market with more than ever expected in 2010.

Since information is power in both health and economic matters, it's always a good idea to seek a second opinion.

Edward Pinto, a consultant to the mortgage-finance industry and former chief credit officer at Fannie Mae, isn't shy about offering some alternative medicine. He says very bluntly that the hole that's been dug by bad loans is too deep to be offset by a modest rise in future employment.
And Pinto strongly disagrees with the government response to the housing bust: to provide medicines (loan modifications) that prevent the market-clearing process and delay the inevitable purging of buyers who can't pay off even modified loans. I've never been much for purging myself but according to Pinto, the market needs to painfully cleanse (that's better) its system so that traditional housing forces can return to the scene.

What are traditional housing forces, Doctor?

Buyers with something at stake in their homes, in other words, a substantial down payment, along with the documented ability to cover all the monthly expenses associated with home ownership. "All we are doing is kicking the can down the street," Pinto said. "The loan modification programs that were designed to help people stay in their homes have been abject failures", depressing prices while foreclosures continue to flood the market.
So what should be done? Pinto would halt all housing stimulus funds and take some basic steps to curtail foreclosures. The initial steps would be tougher on at risk homeowners, but he believes they are critical to restore balance:

1. Separating borrowers who can qualify to pay a lesser mortgage amount from those who cannot.

2. Allowing lenders to accept deeds in lieu of foreclosure whereby the borrower deeds the property back to the lender and avoids the foreclosure process.

3. Banks lowering the loan amount and reducing mortgage principal amount to no less than 90 percent of loan-to-value and negotiating affordable terms and rates.

4. Make loans "judicial" enabling the bank to seek the borrowers' other assets in the event of default.

With all that in place, Pinto believes the result would be that only qualified borrowers would remain in homes, homes would cost less and many more genuine buyers would surface because the "bottom" has been reached. This sounds like tough and bitter medicine for those who lose their homes but Edward Pinto thinks it's the only way to finally cure what's ailing the housing market.

4 comments • Jim Banford • April 13 2010 10:32AM

“New York Times” article got it right - Loan Modification is not the Answer, Foreclosure is

A January 2nd article in the "New York Times" by Peter S.Goodman got it right by essentially stating that the Federal Government's Making Home Affordable program has been largely ineffective and likely is causing more harm than good.

The article, U.S. loan Effort is Seen as Adding Housing Woes, covers a lot of ground but several of the main points brought by the sources referenced in the article are: 1) The Program has hurt an economic recovery by stalling  the eventual outcome - foreclosure -- as most homeowners in foreclosure cannot make or choose not to make even a reduced monthly payment, and 2) the modifications along with the high re-default rate give homeowners the false sense in the short term that they can keep their home only to ultimately loose it to foreclosure.

By some estimates, the leading cause of loan default is not mortgage payment affordability but strategic in nature. Simply stated, the borrower understands that they owe, often by a large margin, more than the home is worth. He or she  then decides the best course of action is to stop paying the loan as it would take many years to recover the lost equity. For example, a home purchased for $200,000 in 2006 and worth $100,000 today, a common scenario in Florida, will take almost 15 years at an average annual appreciation of 5% to be worth $200,000 again.  I know of examples whereby a borrower buys a comparable home for half of what he owes and then stops making payments on the original home, thus securing the new home prior to taking the credit rating hit.

The government's efforts, via directives to the lenders, to modify loans is akin to putting a band aid on a broken arm in most instances. At some point, the arm will need to be reset and cast to ensure proper healing. Foreclosure, while painful in the short term, allows the lender to recover a portion of its loan loss and relend the money to a presumably higher credit quality borrower and put the home into the hands of someone more likely to be able to afford and maintain it, thus addressing the negative influence on the neighborhood of a poorly maintained home. Foreclosure is a necessary healing process.

Jim Banford

6 comments • Jim Banford • January 25 2010 07:18AM

Florida Bank Owned Property Sales - Fall 2009

Florida Bank Owned Property Sales - Fall 2009. Sales of Bank Owned constitute upwards of 50% of all sales and the volume is rising. Real Estate Asset Disposition Corp. is the leading seller of bank owned properties in Florida. As the Broker and Owner of the firm, I have seen tremendous growth in both the volume of REO properties and the volume of REO sales taking place in the past 90 days.

 

I attended a Fannie Mae conference this week during which a presentation was given on the backlog of foreclosure cases throughout Florida. While it varies by County, many areas are seeing a 6-month delay in holding foreclosure sales. Historically, there was a 4 week time-frame between the Final Judgment and the foreclosure sale being held, currently, the delay is 6-months in many areas including Miami-Dade County. The cause of the delays generally involve the large number of foreclosure cases in the County Court systems combined with reduced County staffing to administer the caseload. 

The result of the backlog is going to be a longer but steadier stream of bank owned properties coming onto the market rather than a flood of new properties at once.  The longer stream of bank owned properties coming to market should allow for the current price stabilization to continue.

Jim Banford, President

For more information on Bank Owned Propertes in Florida

 

 

 

 

11 comments • Jim Banford • October 07 2009 10:29AM