This week Bruce is joined once again by Ivan Choi. Ivan is recognized as a mortgage default expert and industry speaker. He serves as the president of REOMAC, a national non-profit trade association of mortgage servicing executives, asset managers, foreclosure attorneys, real estate brokers, and real estate closing service providers. Mr. Choi currently serves as a national default sales executive for New Vista Asset Management.
One problem occurring in the real estate market is the servicer’s interest is not aligned with the lender’s interest, which is difficult to understand. Bruce Norris services a certain amount of loans inside the hard money loan business alone, and in his opinion he is always directed by another lender and has to do what they say. However, for some reason servicers have a misaligned interest. A lot of times during a foreclosure process, it’s almost not in the servicer’s interest to proceed quickly and for some reason they get paid for not moving quickly. According to Ivan, there are a number of conspiracies regarding the foreclosure default topic and banks, and the aforementioned is one of them. There is a certain number of people who either misread mortgage servicing data or there is a certain specialized package of loans where for some reason the bank is indemnified against any losses. Therefore, they don’t have an incentive to move quickly on a foreclosure case. However, this kind of case is so far in the minority of the overall landscape of loans that this is actually not true most of the time. For the mass majority of all loans out there today, banks and loan servicers are under heavy pressure move through the foreclosure cycle and actually recover whatever value they can for a property if a borrower is not paying their mortgage on time and the loan is therefore not performing.
Bruce wonders what is mandatory for a lender. If someone stops making a payment and the lender decides it’s time to start foreclosing, would there be a process of phone calls or notifications that’s mandatory for the lender to make? Ivan does not believe it’s fully mandatory by anybody. Because of everything that has occurred during the meltdown and the dissent into foreclosure, all the major banks and significant loan servicers have adopted very firm policies. Therefore, the process of default, where phone calls are made and who they’re made to, the notices that go out, and the contact to the borrower is a lot more regimented and more of a defined process than most people may realize. The number of foreclosures files being dealt with is unprecedented by about 1,000%, which is ten times greater than ever. When you’re a loan servicer, you’re not thinking that you’re foreclosing on 10% of your inventory. It’s less than 1% historically. However, Ivan believes that today that number is closer to 5%. In a “normal market,” for any mortgage lender, typically less than 1% of their entire loan portfolio is in default. The number of loans in default is much smaller than people realize, and it has really been overblown because of a number of events during our financial meltdown in the last couple of years. It’s been more a crisis of confidence versus raw numbers.
Lenders today are more open to loan modifications and are aggressively pursuing them prior to the foreclosure process. Ivan has always been a bit skeptical of servicing and foreclosure release, but it’s very true that lenders are pursuing loan modifications more aggressively. If you were able to take an inside look at any banking institution today, you will see that they have essentially hired on and ramped up very significantly on staffing and in a lot of cases moved a lot of folks that they normally had on REO into the modification and short-sale areas. What’s interesting in trying to obtain a loan modification is that you have to prove a case of hardship, but the FBI has the exact opposite problem being created where stated incomes from loans received in 2005 were exaggerated. In 2011 when these same people are trying to get a loan modification, they’re trying to hide their exaggerated incomes from 2005. From a bank servicing standpoint, there is actually a little bias in favor of the homeowner. If you look at a scanned copy of the owner’s loan application from five years ago when they received their interest-only loan, you will see that at that time they were CEO of the world and making a lot of money. However, you look at today and see them trying to obtain a loan modification, you see that what happened years ago doesn’t really matter and that they are having a hard time finding a job.
There was a recent court case where somebody went to jail for falsifying information on a loan application for a stated income loan back in 2005. This should be a scare to several people as normally the borrower is not pursued. Ivan believes that not enough of these cases have come to light, and therefore most homeowners still think it’s safe for them to fudge some of the details of their situation. You speak with any real estate broker or agent that is heavily involved in trying to help with short sales, and you often hear a number of “war stories” of how they go visit a homeowner who is apparently in major distress, and the first thing they see in the driveway is a hummer and a late model Mercedes. Some reports and statistics have shown that if you’re surrounded by people that are not making payments and you are the last one in your family, there is a lot of pressure for you to join.
If Ivan were a lender, he does not have a specific preference whether he would choose a short sale or REO status. He says it all really comes down to the numbers. Typically when a loan servicer or lender evaluates a case for a short sale, they take in all the details they can on the property itself. This includes what the property is valued at today, hardship letters, and financial information from the borrower. They will take this information and put it on track for short sale, and they will also take this information and send it to their REO department. They essentially ask the REO department that if they were to try to sell the property in the next 60 days how much they could reasonably sell it. They then compare the short sale with the REO status; and if it’s less of a loss as an REO, then the loan will probably go to REO. This is where the servicer will recover value on behalf of the loan investor. As for hardship letters, the reason for having them on hand is you have to give the forum for a homeowner to explain details of their situation that otherwise are not explained well as well as giving them information on your financial status. As an example, a short sale would occur if someone wrote a hardship letter explaining that they owed $400,000 on a $200,000 house and decided this was not reasonable to pay. This would not make it very far, and yet more often than not this type of situation occurs.
One of the biggest roadblocks and frustrations stems from a second lien; in other words, a second loan or lender often gets in the way of a yes answer for short sales. This is what any real estate agent that’s been involved in a short sale or any homeowner or party to a short-sale transaction will tell you. The issue is getting a lender in first position and then a lender in second position to agree to the terms of a loss on the loan of the property. From a legal standpoint, the lender that holds the first mortgage is entitled to relief from losses before the second lien-holder. Most of the time, it’s hard to get both parties to agree and move ahead with the short-sale. However, there are times when the second would have recourse against the borrower, and if he signs something saying he wasn’t owed anything, then the sale would go away. Usually, however, this is not the case since the signing would usually be simultaneous with the purchase.
Securitization has not affected the foreclosure process or the ease of accessing information or receiving answers from lenders. Unfortunately, the process is still difficult as ever. There is a lot of focus and staffing since servicers and lenders really want to be able to help on loss mitigation and complete more short-sale cases. Sometimes in a lot of markets you have to buy necessity to do a short-sale transaction since these are really the only transactions getting done in today’s market. However, Ivan feels that if he was a real estate broker or agent today, as soon as he found an opportunity to diversify away from short-sale, he would run away from short sales as quickly as possible. The reason is it is still an inherently complicated situation because you have to have multiple decision-makers in line; you have to have a homeowner in distress be engaged to the process. A homeowner going through foreclosure is typically not in their right mind because they are under tremendous emotional and financial distress. In addition, you have to have a special buyer since they’re not talking about a 30-day escrow when they know they’re going to move. Therefore, if somebody makes an offer, they’re usually not informed until 3-8 months. For example, a first-time homebuyer with two kids is not the best candidate, even if they’re the ones who will pay the most for the property.
The reason for the long process is because you have to inherently go through a bureaucracy. The servicer takes in the information, then they go through their analysis of the situation, then they recommend whether a short-sale should be done or not, then that case goes to the trustee or whoever represents the loan investor. If there’s mortgage insurance, the mortgage insurance company has to weigh in on the decision. The other issue that doesn’t really get raised much is that there is a certain level of fraud, which slows down the cases as well because when the servicer is going through information, they’re trying to ensure that they’re doing the best they can to understand that what the homeowner and parties to the transaction are putting down on paper is in fact true. There are lots of schemes going on today, so if you look at it from the seller’s perspective they typically want to move out of the house and be done with it. They buyer, even today, is still thinking they’re going to get a good deal; and the agents are trying to figure out a way to work the system best so the transaction gets done. One example of fraud that occurs today is on the buyer’s side you have a buyer agent and a buyer. A common tactic of a buyer agent is they put in offers with straw buyers because they’re trying to figure out how low the bank is going to go on that short-sale. If it’s low enough, they will do the “switcheroo” of taking out the straw buyer at the last minute and putting in the real buyer and trying to close. Usually the intent is to resell the property right away. Bruce read an FBI fraud document that spoke of perpetrators. Some companies do transactional funding and are actually just buying and selling the property inside different escrows, flipping back and forth.
A term that usually comes up when someone is dealing with REO is “adverse occupancy.” You either have a homeowner that’s not happy they lost their house and have to start paying rent somewhere; or you have an occupant tenant that’s surprised that he no longer has a place to stay. Usually when properties are foreclosed on, approximately 50% are unoccupied by the time foreclosure is finally completed. The Norris Group buys about 15-20 homes a month at trustee sales, and there has been a transition in customer attitude. There is no one at a trustee sale who doesn’t know the term Cash for Keys. It’s almost become the expectation for people to get paid to leave; no one feels bad anymore about not making a payment on time for a while. On the flip side, in some metropolitan areas, especially cities where municipalities enforced an eviction moratorium, there are organized crime groups who have caught on and looked for vacant houses to send someone in and make up a false lease contract. When a bank representative comes by the property to do an occupancy check, the crime member simply shows their fake lease, and they get to stay in the house.
According to the California Association of Realtors, about 71% of the Norris Group’s transactions are either short-sale or REO. This means that, emerging from all the sales, there is not a repeat buyer amongst them. They simply would not qualify. Therefore, when the Norris Group sells 100 houses, only 29 buyers are emerging while 71 other properties are finding someone else to buy it. However, the statistics have never been close to this. Normally, if you have 100 sales you probably have about 95 buyers that reemerge for another property. Now, the percentage is about 29. This is one of the biggest problems, and one solution according to Ivan is you really have to help the buy side. You have to find a way to increase the buyer pool. This does not necessarily mean relaxing loan guidelines to a very significant degree to the point that we’re back into subprime lending. However, if you institute some guidelines to be able to institute the character portion of a borrower, and also do things to appeal to immigrant populations that are very focused on home ownership, then you’re increasing your buyer pool. If you have a large number of owner occupants within this buyer pool, then these strategies by far are the best solution to soak up some of the backlog of inventory out there and help the overall housing industry recover. Numerically and with the current policies in place and the direction of the new policies, this strategy is unfortunately probably not going to happen. You have lenders that are of the mindset that they have to make it very difficult for people to qualify, and you have policy decisions that are saying, “Let’s reduce the loan amounts that are available from FHA and Fannie Mae.” The Republicans just put in a bill into Congress demanding that FHA have a minimum of 20% down payment, which Bruce believes won’t fix much. They’re really under the gun in Washington, and some of the things they would like to do they don’t think they will be able to do. In D.C, there are a lot of people tackling head-on and coming up with very good solutions for very complex problems. At the same time, when you’re speaking of policy-makers, there are still agendas on other issues that get in the way of good solutions for housing.
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