Foreclosure recovery remains ‘slow and drawn out’

CoreLogic, a California-based provider of information and analytics about mortgages, sees some light at the end of the foreclosure tunnel — nationally, at least.

Citing a downward trend in foreclosures and a stablilzing housing market, Anand Nallathambi, the company's president and CEO, says in a recent report that “increasingly, improving market conditions and industry and government policy are allowing distressed homeowners to pursue refinancing, loan modifications or short sales rather than foreclosures.”

Mark Fleming, CoreLogic's chief economist, backs that up with national statistics: homes lost to foreclosure in September were down 50% since the peak month in September 2010 and 22% less than the beginning of 2012. RealtyTrac, an online marketplace for foreclosure properties, in its most recent national report shows a 19% decline in foreclosure filings in October compared to October 2011.

But the picture for Maine isn't as clear. While the CoreLogic report puts Maine's foreclosure inventory at 4.5%, well above the 3.3% national average, RealtyTrac findings for Maine show a 5% drop in filings from September and a 1.3% drop from October 2011.

Clear as mud, says Christopher Pinkham, president of Maine Bankers Association.

The problem with foreclosure numbers provided by RealtyTrac and other national analysts, he says, is that their formulas for arriving at a state's foreclosure rate don't always reflect local realities. There are just too many state-by-state variables to easily arrive at useful apples-to-apples comparisons. Pinkham says that makes gauging how well Maine is doing in the foreclosure arena a difficult question to answer, even for the financial and real estate professionals who are involved in it on a daily basis.

Judicial review

One of those variables is whether a state follows a judicial review process, which requires mortgage lenders to initiate the foreclosure process through the courts. In Maine, that process was modified in 2009 when the Legislature established a statewide foreclosure diversion program to “preserve home ownership and stabilize the economy by preventing unnecessary foreclosures.”

Pinkham says Maine banks support those goals, but notes the mediation aspect of the diversion program appears to have contributed to a lengthening of the foreclosure process. That, in turn, keeps Maine's foreclosure rate and processing time higher than states that don't rely so heavily on mediation, or don't require a judicial review.

For Maine banks, any lengthening of the foreclosure process creates a business problem: Not only do they incur the hassle and expense of owning the property once a foreclosure is granted by the court (including making repairs, paying taxes, paying broker's fees, etc.), they also lose the income from the mortgage payments, and that depletes reserves and forces the bank to use other money, which hamstrings how much lending it can do.

And the longer distressed properties remain in limbo, slowly trickling back into the market usually at lower prices than neighboring properties, the longer it will be before Maine's banking and real estate industries can expect stability.

For example, a June 2012 state comparison of the foreclosure time frame allowed by Fannie Mae — defined as the maximum number of allowable days between the due date of the last paid installment and foreclosure sale date — puts Maine in the No. 5 spot at 570 days. In June 2011 Fannie Mae reported Maine's maximum time frame was 420 days.

The four states with a longer time frame in Fannie Mae's June 2012 report — New York (820), New Jersey (750), Connecticut (690) and Florida (660) — are judicial review states like Maine. The 11 states with the quickest turnaround time — 270 days — don't require judicial foreclosures.

Laura Pearlman, manager of Maine's Foreclosure Diversion Program, is aware of bankers' concerns about a lengthening foreclosure process. But she balances that against the number of mediated cases that have ended up being dismissed, almost 40% as of October, most often because the borrower and lender have found a way to resolve the past-due mortgage payments without going to a foreclosure judgment (the end result in 14% of those dismissed cases).

“We definitely understand that delay, whatever the reason, doesn't help anyone,” she says.

The statewide foreclosure diversion program that began in January 2010 makes sure lenders and distressed borrowers communicate with each other, something she acknowledges is a greater problem nationally than it is in Maine, where the smaller banks and credit unions typically have closer relationships with their customers. Even so, she says, the mediation process can often defuse the shame, defensiveness and tension that can arise when borrowers fall behind on mortgage payments. The focus is on solving the problem, and that generally benefits both lenders and borrowers.

“Mediation is a wonderful tool if we can get everyone to use it,” she says. “Our goal is to reach a mutually favorable solution.”

Pearlman points out the state's diversion program is only in its third year and remains a work in progress. A case in point is the pilot program initiated in July in Bangor and Rockland courts, which introduces mediation in the first informational court session, instead of having it occur later. The initial feedback she's been getting is that jump-starting the communication between lenders and borrowers is beneficial. If it results in quicker resolutions, it could be implemented statewide and eventually address the lenders' concerns about a lengthening of the foreclosure process.

“It allows the parties to focus immediately on making a plan, to focus on reaching a resolution,” Pearlman says.

State-chartered institutions ‘stable’

Maine's Bureau of Financial Institutions has been providing quarterly reports of foreclosure activity at Maine's 32 state-chartered banks and credit unions since October 2006. That's when a six-year real estate bubble — in which home prices nationally rose by 130% since 2000 — suddenly burst, triggering the near collapse of Wall Street and the federal mortgage programs Fannie Mae and Freddie Mac, along with the greatest recession since the 1930s.

Lloyd LaFountain III, the bureau's superintendent, says he initiated the quarterly survey in response to inquiries from Maine lawmakers who were concerned about foreclosures in Maine at that time but were finding it difficult to get consistent and reliable data. Although the bureau's survey is limited to state-chartered banks and credit unions — excluding federally chartered banks and credit unions as well as mortgage companies — LaFountain says it does provide a reliable apples-to-apples overview of foreclosure activity in Maine-chartered financial institutions.

“We're not just showing you a quarterly snapshot, we're showing the historical trends as best we can,” LaFountain says of the now six-year foreclosure record compiled by the bureau.

Third-quarter results weren't available by Mainebiz's deadline, but LaFountain says the second-quarter report, issued on Sept. 30, showed mixed results: Numbers in some categories went up, and in others went down.

Overall, Maine-chartered banks and credit unions reported 331 loans in the process of foreclosure during the second quarter, an increase from 310 reported in the first quarter. While that's the highest number of loans in foreclosure since the bureau began keeping track in 2006, LaFountain puts an asterisk next to that number.

The caveat, he says, is that Maine's judicial review and mediation process can keep loans in foreclosure that have been successfully mediated until several months of payments have been made. In other words, some loans identified as being in foreclosure might be on their way to being removed from a Maine-chartered bank or credit union's delinquency list.

LaFountain's conclusion? “The numbers we're seeing from our institutions, while above historical levels, do not pose a threat to the stability of Maine's state-chartered financial institutions,” he says.

He also points out that the foreclosures involving Maine-chartered banks and credit unions typically occur because of “a change in life circumstances” — a job loss, divorce or death — rather than risky loan practices typified by the sub-prime lending seen in states most affected when the housing bubble burst.

“Our banks and credit unions pride themselves on knowing their customers,” he says.

But, he quickly adds, before making a mortgage loan they also tell prospective borrowers, “'Show me you can afford it.'”

‘Robo-signing’ deal

Another variable impacting foreclosure numbers is the National Mortgage Settlement reached in February with five major banks and mortgage companies involved in the “robo-signing” scandal, in which thousands of mortgage documents and affidavits had been signed without bank officials verifying the information contained on them.

The federal government, joined by Maine Attorney General William Schneider and his counterparts in every state other than Oklahoma, said the practice called into question the validity of thousands of mortgage foreclosures across the country. The settlement requires Ally/GMAC, Bank of America, Citi, JPMorgan Chase and Wells Fargo to provide at least $25 billion in consumer relief, to be distributed in several ways:

• At least $17 billion in principal reduction and loan modification for distressed homeowners needing help to avoid foreclosure.

• Up to $3 billion in refinancing for “underwater” homeowners who are current on their mortgages but are unable to refinance because they owe more than their homes are worth.

• $1.5 billion in payments to homeowners who lost their homes between Jan. 1, 2008, and Dec. 31, 2011.

A Nov. 19 progress report filed by the settlement's monitor, Joseph Smith Jr., shows the five banks already have extended $26.11 billion in relief to more than 300,000 distressed borrowers nationally, typically in the form of reduced principal balances and reductions in monthly payments. In Maine, the settlement tally shows the five banks have provided almost $25.7 million in relief to 544 qualified borrowers — an average benefit of $47,238 per borrower. (See table, page 22.)

Another $14.46 million in relief for 184 distressed Maine borrowers is “in process,” according to the National Mortgage Settlement report. Presumably, the refinancing agreements and other relief provided by the settlement will remove some of the distressed properties that have been on Maine's foreclosure rolls.

Avoiding foreclosures

Maine Bankers' Pinkham says the vast majority of mortgage foreclosures in Maine stem from changes in borrowers' economic circumstances that are often beyond their control: a company layoff or decrease in hours, the loss of a second job, medical expenses stemming from a serious illness. In many instances, he says, if those circumstances had been brought to the attention of a bank early on — instead of allowing mortgage payments to go unpaid — foreclosure could have been avoided by a negotiated payment arrangement that helps the borrower get through the crisis.

“We don't want to own that real estate,” Pinkham says.

Pearlman agrees, saying “What the lender wants is a performing loan.”

Both Pinkham and Pearlman point out that in some foreclosure cases a lender, after evaluating the borrower's financial situation, might modify the loan's terms. Or, in some cases, the borrower agrees to pay off gradually the past-due amounts on top of meeting the regular mortgage payments. Or, the borrower might hand the deed over to the lender or agree to a short sale as an alternative to foreclosure, sparing both parties the expenses that come with delaying what might be unavoidable.

With mixed foreclosure data, Maine's Bureau of Financial Institutions isn't going to prognosticate. LaFountain won't deliver his annual report to the Legislature until January. For now he's only able to cite the conclusion of his January 2012 report: “The recovery will continue to be slow and drawn out.”