Mortgage Banking “The Worst of the Foreclosure Crisis: Are We There Yet?”
Mortgage Banking Magazine ran an article in its February 2009 issue about the forecasts for the mortgage foreclosure crisis through 2009 and beyond.
The Worst of the Foreclosure Crisis: Are We There Yet?
ARM resets and high unemployment will compel us all to develop even more effective and creative solutions for maintenance and disposition of vacant and abandoned properties.
By Robert Klein
One of the biggest questions these days at business functions and family gatherings has to be, “When do you think the mortgage crisis will bottom out?” The mortgage crisis made big news in 2008. Subprime loans were the first wave, blamed for the collapse of financial giants Bear Stearns & Co. and Lehman Brothers, insurance giant American International Group (AIG), numerous banks, the freefall in the U.S. stock market, as well as financial markets across the globe. The Mortgage Bankers Association (MBA) reported that one in 10 homeowners were behind on their loans — the highest number since 1979, when data began to be tracked.
In the fall of 2008, Congress passed a historic rescue package in an attempt to shore up the banking and financial markets and prevent a predicted global crisis. As a result, some experts predict that the country may see a leveling of the foreclosure crisis later in 2009. Others disagree.
Late in 2008, in a segment on CBS’ 60 Minutes, financial adviser Whitney Tilson predicted that the United States is only about halfway through the mortgage crisis. He pointed out that even at the introductory teaser rates characteristic with adjustable-rate mortgages (ARMs), an unusually large number of homeowners have been defaulting on their loans.
Tilson predicted that 50 percent to 70 percent of ARMs ultimately will default once loan rates reset, potentially doubling monthly loan payments for many borrowers. Because of this, he believes a second and potentially more severe wave of defaults and foreclosures is on the way, as ARMs reset to higher rates in the next two, three and even five years.
Rising unemployment — the third wave?
The result of the mortgage crisis has been a general tightening of credit markets, both for consumers and businesses. Without credit, businesses can’t grow and consumers can’t spend. The impact is evident nearly every day, as newspaper business pages carry news of layoffs in virtually every industry sector. The United States is experiencing unemployment rates unseen since the 1970s, and especially hard-hit have been the auto and recreational vehicle markets, banking, retail and tourism.
The Bureau of Labor Statistics (BLS) reported that payroll employment fell by 524,000 people in December 2008 alone and by 1.9 million during the last four months of 2008, while unemployment reached a 15-year high of 7.2 percent. Those levels are expected to continue, and even increase, into 2009.
And those statistics don’t even include the legions of the long-term unemployed, estimated to be at more than 2 million nationwide. These are the people who have given up their job searches and therefore are no longer counted on the unemployment rolls. Nor do the statistics reflect the countless numbers of underemployed people who have taken part-time or lower-paying jobs after being laid off from their previous positions, and who struggle to make ends meet.
Sustained rates of unemployment and underemployment are certain to trigger even higher levels of defaults and foreclosures. Without jobs, more people — even those who bought homes at low rates with conventional mortgages — will be at risk of losing their homes.
Freddie Mac reported that in 2006, 36 per-cent of all loans more than 90 days delinquent were related to job losses. In the first half of 2008, job-related delinquencies jumped to 4 percent.
If unemployment continues to rise in 2009, as many economists predict, we’re unlikely to see a leveling off of foreclosures; rather, the more likely outcome is foreclosure volumes that persist and may even grow into 2010.
New approaches needed to address higher volumes
What that means for our industry is that the record foreclosure volumes of 2008 aren’t likely to subside anytime in the foreseeable future. In fact, they may get worse. ARM resets and high unemployment will compel us all to develop even more effective and creative solutions for maintenance and disposition of vacant and abandoned properties.
What are some of those solutions?
First and most important, we have to uphold quality standards even as volumes grow at unprecedented levels. It is essential that field servicers revisit their recruitment and training procedures to ensure they have enough qualified contractors to inspect and maintain properties. Especially in challenged markets, we have to redouble our efforts to ensure vacant and abandoned properties maintain their asset value and structural integrity, and don’t create a nuisance for neighborhoods and communities.
Second, as greater numbers of real estate-owned (REO) properties linger on the market for longer periods, we need to enhance REO services so that these properties can compete with traditional-market homes that also are lingering on the market. In a more competitive market, REO properties should be maintained with curb appeal and “nesting” appeal in mind. When potential buyers drive up to an REO property, they should see a home maintained to the standards of the rest of the neighborhood — with a well-manicured lawn, neatly trimmed landscaping and a yard free of debris.
On the interior, the REO property should be clean and inviting. Even if the property isn’t in a high-value market, it can and should look and smell clean. It doesn’t cost much to scrub floors and carpets, wash walls, wipe down counters, remove cobwebs and clean appliances and plumbing fixtures. The payoff is Iikely to be well worth the investment if homeowners walk through the door and can envision a home where they want to raise a family.
A third solution is finding new approaches to dispose of REO properties that struggle to find buyers. Many servicers have actively embarked on REO-gifting as a way to reduce their portfolios, by donating them to community development groups, land banks and other non-profit entities. The challenge for both servicers and the acquiring organizations has been finding one another and matching up appropriate properties.
Through creative partnerships, clearinghouses can be developed whereby community organizations and land banks can access properties through a “one-stop-shop” approach. Additionally, by pooling properties in targeted neighborhoods, it may be possible to offer communities a package of properties that may be more appealing for economic or community-development purposes.
As an industry, we have the potential to turn the current economic challenges into opportunities for future community development. By focusing on effective ways to maintain the integrity of vacant homes, we cannot only make them more appealing and desirable for potential homeowners, but we also uphold the asset value of properties. And by identifying creative solutions for disposing of surplus properties, we can help communities survive and evolve to meet their changing needs.
Robert Klein is founder and chief executive officer of Sateguard Properties, Brooklyn Heights, Ohio. Founded in 1990, Safeguard is the largest privately held mortgage field service company in the United States. He can be reached at firstname.lastname@example.org.