FORECLOSURE UPDATE

10/20/2010
REOMAC CONFERENCE
HOLLYWOOD, FLORIDA
SESSION REPORT, by Bryan Crabtree

Moderator:  
Rob Galbraith, Esq. Of Davidson Fink

Panelists:
Steve Benetz, NRT REOExperts LLC    
Tom Federman, Esq. Federman and Associates
    Rick Sharga, Realty Track
    


“The foreclosure industry is in a state of turmoil,” according to Rob Galbraith, speaking as Moderator in the Foreclosure Update Session at REOMAC, Hollywood, on October 22, 2010.  He added that there are basically four types of legislative and political events currently contributing to this reassessment of the foreclosure process.  These include new legislative interpretations of new and old statutes (on the assignment of mortgages), scamming in the foreclosure arena, the general legislation of public opinion and business determinations between title insurance and underwriting.

By the numbers, Rick Sharga from Realty Trac reports that (in the Third Quarter of 2010) 930,000 homeowners received a foreclosure notice representing an increase of 4% from the previous quarter, and a decrease of 1% from one year ago.  347,000 homeowners, in September received a foreclosure proceeding, representing a year over year increase worth watching.  There have been 2.3 million year to date foreclosure notices (2.8 million total in 2009).  By contrast there were only 550,000 homeowners who received a notice in the entire year of 2005.

A statistical record was set in the month of September for the number of actual REO properties: 102,000 in September alone.  There were 820,000 REO Properties year-to-date.  According to Sharga, “we were on pace to exceed last year until the foreclosure freeze.”  He adds, “From the twenty-four states that Bank of America released, those states account for 40 percent of all foreclosures and 36 percent of all REO inventory.  The potential drop-off is enormous.”

There is one thing for certain.  The “Foreclosure Freeze” by many of the major servicers is having an impact on the overall REO market and the ability of the Housing industry to “cleanse” itself of the distressed inventory, an event necessary to fully heal the housing market.  By the numbers, The Foreclosure Freeze has had only a modest impact on the Default Industry numbers as of October 18, 2010:

Through 10/18 – off 3 percent in terms of foreclosure actions compared to September.
Through 10/18 – off 2.8 percent in REOs – expected to see a larger drop.
Notices of sale were off 7.5 percent in October.
The industry experienced an increase in notices of default for October.
The Trend may or may not hold for the balance of the month.

A lot of Brokers are having sales delayed and some even canceled.  The general concensus is that the Foreclosure Freeze will simply “bring Christmas early.”  Foreclosures and related activity tends to experience a seasonal slow-down during the Holidays each year.  This year, its assumed that the bulk of the “Foreclosure Freeze” will be sorted out by the Holidays, even though in some cases we may experience remnants of this for as much as 12-18 months to come.  By first quarter, volume should start to accelerate again and be normalized into second quarter of 2011.  

The case that essentially “blew open” this latest foreclosure crisis was a small house in Maine, which represented a microcosm of the broad spectrum of procedural problems in the Industry.  During this case, the term "robo-signing" became Nationally known, because it was found that the employee for GMAC, who signed the foreclosure affidavit actually signed hundreds of them a day without reading the documents.  In this microcosm, the house was financed with 103% financing and purchased from a “brother-in-law.”  The borrower took out a second loan for repairs.  But, according to Sharga, “What was the money used for [the house didn’t appear repaired at all].”  This borrower went from full-time to part-time employment, later falling behind on her payments.  She then applied to GMAC for a loan modification where her loan payments went from $1500 to $1700 per month, which she couldn’t afford.  After failing to remain current, GMAC filed a foreclosure action.  The borrower hired a “pro-bono” attorney who got the case dismissed because of improper paperwork.  GMAC refiled the case, and had it thrown out again for failing to provide accurate property address information.   GMAC (Ally Bank) plans to file the case again.  According to Sharga, “The judge has not rescinded their right to foreclose – or ruled against them…” The Judge said “go get your paperwork right.”  Sharga adds,  “The fallout from the robo-signing could be a lot less severe than what you’ve read in the press.”

According to Tom Federman of Federman and Associates, “In real terms, a judge will often do whatever they want when it comes to helping someone keep their home.”  “I don’t think you’re ever really going to be free from this issue.  A lot of people [will be] be going for the assignment [defense].  The right to sue will come under a lot of scrutiny.  This doesn’t really impact the borrower or their obligation under the mortgage.  It’s still a legitimate technical defense that can be raised.”   The end result is that foreclosures in some states like New York that used to typically take 9-12 months have now slowed to as much as 20 months.  States like Texas typically took 30 days for a foreclosure now it’s 90 days or longer.  Florida is about double what it was just two-three years ago.  The average foreclosure in Florida is a 330 day process.  

What do Real Estate brokers need to know about this latest crisis?

Maintain the status quo until you’ve gotten direction otherwise.
It’s on a servicer by servicer basis.
A lot of what we’re seeing depends on the size of the servicer.  Larger servicers are taking a conservative approach.  Some of the smaller ones are quite comfortable with their processes.
This robo-signing situation is likely to take 30-60 more days to work through.
It’s going to trend toward work-outs and short-sales, as these things continue to happen.  It’s going to continue to drive a trend towards more short-sales.  

From a “Macro-level” Rick Sharga added, “If you have 330 days to complete a foreclosure, why can’t you take 10 minutes to review the document?  It doesn’t seem we should be worried about being staffed up five years into a foreclosure crisis?”

How safe is it to buy an REO?

Rick Sharga added that “I assumed that by the time it was put on the market, they had secured clear title.”  Now as a buyer, are these things toxic sludge?”  That’s what the latest media reports might have you believe, anyway.  

The Answer?  Title companies are asking for indemnification from the servicers.  And, it may be that safe and that simple.  

Attorneys General in non-judicial states are thrust into the position of the judges in judicial states.  There has been some significant movement by the major title insurers as to what they are going to accept from the foreclosure process.  Some want to get an order from the judge to affirm that the foreclosure was properly done.  And, according to Galbraith “going back to court in NY, I could get my head handed to me, literally.”  This Title Insurance issue has a similar ring to The Asbestos-issues that could have stopped the sale of any property more than 30-40 years old for a long time.  After that “scare” was sorted, now you just abate it and move forward.  

Galbraith adds, “Some agency is going to have to lead and step-up [here].  Now you have 50 states, towns, attorney’s generals, etc.  Everybody that can get their finger into the pie is putting their finger in the pie” [it is so big and there’s so many of them].”

One audience member asked, “When can I sell more REO Properties again?”  And, the answer may just be, “you should keep brushing up on your short-sale skills,” in the words of Federman.  

Is there a liability from Real Estate Brokers due to all of this?

“You can’t stop someone from suing,” according to Federman.  But according to the Seller’s Bank addendum, all of this is clear in the language that if title is defective, that the seller has no liability.  There is no perfectly correct way to do it.  

Some brokers have a one page letter and have the buyer sign the bottom to have the buyer made aware of the process and potential pitfalls.  Doing that sort of thing is advantageous.  

Rick Sharga was asked if he sees a “mass-release” of REO Properties as a result of this latest crisis or a continual and controlled release as we’ve been seeing.  Sharga said, until this, “we were forecasting next year as the foreclosure peak.  Now we will guarantee an increase.”  Based on the REO pipeline, 2012 will start to get better.  In 2013, REO could actually get back to normal levels.  “We don’t think that we’re going to see a flood at any point,” according to Sharga.   We’ll see a very gradual process of properties through the system to the market.  Interestingly, the Lenders are processing the same number of new defaults now as they are processing actual REO properties.  This represents a controlled delivery of REO to the market.  A lot of the smaller lenders don’t have capital reserves to handle the losses.  Some of the bigger ones can’t afford to miss wall-street expectations.  These two facts keep the “tidal-wave” of foreclosures and REO properties in check.  

With all of the recent procedural discoveries, the pressure in the Court of Public Opinion and the mid-term election cycle, the “chaos” may well continue through the end of the year.  But, it appears the default industry cycles will get back to normal procedural operation by the end of the First Quarter of 2011.  While there is a lot of fear being injected into the market about the quality of titles, the rights to foreclose properties (due to paperwork flaws), and the potential impact of this on the already battered housing market, the most likely scenario is that this is nothing more than a “righting” of the processes still existing, today, that similarly led to the overall Housing Crisis.  But, there is little evidence that this will otherwise broaden the effects of the overall housing crisis.  Likely, it will just extend the time it takes to foreclose on many of the properties and give homeowners more “free” time.

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