Servicers, Do You Know?

Which properties in your portfolio are tied to an HOA? It may seem like an easy—or even irrelevant—question to answer, but many servicers surprisingly do not know. And that lack of awareness can result in diminished returns and portfolio risk. At the end of the life of the loan, when servicers are about to liquidate, foreclose, or sell the property, they must be aware of whether the loan is associated with an HOA so they can communicate with and retrieve critical data from the HOA. In fact, HUD now expects servicers to have an established relationship with the HOA to ensure the borrower is current on all payments.
In HUD’s Mortgagee Letter 2013-18, it states at the very bottom of one of the HOA-related clauses a very important point. And because it’s positioned at the end (almost as an afterthought), many servicers overlook it or do not pay much attention to the point. It states, “FHA expects servicers to: (a) implement procedures that will result in them being notified when mortgagors default on HOA fees, and/or (b) establish escrows for HOA fees.” That expectation changes everything. That expectation puts more pressure on the servicer to establish a working relationship upfront with the HOA and notify the borrower in the event of any defaults.
If servicers do not include the HOA as part of their foreclosure notice and communicate with the HOA in a timely manner, it could result in litigation and/or loss of revenue because the servicer is out of compliance with foreclosure proceedings. And remember, HUD now expects that the servicer will make all necessary payments on the foreclosure before it will even consider taking possession of the home.
Keep in mind, the HOA already has a vested interest in the borrower and property, which is very beneficial for the servicer if the servicer knows when and how to communicate with the HOA. The association effectively manages collections with the borrower and records liens early in the HOA delinquency. When servicers regularly monitor for HOA liens and engage with the HOA, they can see that happening early on and can react accordingly to protect their assets.
There are more than 350,000 HOAs in the United States. With such a large number, the likelihood of servicers having at least some HOAs in their portfolio is inevitable. Eliminate portfolio risk by determining which properties are associated with HOAs and actively monitoring those HOA properties. Servicers who do not have the means to track all properties themselves should consider outsourcing to companies that specialize in managing HOA liens on their behalf. Now more than ever, servicers must make the decision to resolve HOA claims before they risk losing their well-earned returns.

Poor Underwriting is Contagious

Last year, University Financial Associates (UFA) introduced the idea of contagious misbehavior and their effect on the default rate. UFA utilized that data to take a closer look at how poor underwriting spreads within the mortgage sector in a report titled “Race to the Bottom?” released on Wednesday. According to the report, lenders tend to be pressured to lend more aggressively if competing lenders relax standards.

Data from UFA shows that in the years leading up to the financial crisis in 2007, lenders sought after more and more ways to lend to marginal buyers. The “No-doc” and NINJA (no income, no job, no assets) loans increased as lenders fought to outdo each other by selling more loans, thus the quality adjusted index of default rose for multiple lenders. As one lender began to its questionable underwriting practices, others followed suit in order to keep up competitively.

“Our research shows there is compelling evidence that poor underwriting is indeed contagious. The underlying data provides evidence of most private-label lenders’ relaxed underwriting standards which spread through the industry during the 2000s,” said Dennis Capozza, Professor Emeritus of Finance in the Ross School of Business at the University of Michigan, and a founding principal of UFA. “Data for other loan types like autos and mobile homes have similar contagion events before default crises. The challenge for regulators is to identify these contagion events and act to control them before a crisis develops.”

UFA’s original research from last year showed that political corruption in an area correlated to some extent with excessive defaults. If misbehavior can have an effect on separate sectors, it is easy to see how aggressive lending from one lender can lead to aggressive competition to another.

To view the full report and more from UFA, click here.

Court Deals a Blow to Fannie Mae Shareholder Hopes

Gavel BHThe Federal Housing Finance Agency (FHFA) is substituting for Fannie Mae shareholders as the plaintiff in a lawsuit against accounting firm Deloitte & Touche accusing the company of negligent auditing practices that resulted in millions of dollars in losses to the shareholders, a move which may ultimately lead to the case’s dismissal.

A federal judge in the U.S. District Court for the Southern District of Florida ruled that the FHFA, as conservator of Fannie Mae since September 2008, owned all claims against Deloitte, citing a provision of the Housing and Economic Recovery Act (HERA) of 2008. At the same time, the court denied the motion of the Fannie Mae shareholders to remand the case.

“The FHFA moves to substitute as plaintiff, arguing that the FHFA succeeded to all the rights of Fannie Mae’s stockholders under HERA’s succession clause, including the plaintiffs’ rights to bring this suit,” Judge Robert N. Scola wrote in the decision, stating in the conclusion that “Because Deloitte had met its burden in establishing that one of the plaintiffs’ claims arise under federal law and the plaintiffs’ derivative claims belong to the FHFA under HERA, the Court denies the Plaintiffs’ Motion to Remand and grants the FHFA’s Motion to Substitute as Plaintiff.”

The FHFA declined to comment on the matter, and Deloitte did not immediately respond to a request for a comment. The Wall Street Journal reported that the FHFA is unlikely to continue with the suit now that the agency owns the Fannie Mae shareholders’ claims.

The Fannie Mae shareholders claim in their complaint that Deloitte failed to properly audit the GSE’s financial statements, accusing the accounting firm of giving its “seal of approval to Fannie Mae’s grossly misstated financial statements” and stating that “as a direct result of Deloitte’s negligent accounting and auditing and its role in assisting FHFA, Treasury, and Fannie Mae’s directors and officers in violating their fiduciary duties, plaintiffs suffered losses of hundreds of millions of dollars.”

Fannie Mae and fellow GSE Freddie Mac received a combined bailout of $187.5 billion from taxpayers in 2008 in order to remain solvent, at which time they were taken under conservatorship by the newly-created FHFA. In 2012, both Fannie Mae and Freddie Mac became profitable again, but the government amended the terms of the bailout to sweep all GSE profits into Treasury. The so-called “net worth sweep” has prompted no fewer than two dozen lawsuits by GSE shareholders who believe they are entitled to some of these profits. Some of the suits have gained traction in courts but none have been decided in the shareholders’ favor as of yet.

The Fannie Mae shareholder suit was not the first GSE suit against Deloitte. Freddie Mac sued the accounting firm in 2014 for $1.3 billion, accusing them of negligence regarding the representation of mortgage loans that Deloitte audited in the years leading up to the crisis. Freddie Mac purchased the toxic loans from now-defunct servicer Taylor Bean & Whitaker based on Deloitte’s audits and claims to have suffered millions of losses as a result. Both parties agreed to dismiss the suit without prejudice in January 2016, a month before the case was scheduled to go to trial.

Foreclosure Rate Declines, Economic Activity Rises

The foreclosure inventory was down 1.9 percent in December 2016, representing 62 months of consecutive year-over-year declines, according to the National Foreclosure Report released by CoreLogic on Tuesday.

The report stated that while decline in delinquencies had been realized for most of the country, there were a few states that continued to experience a high rate of foreclosures. “Serious delinquency rates rose in Louisiana, Wyoming, and North Dakota, reflecting the weakness in oil production,” said Frank Nothaft, chief economist for CoreLogic.

The report continued by stating there were only 21,000 completed foreclosures nationally in December 2016 compared to 36,000 in December 2015. Approximately 329,000 homes in the United States were in some stage of foreclosure compared to 467,000 in December 2015.  The seriously delinquent rate is at 2.6 percent, which is the lowest level since June 2007.

As of December 2016, the foreclosure inventory represented .08 percent of all homes with a mortgage, compared to 1.2 percent in December 2015.

Anand Nallathambi, President and CEO of CoreLogic, cited that foreclosure decline is attributed to a number of economic factors. “The decrease in foreclosures is powered principally by increasing employment levels, stringent underwriting standards, and higher home prices over the past few years,” he said. “We expect to see further declines in delinquency and foreclosure rates in 2017.”

Approximately 29 states have an inventory of foreclosed homes lower than the national rate, with 16 states showed declines of more than 30 percent in year-over-year foreclosures inventory. Washington (-42.1 percent) and Florida (-41.1 percent) showed the greatest year-over-year declines.

States with the highest foreclosure inventory as a percentage of mortgaged homes include New Jersey (2.8 percent); New York (2.7 percent); Maine (1.8 percent); Hawaii (1.7 percent); and Washington, D.C. (1.6 percent).

Those states with the lowest foreclosure inventory as a percentage of mortgaged homes include Colorado (0.2 percent), and Arizona, California, Minnesota, and Utah, all with a percentage of 0.3 percent.

Among major metropolitan areas, the foreclosure rate in New York City decreased by 27.5 percent while the Chicago area experienced a 29.1 percent decrease.

Twenty-eight non-judicial states, 22 judicial states, plus Washington, D.C. (non-judicial) posted a year-over-year double digit decline in foreclosures.

Homes are Shrinking Again

New single family homes are starting have been shrinking, according to the National Association of Homebuilders (NAHB).
According to Q1 2017 data from the Census Quarterly Starts and Completions by Purpose and Design and NAHB analysis, median single-family square floor area was slightly lower at 2,389 square feet. Average (mean) square footage for new single-family homes declined to 2,628 square feet.
According to the data, home sizes reached a plateau in 2015 and 2016 after experiencing a steady rise post-recession, but have started to drop off since. The current average home size is 2,624 square feet, 10 percent higher than the cycle low. The median size is 14 percent higher, at 2,402 square feet.
The post-recession increase in single-family home size is consistent with the historical pattern coming out of recessions. Typical new home size falls prior to and during a recession as home buyers tighten budgets, and then sizes rise as high-end homebuyers, who face fewer credit constraints, return to the housing market in relatively greater proportions.
This pattern was exacerbated during the current business cycle due to market weakness among first-time homebuyers. But the recent declines in size indicate that this part of the cycle has ended and size will trend lower as builders add more entry-level homes into inventory.
Meanwhile, while single-family is up post-recession, new multifamily apartment size is down compared to the pre-recession period. According to the NAHB, this is due to the weak for-sale multifamily market and strength for rental demand

CFPB: One Million Complaints Handled and Counting

Complaint BHSlightly more than five years after opening its doors in July 2011, the Consumer Financial Protection Bureau (CFPB) has handled more than one million complaints.

The Bureau surpassed the one million complaint-handled milestone this month, according to a release announcing the September 2016 Monthly Complaint Report (Volume 15), published on Tuesday.

“Since opening our doors in 2011, we have handled over one million complaints from consumers about their problems with financial products and services,” said CFPB Director Richard Cordray. “Not only have we achieved substantial relief for consumers, but hearing directly from consumers is fundamental to our mission. We can better protect all consumers because of what we learn from those who have submitted complaints and shared their experiences with us.”

The CFPB began accepting complaints about credit cards when it opened its doors in July 2011. The Bureau later expanded its complaint handling to include other areas of finance; mortgages were added early in 2013. Other categories include credit cards, mortgages, bank accounts and services, private student loans, vehicle and other consumer loans, credit reporting, money transfers, debt collection, and payday loans.

Once the most complained-about financial product to the CFPB, mortgages have since been surpassed by debt collection on the list. Nearly a quarter of complaints from consumers to the Bureau have been about mortgage products (244,008 out of the one million), second only to debt collection’s 264,123 complaints. Together, those two categories make up more than half of the one million complaints consumers have made to the Bureau in five years. Credit reporting was the third-most complained about financial product, logging 163,651 complaints.

With a total of 4,310 complaints in August (a 10 percent increase from July), mortgages ranked third behind debt collection (9,746) and credit reporting (5,723) as the top complained-about categories for the month. Mortgages rank second on the list of average number of complaints received since the CFPB’s launch, with 4,206, behind only debt collection (6,871).

The Bureau received a total of 28,651 complaints across all financial products in August, which is nearly double the agency’s monthly average of complaints received since its inception (15,845). Approximately 15 percent of complaints received by the CFPB in August 2015 were mortgage-related.

Foreclosure Lows Are the Needed Boost to Housing Stocks

Foreclosures and foreclosure inventory are definitively down. Compared to a year earlier, the foreclosure inventory nationally in August was 30 percent lower, while the actual number of completed foreclosures was down by more than 42 percent, according to CoreLogic’s August 2016 National Foreclosure Report.

In raw numbers, there were 37,000 completed foreclosures in August. A year ago, there were 64,000. The national foreclosure inventory included approximately 351,000 homes with a mortgage (about 1 percent) compared with 499,000 homes last year. The numbers made August’s foreclosure inventory rate the lowest it’s been since July 2007.

CoreLogic also reported that the number of mortgages in serious delinquency (90 days or more past due, including loans in foreclosure or REO) declined by 20.6 percent from last August. The decline was geographically broad with decreases in serious delinquency in 48 states and the District of Columbia.

Over the year, Florida had twice the number of completed foreclosures (55,000) than its nearest second, Texas (27,000). Ohio, California, and Georgia also all had more than 20,000 foreclosures, and these five states made up about a third of all national foreclosures.

On the other side of the coin, the District of Columbia had the lowest number of completed foreclosures since last year, with 212. Conversely, D.C. also had the highest foreclosure inventory rate in August, almost 2 percent. Over the year, New Jersey’s 3.2 percent inventory rate led the way, followed closely by New York, with a 3 percent rate.

“Foreclosure inventory fell by 30 percent from the previous year, the largest year-over-year decline since January 2015,” said Frank Nothaft, chief economist for CoreLogic. “The large decline in the distressed inventory has been one of the drivers of steady home price growth which helps Americans increase their home equity to support increased spending or cushion future economic risk.”

Anand Nallathambi, president and CEO of CoreLogic, said that the downward trend in foreclosure and serious delinquency exhibit strong demand growth and rising prices.”

“With the foreclosure inventory now under 1 percent nationally,” he said, “the need to boost single-family housing stocks through new construction will become more acute in the coming months and years.”