As news and rumors continue to circulate that the federal government is ready to pull back from its role as the savior of the U.S. housing market, I see many players rubbing their hands together and smiling. The Treasury winds to wind down Fannie Mae and Freddie Mac and the GOP is ready to close down the failed HAMP program for good. Whether or not we agree that these things should happen, anyone who is holding their breath is acting the fool.
There are a number of reasons the government will not step away from the industry right now and couldn’t if it wanted to, something I’m not convinced is true. The first reason has to do with alternative disposition of REO.
It was Jim Sinclair
on his excellent blog who first brought the
Washington Business Journal news to my attention.
“Bank of America Corp. is segregating almost half its 13.9 million mortgages into a ‘bad’ bank comprised of its riskiest and worst-performing ‘legacy’ loans, Bloomberg News reported, citing Terry Laughlin, who is running the new unit.”
Laughlin says he plans to deal with the problem over the next 36 months. That’s 3 years!
There is no question in my mind that the government would opt for another TARP program before it would let BofA, the nation’s largest lender, stew for three years in a soup of bad loans. And if for some reason the government doesn’t step up, then I’ve got some great investment advice for you: leverage your entire portfolio and short BofA, because they won’t make it.
Let’s not fool ourselves, the government knows that the industry is awash in defaulted and toxic mortgage assets and the economy can’t take the stress caused by having these assets on the banks’ books.
That’s why you can expect loan modifications and alternative disposition methods for defaulting or defaulted properties to continue to be an important industry focus, most likely mandated by the federal government. And you can expect plenty of people to continue to be involved in telling the industry exactly how to do our jobs.
In a recent Financial Bulletin, Grant Thornton pointed to some key changes servicers had better be prepared to implement if state attorneys general and federal regulators get their way, including:
- Changes to required foreclosure and bankruptcy information and documentation
- More complete evaluation of borrower’s loss mitigation-related options
- Providing borrowers a single point of contact for communication
- Development of comprehensive loan portals
- Restrictions on servicing fees
Servicers still have a lot of work ahead of them. It’s going to take some innovative thinking and some great technology and we’re ready to help with that. Alternative disposition methods are not going to go away and that’s why Mortgage Cadence is focused on continuing to invest in that space and to support not only the workflow requirements to make it easy for servicers to handle these new and alternative methods of disposition, but also the borrower-facing communication technology required to get the job done.
We’re going to be in the midst of trying to sort through all of this inventory for at least the next three years, if not longer. But that doesn’t mean that every market in the country will remain depressed. The downturn did not affect every market to the same degree. So rather than looking only at the situation in the aggregate, like the mainstream media loves to do, we need to use models that allow us to understand the real value of each individual property.
I have to say that I agree with most regulators in saying that the Appraisal Management Company/vendor management model is the best way to bring lender confidence back into the collateral valuation business. This is critical if we want to return to a robust origination market, for both forward and reverse mortgages. But it will also allay fears of a resurgence of valuation fraud, something our industry (and economy) can ill afford.
As we continue to get a better handle on collateral valuation, you’re going to start seeing news stories about markets that are performing better than anticipated. Sure, we’ll still have markets that are struggling--like Detroit, Phoenix, Las Vegas. But you’ll also see some pleasant surprises, if you’re watching for them.
Waiting for the government to get out of the way and let us do our jobs is not going to be an effective strategy for survival in the future. It will take innovation and solid technology and a willingness to work hard to dispose of existing inventory for years before we return to anything close to a normal housing market. I’m fine with that. My company is in it for the long term. What about you?
