Posted on Wednesday, January 12, 2011
PHOENIX — An array of federal and state investigations into the way banks foreclose on delinquent homeowners has contributed to a sharp slowdown in foreclosures across the country, especially in hard-hit cities like this one.
Over the last several months, some banks have been reluctant to seize homes from distressed borrowers, economists and government officials say, as they face scrutiny from regulators and the prospect of sanctions when investigations wrap up in the coming weeks and months.
The Obama administration, in its most recent housing report, said foreclosure activity fell 21 percent in November from October, the biggest monthly decline in five years. Here in Phoenix, foreclosures fell by more than a third in the same period, reflected in the severe drop in foreclosed homes being auctioned on the courthouse plaza.
“There’s no product, just nothing to buy,” complained Sean Waak, an agent for investors, during a recent auction.
The pace of foreclosures could be curtailed further by courts. In a closely watched case, the highest court in Massachusetts invalidated two foreclosures in that state on Friday. The court ruled that two banks, U.S. Bancorp and Wells Fargo, failed to prove they owned the mortgages when they foreclosed on the homes.
If the slowdown continued through this month and into the spring, it could be a boost for the economy. Reducing foreclosures in a meaningful way would act to stabilize the housing market, real estate experts say, letting the administration patch up one of the economy’s most persistently troubled sectors. Fewer foreclosures means that buyers pay more for the ones that do come to market, which strengthens overall home prices and builds consumer confidence in housing.
“Anything that buys time, that reduces the supply of houses coming onto the market, is helpful,” said Karl Guntermann, a professor of real estate finance at Arizona State University.
It is not that borrowers have stopped defaulting on their mortgages. They are missing payments as frequently as ever, data shows. But the lenders are not beginning formal foreclosure proceedings or, when they are, do not complete them with an auction sale. And in the most favorable outcome for distressed borrowers, some lenders are modifying loans so foreclosure becomes unnecessary.
The drop in foreclosures began in late September when some lenders were revealed to have been using so-called robo-signers to process thousands of foreclosures without verifying the accuracy of the data. As the investigations into the problems proceeded, the uncertainty caused many lenders to become more cautious.
Their foreclosure procedures, the banks have repeatedly said, are sound. But preliminary results of several of the investigations have indicated substantial problems. Coordinating many of the inquiries is the Financial Fraud Enforcement Task Force, established by President Obama.
“The administration is committed to taking appropriate action on these issues where wrongdoing has occurred,” said Melanie Roussell, an administration spokeswoman.
The diminished supply of foreclosed homes has already had an effect on prices at the auctions on the courthouse plaza here, bidders said.
Houses change hands on the plaza with a minimum of ceremony. Three sets of trustees hired by the banks sit a few feet apart, their backs to a statue of a naked family looking for all the world as if its members had just been cast out of their home. The trustees call off properties in a monotone to bidders clustered around them. Winners must immediately hand over a $10,000 deposit in the form of a cashier’s check.
On a recent afternoon, one bidder, Pam Mullavey of Infoclosure, found herself in a bidding war with Chris Romuzga of Posted Properties for a 2001 house that had fetched $644,000 at the very peak of the boom.
This time around, the bank set the floor at $271,000. Ms. Mullavey and Mr. Romuzga rapidly pushed up the price in varying increments of $100 and $500. Mr. Romuzga’s client had planned to pull out at $307,000 but asked him to keep bidding as Ms. Mullavey sailed on. Her winning bid was $310,100, well above what a similar house might have fetched just a few months ago.
“Sometimes I wonder why people are bidding so much,” Ms. Mullavey said.
For Mr. Romuzga, it was the fourth time that afternoon he had been outbid. Only once had he secured a property.
The investors’ frustration could be a good thing for Phoenix homeowners, who have seen values fall 54.5 percent since 2006. In the last few months, home prices have started to drop again. A decline in foreclosures, economists say, could break the fall.
Cameron Findlay, chief economist with the mortgage company LendingTree, said that the shifting behavior of lenders had helped change perceptions about the foreclosed.
“Initially, society’s view was to run them out of the house,” he said.
That resulted in vacant and dilapidated homes, which blighted neighborhoods and drove potential buyers away.
“People should be hopeful the modification programs work — for their own benefit,” said Mr. Findlay.
More than four million households are in serious default and vulnerable to losing their homes. Lenders maintain that cases of borrowers improperly foreclosed are extremely rare.
But the Federal Reserve, which is investigating lenders’ policies in conjunction with other banking regulators, has found significant weaknesses in risk management, quality control, auditing and compliance.
Another investigation is being conducted by the Federal Housing Administration, which is examining whether loan servicers are exhausting all legally required options before foreclosing on government-insured mortgages. An agency spokeswoman said that initial reviews indicated “significant differences” in efforts by servicers to keep borrowers in their homes.
A third investigation is being conducted by the Executive Office for U.S. Trustees, part of the Justice Department. It is looking into documentation errors by lenders and their law firms in homeowners’ bankruptcy filings.
At the state level, there is a joint effort by all 50 state attorneys general, with the specific goal of changing the face of foreclosure in America by making it more difficult for lenders to act against homeowners. The effort, led by Iowa’s attorney general, Tom Miller, is in flux as several prominent attorneys general left office and their replacements decide whether to make foreclosure reform a priority.
There have been many attempts during the housing crash to stem the flow of foreclosures, only fitfully successful. Some experts think neither federal reforms nor any agreements brokered by the attorneys general will make much of a difference.
“Whether it is really true that there are millions of foreclosures that could be avoided if servicers were just more willing to do more modifications that make sense — meaning overall losses would be less than would otherwise be the case — is far from clear, and in fact highly unlikely,” said Tom Lawler, an economist.
Loan servicers are not set up to identify the true financial picture of each borrower having trouble, Mr. Lawler said, and cannot easily figure out who is likely to stop paying without a modification and who will keep sending a check every month.
The courthouse plaza bidders in Phoenix do not believe their livelihood is threatened. By the end of January, several bidders predicted, lenders would gear up and foreclosures would once again be abundant.
In the meantime, Tom Peltier watched unhappily as a house started at $68,000 and quickly spiraled up. He finally locked it in at $98,500. “That was about 20 grand more than I wanted to pay,” said Mr. Peltier, who planned to rent it to his sister as soon as he moved out the former owner.
By DAVID STREITFELD, THE NEW YORK TIMES