Effectively Addressing the Foreclosure Backlog

This column originally appeared in the September 2011 Issue of Asset Securitization Report.

The recent focus on the economy and the jobless rate has, in the popular press, pushed the housing market from the front pages of the mainstream press. The continued weakness in the housing markets, however, is a major factor in the sapping of consumer confidence and the resulting lack of a robust rebound. While housing and mortgage lending remains entangled in a seemingly intractable web of investigations, negotiations and unimplemented regulations, an important short-term goal should be to make headway against the huge backlog of nonperforming loans.

The housing market remains under severe pressure almost five years after the mortgage crisis first erupted. While this is due to a host of factors, the counterproductive and destructive role played by the government and its various representatives cannot be overlooked as a major impediment to progress. Particularly frustrating are the conflicting positions taken by various regulatory agencies. As an example, the Federal Reserve is charged with ensuring the "safety and soundness" of the banking system; at the same time, they are (as owners of securities held in their Maiden Lane facilities) a party to the legal action and settlement with Bank of America that will (if approved) cost the bank $8.5 billion of its capital. Even more bizarre, the FDIC (as the owner of securities inherited from failed institutions) has objected to the settlement even though their actions may be harmful to a bank that they are regulating (and whose deposits they are insuring.) Such actions have stalled the resolution of the mortgage crisis; as someone recently quipped, time in the mortgage market seems to pass in "sequoia years."

In addition, the investigations into foreclosure irregularities have caused the foreclosure glut to grow to truly astonishing proportions. The June report from Lender Processing Services, which incorporates data on roughly 52 million loans, shows that more than 4 million loans are either seriously (90+ days) delinquent or in some stage of foreclosure. Loans in foreclosure are an average of 587 days delinquent, and 35% of these borrowers have not made a payment in two or more years. In this light, policy makers are left with the unattractive alternative of either ignoring the foreclosure pipeline (which remains a huge drag on home prices and confidence) or passively watching a surge in home repossessions that leave millions of families, in FDR's words, "ill-housed."

A recently proposed alternative that might help address the foreclosure backlog while helping delinquent borrowers would allow homes in foreclosure to be sold to private investors; the current occupants, while losing title to the properties, would remain in the homes as tenants. Such a program would require cooperation between private investors, servicers, realtors, and rental managers. An effective approach would lean heavily on local resources, particularly with both administering the property sales and managing the homes as rental properties. The government's role should be limited to setting up the parameters of the programs, including incentives for all parties (including the homeowners/renters) to participate. Attention must be paid to adequately managing the properties, which can be done only at the local level; no former homeowner wants to wait weeks to hear from someone in Washington over how to proceed with plumbing repairs.

In order to rapidly institute such a program, the administration would do well to learn from the problems encountered by HAMP and other well-intentioned but disappointing programs. A successful initiative will require an appreciation for the processes involved in instituting a large-scale, broad and complex program. In particular, officials need to be cognizant of the capabilities of the various parties, with the operational and legal constraints associated with servicers given special attention.