What's In Store for 2013 in Real Estate Default

2013 is off to a booming start, the election season is finally behind us (those of us Ohioans are very thankful for that), and Congress has avoided the fiscal cliff, at least temporarily, so now let's get out the crystal ball and look ahead to what the remainder of this year has in store for us.

For those of us working in the real estate default servicing world, we all know that the start of 2013 has brought about the greatly anticipated CFPB mortgage servicing rules which are scheduled to go into effect in January 2014.  While mortgage servicers will be struggling throughout the year to undergo operational changes to policies and procedures on core servicing functions, staff oversight and vendor management in order to comply with the new rules, there also appears to be some good news on the horizon.   Recent statistics suggest that the housing market is stabilizing, as data released January 29, 2013 by S&P Case-Shiller Home Price Indices revealed, home prices rose as much as 5.5% for the composite report ending in November 2012.  

What affect will this positive real estate outlook have on the foreclosure industry in 2013?   As the real estate market continues to stabilize, we can expect to see foreclosure rates slightly decrease, as has been the trend since late 2010.  Yet, the decrease may not be significant unless lenders take significant steps to reduce mortgage delinquency. Corelogic's recent national foreclosure report suggests that properties in the national foreclosure inventory and the shadow inventory now total 3.6 million homes, which is nearly as many as the 3.9 million foreclosures completed since 2007.   The shadow inventory of mortgages that are now in the pipeline could keep foreclosure filings steady throughout 2013 and beyond.  Additionally, there are anticipated re-defaults on modified mortgages, which are not yet being reported in the shadow inventory.  

What trends might we see in the short run to help curb a rash of new foreclosure filings? For one thing, the CFPB rules include strict loss mitigation components which will certainly delay the filing of many new foreclosures in the short term, and loss mitigation efforts are also certain to delay those foreclosures already in the pipeline as servicers continue to develop their implementation plans.  Additionally, the number of new foreclosures dropped in 2012 as banks were more willing to go through the short sale process - a trend that should continue as the housing market improves and prices rise.  

The most impactful change, however, could be determined by the willingness of investors to grant principal reductions to homeowners facing foreclosure.  Principal reductions are a requirement of the National Mortgage Settlement between 49 State Attorneys General, the Federal Government and the five largest mortgage servicers.  The State attorneys general envision that this requirement will show the mortgage servicing industry that principal reduction is an effective tool in combating foreclosures, and that granting reductions to borrowers in distress will not lead to widespread strategic defaults by homeowners who really can afford to pay. 

To date, there has been no widespread movement in the industry towards principal reductions.  But, now with the increased pressure on servicers brought about by the CFPB rules, in addition to the stabilization of home values, the time might be right for lenders to consider granting principal reductions in order to reduce the number of properties being sold through foreclosure.   Drastically reducing the number of foreclosures through principal reductions could lead to a two pronged benefit.  First, resolving distressed loans will help to shrink the shadow inventory and the costs associated with boarding loans in distress. Second, reducing the number of properties going to foreclosure sale will help the real estate market continue its incline, which could lead to improved returns on the significant REO portfolio of properties that have recently hit the market.