Good News And Bad News
Ironically, even though foreclosures are down, servicers will
find that they are allocating greater resources for "default
management" and the disposal of secured properties.
By Erwin Wilbanks
Good news:The percentage of foreclosures in the
United States has declined just over 1% of the total number of
outstanding mortgages. Bad news:With the increased number
of mortgages over the past 20 years, the total number of defaults
has dramatically increased.
Additionally, the rollout of home equity lending will,
over time, also contribute to the increase in loan delinquency.
The result:Unavoidably, lenders are spending more time and
resources in "default management" and the subsequent
disposal of the secured properties.
During the late '80s and the early '90s, lenders were
taking a hard stance with delinquency portfolios: "Pay the
money," or "Give up the deed to the ranch." This mindset
resulted in lenders burdened with large, unmanageable REO
portfolios consisting of properties worth less than the loan
balance. However, the lender position has moderately softened
due to the realization that a loan that is paying is better than
owning a property that must be managed and sold.
In foreclosure cases, better appraisal methods have
assisted in narrowing the gap by providing the lender with an
asset that can be sold for the mortgage money invested. The cost
of the foreclosure and the significant cost to sell the property
indicate a greater need for lower loan-to-value ratios. The
current trend is to use more detailed and accurate appraisal
methods, which have assisted lenders in maintaining a relatively
small inventory of foreclosed properties.
Additionally, home equity loans are another important
factor in the overall mortgage loan risk equation. Borrowers
often take great measures to retain their homestead. Even
in the case of financial difficulty, the "home" is most often the
last item to go. In many cases, however, default is inevitable.
The best way for a lender to preserve its interests is to
enter into some type of borrower-lender agreement, allowing the
owner to move towards loan rehabilitation and forestall
complete default. Personnel working at the default desk need to
have a measure of enlightened compassion for the struggling
borrower- particularly when rehabilitation is in the best interest
of the lender.
Mustache twisting
Borrower bankruptcy can often result in cases where the
lender refuses to work with the borrower who is in financial
difficulty. In cases of bankruptcy, the lender should be aware of,
and prepared for, the potential danger of the multiple filer.
The multiple filer is typically a well-educated borrower
who knows how to work the system by engaging in a cycle of
filing and dismissing until the courts determine that the debtor
is abusing the system. Continuing to file the lender's motion to
remove the automatic stay in the Bankruptcy Court is very time
consuming and expensive.
Of course, all these processes occur in Federal Court with
judges who are inherently biased toward the debtor. This view
may stem from the old black-and-white movies with the banker
venomously twisting his mustache as "Little Nell" squirmed on
the railroad tracks.
Whatever the reason, extricating the recalcitrant
borrower from the property remains a difficult proposition. The
several types of bankruptcies have several associated causes and
processes, but what one can count on is that bankruptcy is
typically an extremely costly experience for the lender when all
elements and efforts involved in the process are considered.
Washington has attempted bankruptcy reform policies,
but not much good has evolved from the effort. Still today,
lenders are heavily burdened with the task of protecting their
interests without much assistance from the courts.
In any foreclosure case, the smart lender obtains an
attorney who is not only familiar with the rules of the court but
who is also familiar with the foreclosure system. (Don't they also
need to know the laws of the particular state in which the action
is filed? I think that's a given especially taking in the next
sentence.) Knowing the way in which each court functions is as
important as the "law" of the matter.
Also, the attorney should be on a first name familiarity
with the rules of discovery, particularly with the "pro se" debtor,
which presents a special set of problems. The implementation of
the discovery rules will quickly resolve the bankruptcy issue and
most often in favor of the lender. Lenders, however, should be
aware that any bankruptcy filing will delay the recovery process
from three to five months and with multiple filings that number
may double.
Outsourcing
When considering outsourcing foreclosure services, one
must also assess the costs involved. The foreclosure service
provider must be able to price each element of the process
individually.
Per item billing allows the lender to be charged for only
the work that is accomplished, rather than for the work that was
scheduled to be executed in the future but never realized due to
reinstatement or other workout efforts.
Another inherent cost is the time spent monitoring each
foreclosure process. Considering the critical factor of timeframes
in the foreclosure process, the lender should employ an
organization with electronic order receipt and electronic job
tracking capabilities. Foreclosure service organizations should
be able to track critical dates and provide information in the
most efficient manner, of course, which will also be the most cost-effective.
Although comprehensive, cost-effective foreclosure
services are available, we, as an industry, must continue to make
efforts to inform our Congressional representatives as to the
hardship and burden of the liberal rules that the Bankruptcy
Court imposes upon lenders in this country. Appropriate
changes in the rules will help prevent abuse of a system of
borrower safeguards that have been in place for many years.
In the meantime, lenders can feel more confident in
protecting their assets by employing individuals and
organizations specializing in foreclosure services to ensure
compliance with the complexity of the current foreclosure rules
and procedures.
Erwin Wilbanks is general counsel for Stewart Mortgage
Information Company. He has practiced real estate law since
1967 and is board certified in residential and commercial law by
the Texas Board of Legal Specialization. He may be reached at
(713) 479 - 2141 or via email at EWilbank@stewart.com.
This article was previously published in the March 2000 Issue of Servicing Management.
