PERSON OF THE WEEK: The latest foreclosure activity report from RealtyTrac, released last week, showed that while foreclosure filings grew nearly 4% from June to July, default notices fell about 1%. To make heads and tails of what this means for servicers, MortgageOrb went to the source, speaking with RealtyTrac Senior Vice President Rick Sharga.
Q: When we spoke for an article that appeared in the November 2008 issue of Servicing Management, you suggested that a suitable visual representation of servicers' REO inventory might be that of a boa constrictor that has just swallowed a large warthog. Now, almost two years later, how's the snake doing?
Rick Sharga: The snake actually managed to digest almost all of that old warthog, but it came upon a second, potentially even bigger warthog and swallowed that now, too.
We're really in the second wave of what looks like it's going to be a three-wave foreclosure problem. That first wave was bad loans that were written on overpriced properties and issued to people who, in many cases, were simply not qualified for the loans. That led to a global economic downturn, which subsequently led to very high levels of unemployment, which has now generated a second wave of foreclosures.
That may well wind up being bigger than the first one was. And because that second wave hit, we have the prospect of a third wave, which is that there are hundreds of millions of dollars of adjustable-rate loans due to reset over the next 12 to 15 months on properties that have probably depreciated 30% to 50%. And because the market hasn't had a chance to recover from the first wave, as those loans reset, they will probably become foreclosures.
Q: That leads to my second question. The July report was something of a mixed bag. Bank repos were up from the previous month, but new defaults seem to be tapering off. Is it too early to say we're nearing a plateau in new problem loans?
Sharga: I'm going to give you a qualified yes. What we appear to be seeing is fewer new delinquencies. And what that suggests is, ultimately an end of the pipeline of problem loans, so that the more recent loan vintages are performing more along the lines of what you would expect historically.
The reason I'm only giving you a qualified yes is because I think we may read too much into the lower levels of initial defaults. I think that's an artificial construct. What we're seeing is loans becoming more and more delinquent before they enter foreclosure, so we actually should be seeing more of those in the pipeline than we're currently seeing.
But I believe the banks are holding them out and basically letting them enter the foreclosure pipeline, as they believe they can sell them at the other end of the spectrum. And while we're seeing that, we're simultaneously seeing a rapid escalation of REOs. They're processing the loans that have been in foreclosure for a while, but they're slowing down the initiation of new foreclosures to manage the flow.
Q: The foreclosure-prevention programs have resulted in fewer loan modifications than some groups would like, of course, but it's been argued that one of the byproducts of the programs is that they slowed the flow of distressed properties into the marketplace. What are your thoughts on such programs' effects on limiting the downward pressure on home prices?
Sharga: I don't think you can attribute home-price stability to any of the loan modification programs we've seen so far. When [the Home Affordable Modification Program (HAMP)] was introduced, it was probably the most ambitious and well-thought-out program introduced to the marketplace to try to prevent foreclosures. And yet, when it's all said and done, it will probably only save about 10% of the homeowners from foreclosure that had been projected initially.
I think that speaks more to the complexity of the problem than to any inherent flaw in HAMP. What HAMP did do, inadvertently, was delay foreclosure proceedings on probably hundreds of thousands of loans, as the Treasury Department was pressuring servicers and lenders to re-evaluate their portfolios to see which loans might qualify for the program. What we've seen in terms of loans that enter the program has been – I think by any objective standard – pretty disappointing.
And, in fact, delays, in a certain sense, have caused a build-up of shadow inventory. Once you have a certain critical mass of distressed properties on the sidelines, you more or less have to keep them there and disperse them in a very managed way, because if you flood the market with these properties, you're going to have further price deterioration, which could lead to yet another wave of foreclosures and would put a lot of banks in a very precarious position from a capital standpoint.
Q: Breaking the RealtyTrac report down by region, we see that the markets that have been hit the hardest by the foreclosure crisis are still leading the way in terms of foreclosure notices. Were there any surprises, from your perspective, as far as geographic trends go?
Sharga: Sure. In a sense, definitely. If we had been having this conversation a year ago, I wouldn't have been talking about Boise, Idaho; or Provo, Utah; or Fayetteville, Ark.; or Charleston, S.C., and yet those are four metropolitan areas with significantly higher-than- average rates of foreclosures. What we're starting to see is a return to a pretty predictable way of figuring out where foreclosures are going to happen, because these foreclosures are based on unemployment.
Prior to 2006, you could almost go county by county across the country, and wherever you see higher-than-average levels of unemployment, you could pretty much guess that higher-than-average levels of foreclosure activity would follow. That rule of thumb went by the boards for the first wave of foreclosure problems that we had, but it's coming back right now. It's a little unusual at this point to be talking about Idaho and Utah and Illinois, but they've become very high foreclosure-activity states.
Q: RealtyTrac recently announced a partnership with Moody's Analytics. Can you fill me in on what the announcement means for RealtyTrac and for users of Moody's Analytics platform?
Sharga: I think that for us, it's the first of what we hope will be many partnerships in a growing part of our business, which is business-to-business data sales. There are an awful lot of organizations across the country that really need a reliable source of very granular, detailed foreclosure information as they go through their various forms of financial or economic analysis – whether they're builders or financial institutions or looking at general economic trends – and it's gratifying that someone with a reputation as strong as Moody's has selected us.
For Moody's customers, I think it means they now have a best-of-both-worlds scenario, where they have some of the highest-quality economic analyses available on the market from Moody's, which will be augmented by having what we believe is the most comprehensive foreclosure data available.