[The BBQ Interview] Rick Sharga of Carrington Mortgage Holdings – “Why is REO Volume Down?”
Posted by Jonathan Miller - Wednesday, May 30, 2012, 3:24 PM
I was looking for guidance/insight on the issue of future REO volume because I had anticipated a faster pickup in REO volume once the state AG agreement was signed with the major servicers (ie being held back after robo signing scandal) but that is yet the case.
One of the most knowledgeable people in the business and a good friend (as well as an expert in the field of the BBQ) is Rick Sharga, Executive Vice President of Carrington Mortgage Holdings so I traded emails with him, compiled it and received a great overview of the topic:
Miller: Most pundits are looking at all the price metrics saying things are improving and inventory is low. To me it feels like there is an essential component not being factored in and that is foreclosure shadow. Am I overly concerned about it? I thought we were looking at several years of heavy volume. In fact S&P says 48 months of heavy REO volume.
Miller: But why is volume down?
Second, we’re (finally) starting to see some sales of non-performing loans (NPLs) by the major lenders; we’ve purchased two portfolios worth between $150-250 million in the last few months. Those sales at the very least delay REO actions while the notes are being transferred. Then, in cases such as ours where our mortgage servicing unit starts contacting the delinquent borrowers, a lot of loans are modified and taken out of foreclosure. Those that can’t be modified are typically offered the option of a short sale. So foreclosure actions actually are reduced by NPL sales.
Third, the long-awaited AG settlement has had a bit of an unintended consequence in this area. While we anticipated – and have seen – the return of foreclosure processing in some of the judicial states where the engines had seized up during the AG negotiations, we’ve also seen an unexpected drop in activity in the non-judicial states. Part of this is due to the terms of the settlement. The five largest servicers have agreed to write off about $20 billion in principal balance on their delinquent loans. A high percentage of these loans are in the Southwest, in non-judicial states like CA and NV. These states also had some of the largest price declines from peak to trough. The servicers have financial incentives to meet their $20 billion amount as quickly as possible (one servicer, for example, is believed to have a “dollar for dollar” incentive on anything it writes down this year). So, the quickest way to meet the write down requirement is to target delinquent loans in the Western non-judicial states. “Dual tracking” is now illegal. Therefore, it makes sense for the servicers to halt foreclosure actions on these properties and see if the borrowers qualify for the write downs. How big is this? BofA announced that it had already made offers to 200,000 borrowers. The huge drop off in REO activity in these states won’t be offset by increases in the judicial states; even though they’re starting to execute foreclosures again, it will take time to unclog the system in those states and get through the processes.
Finally, some of this is localized (Nevada has some new laws that make it difficult to execute a foreclosure without the original mortgage note); and some of it is due to pending Federal programs (HAMP Tier 2 is scheduled to launch next month, which will require servicers to see which of their previously un-modified loans will qualify for the latest government program).
Miller: What about that shadow inventory we’ve all been hearing about, and the several million seriously delinquent loans not yet in foreclosure?
Miller: This is very helpful, thanks. Another important topic of the day is BBQing. Any sage advice for a novice?
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