Property foreclosure freeze in US hasn’t helped

Widespread property foreclosure freezes that began late last year in the US in a bid to halt the dramatic rise of troubled defaults have had little effect and may even have made the real estate crisis worse, it is claimed.

A report from due diligence and surveillance specialist Clayton shows that halting foreclosures did little to improve the outlook for most troubled borrowers. Of the loans that the firm's analysts estimated would have otherwise had foreclosure sales completed during the freeze period, 93% remained in foreclosure or were moved into REO status by April among those servicers that implemented a widespread moratorium on foreclosure activity.

In comparison, those that did not implement a large scale freeze on foreclosures, some 89% of loans estimated to have progressed to foreclosure sale by the end of March either remained in foreclosure status or had been moved into REO.

The data also shows that among servicers implementing a moratorium, just 7% of borrowers facing imminent foreclosure were helped, either in the form of repayment plans, modifications, reinstatements, or short sales. That number actually grew to 11% among servicers that did not implement a foreclosure freeze — a result that is clearly at odds with reports in the popular press which have painted the freezes as a needed step to help troubled borrowers.

Industry experts point out that the real problem is negative equity, or borrowers who have seen the value of their homes drop precipitously in the most troubled housing markets. Negative equity puts borrowers into a precarious situation. Borrowers are over-leveraged, on homes, cars, and everything else, to begin with so halting foreclosures didn't solve the leverage problem.

'The moratorium or freeze has really ended up digging a deeper grave for many consumers, in the form of further arrearages and potential fees that get added to the mountain of debt that already must be repaid to bring a loan current,' said one executive.

Another executive, who runs a loss mitigation department at a subprime servicer and asked to remain anonymous, said many borrowers are simply beyond help. 'Say we've got a borrower that went 100% on a $500,000 home in California that's now worth $375,000 and the borrower loses their job and comes calling. Even if we forgive some of the debt, we can't solve long-term for a lack of income,' he explained.

Servicers also note that a troubling trend is emerging, where borrowers are increasingly refusing to consider repayment plans or offers for a loan modification, believing that Obama administration's modification plan guidelines entitle them to a larger payment reduction than what is actually possible.

They also hit out at the Obama administration and said that details of modification plans were slow to arrive, which hampered modification efforts during the moratorium period. The Clayton report confirms this. It said that many servicers said they 'were given minimal detail up front, and instead relied on their own loss mitigation and loan modification programs to review loans during the moratorium timeframe.'