Magazine article Mortgage Banking

There's Got to Be a Better Way: Offering Seriously Delinquent Borrowers a Way to Avoid Foreclosure Is the Way of the Future. Early Results Show That Voluntary Pre-Foreclosure Property Auctions Are Netting Solid Values for Distressed Homeowners. They Can Also Save Lenders from Steep Foreclosure-Related Losses

Magazine article Mortgage Banking

There's Got to Be a Better Way: Offering Seriously Delinquent Borrowers a Way to Avoid Foreclosure Is the Way of the Future. Early Results Show That Voluntary Pre-Foreclosure Property Auctions Are Netting Solid Values for Distressed Homeowners. They Can Also Save Lenders from Steep Foreclosure-Related Losses

Article excerpt

In marketing circles there is a concept known as "brand exhaust." It's the idea that every business or industry, for all its good intentions, has residual and sometimes undesired output. Think of the film "Super Size Me" and how it relates to the negative results of eating fast food. For mortgage lending, the undesirable exhaust is clearly foreclosures. [??]. Since 1995, loan innovation as well as production simply exploded. From online application technology to historically low interest rates, no-down-payment programs to interest-only financing, the mortgage banking industry decreased the time and cost to finance property while simultaneously expanding the loan options available to practically every consumer. [??] Few can argue with the benefits achieved by the industry's pursuit of its core mission--to provide a more liquid and transparent finance system to serve the interests of mortgage investors and borrowers. This increase in liquidity has furthered the dream of homeownership for millions of families by making loans more affordable. The progress that's being made underlies an even larger vision for an "ownership society."

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One thing that hasn't changed is the time and cost involved in selling a home. While today anyone can sell stocks, autos or practically any other tangible property easily, directly, quickly and for less than ever before, real estate sales remain illiquid and costly.

As anyone who has bought or sold more than a few properties can attest, home sales are anything but time-definite, cost-efficient or transparent. Asking prices for most real estate are still set, and then the seller hopes for the "right" buyer. There is little open or competitive bidding, and actual current market values are often anyone's guess. The cost of this overall illiquidity becomes most painfully obvious when a homeowner can no longer afford to make his or her mortgage payments and faces default and possible foreclosure.

Based on the Mortgage Bankers Association's (MBA's) National Delinquency Survey for third-quarter 2005, released in December 2005, foreclosures have risen to more than 500,000 annually. While defaults as a percentage of all outstanding loans remain historically low, the tremendous growth in the number of mortgages has resulted in large numbers of foreclosed properties. To many, this is a shocking number of families who lose their homes each year, especially in light of the unprecedented appreciation in property values over the last decade.

No one wins in foreclosure. That is why today's lenders are adamant about trying to keep every borrower in his or her home if at all possible. They are keenly aware of the massive toll on human dignity and the financial loss that occurs. Cities, communities and even other property owners all suffer from the subsequent costs, depreciation and blight caused by vacant properties sitting for sale. This brand exhaust from mortgage lending is coming under increasing scrutiny from government and consumer advocates as servicers continue to go through the lengthy process of foreclosure and traditional real estate-owned (REO) sales.

While some of this might be unavoidable, in my view there is significant opportunity here for the lending industry to further lead in preserving property values, lowering costs and serving customers.

Why do foreclosures happen in the first place? As the chief executive officer of a top-10 lender recently noted, foreclosures happen "when someone is either unwilling or unable to pay." Those unwilling to pay are typically involved in some degree of fraud, whether for profit or property. Those unable to pay most often are those who have experienced a significant life event such as divorce, job loss or a health emergency.

As most of us can appreciate, people in these circumstances have a hard time seeing any hopeful options that might be out there. Even though many lenders offer options such as loan modifications, homeowners in severe financial distress still perceive correctly or otherwise that they simply can no longer afford the payments related to owning their property. …

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