A Better Way: Mortgage Foreclosures Are a Major Challenge for the Banking Industry; Bloated Property Inventories, Skyrocketing Costs, Crippled Liquidity Are Dragging Down Balance Sheets with No End in Sight
Rogers, Rick, Mortgage Banking
How bad is it? No need to spend a lot of time talking about that; you lenders know how bad it is. In November, the Federal Deposit Insurance Corporation (FDIC) labeled 171 institutions as "problem banks," meaning their viability is threatened. That's almost triple the designated 65 problem banks from one year earlier. * One of those banks, Pasadena, California--based Indymac Bancorp, failed while this article was being written. Also now in conservatorship are Fannie Mae and Freddie Mac. These two government-sponsored enterprises (GSEs) own or guarantee about half of all U.S. home mortgages, and their stock prices plunged more than 75 percent before the federal government had to step in and take control of both in September. The magnitude of the problem has not only depressed the banking industry, but has spilled over to depress the commercial real estate market, the U.S. economy and global credit markets. * According to the Mortgage Bankers Association's (MBA's) National Delinquency Survey (NDS) for the third quarter of 2008, the percent of loans that were classified as seriously delinquent reached 5.17 percent. That number is up 222 basis points from third-quarter 2007. The NDS report states: "Since the third quarter of 2007, the seriously delinquent rate increased 497 basis points for prime ARM [adjustable-rate mortgage] loans and 1,321 basis points for subprime ARM loans." * The NDS also found that the percentage of loans in the process of foreclosure set a new record in last year's third quarter. * In a press release announcing third-quarter results, MBA Chief Economist Jay Brinkmann noted, "In the last quarter we saw about 575,000 foreclosure actions started, compared with an estimated 580,000 in the second quarter and 535,000 in the first quarter. At this rate, we are looking at finishing 2008 at about 2.2 million foreclosure actions started. Absent a recession, the 2009 number would likely have fallen by several hundred thousand but the effects of job losses and general economic deterioration make the 2009 outlook worse, particularly if mortgage problems become more widespread."
Much attention has been focused on helping the affected mortgage borrowers, and rightly so. This article, however, is a "how-to" article for the benefit of lenders, outlining how to dramatically improve their performance in managing and selling foreclosed properties.
In response to the mortgage crisis, banks have changed lending practices and lobbied successfully for government assistance, but have taken few major steps to improve their foreclosure practices. This article is a call for such action.
Current industrywide practices are ineffective. Close scrutiny reveals much room for improvement. Such an effort could well save many banks currently headed for that growing "bank failure" list.
Weeks before Indymac's announced failure, I met with Cary Sternberg, its first vice president of home loan servicing and real estate-owned (REO) to discuss the foreclosure crisis. Sternberg is an industry veteran with a positive mental attitude. Asked about the depressed state of the real estate market, he said it was an exciting time for buyers. With home prices depressed and mortgage rates so low, many people could now buy the homes they always wanted but couldn't previously afford, he said.
Asked about Indymac's stock price, which was above $50 a share two years earlier and was then trading for pennies a share, Sternberg said it's a terrific buying opportunity, and if he were still in the market he would be buying all the Indymac stock he could get his hands on.
After talking to Sternberg for an hour, I was ready to "sell the farm" to buy Indymac stock. Fortunately, given the state of the real estate market, I was unable to sell the farm. More about Sternberg later.
Banking's biggest blunders
One can debate the cause of current conditions--e. …