Rising home prices have been a boon to many homeowners but may not bode as well for those who are facing foreclosure. Black Knight Financial Services' Mortgage Monitor this month takes a look at how liquidation strategies for properties facing foreclosure can affect the recovery on principal made by lenders. They found that foreclosure and sale of the resulting REO may provide a higher recovery of the unpaid principal balance (UPB) than short sales, a reversal from just a few years ago.
Using its newly developed Resolution Module the company looked at three methods of liquidation, a sale to a third party at foreclosure auction which consistently results in a fully paid mortgage, short sales in which the lender agrees to take proceeds of the property sale which is, by definition, less than the UPB, in full settlement of the debt, and a foreclosure and subsequent sale of the REO.
First Black Knight found that, beginning in October 2012, about six months after home prices bottomed out, lenders began to recover a larger percentage of UPB from foreclosure and resale than through a short sale. Recovery on an REO now averages 71 percent of UPB while short sales recover from a REO 65 percent.
Trey Barnes, Black Knight's senior vice president of Loan Data Products notes that, "Of course, REO sales have additional timelines and associated costs that impact total losses and are not accounted for in this analysis. That said, on average, REO properties are selling for 71 percent of the corresponding loans' defaulted UPB, as compared to just 65 percent for short sales. Both recovery rates pale in comparison to third-party sales at foreclosure auction, however, where average gross sales price is 116 percent of UPB."
Barnes said, "We also saw clear separation in terms of gross UPB recovery by investor groups. REO sales on GSE loans gross a significantly higher percentage of UPB than do FHA and private/portfolio loans. GSE loans are currently averaging 75 percent gross UPB recovery through REO, whereas FHA loans see just 65 percent. Portfolio and private loans land in the middle, with gross recovery of 70 percent of UPB. In addition, REO timelines on GSE loans are shorter than both FHA and private/portfolio, averaging just 11.5 months to complete liquidation. Given the additional carrying costs lenders face while holding REO properties, the longer timelines associated with FHA and private/portfolio loans can add up."
Black Knight looked at this data for the states that have had the highest numbers of delinquent loans and foreclosures and found that, while recoveries as a percentage of UPB varied over a 30 percentage point range depending on location and recovery method, the higher recovery for REO sales held true almost universally. The exception was Ohio which also ranked near or at the bottom for recoveries using either method.
So, with short sales not the least likely to provide full recovery to the lender, will distressed homeowners now have no choice but to go through the lengthy foreclosure process? We have noted from other reported data that, while sales of distressed properties overall have steadily diminishing share of home sales, short sales generally rank below sales of REO.
Black Knight also revisited, as it does regularly, monthly mortgage prepayment rates which are tied closely to refinancing and found a 25 percent increase over November. This was the largest increase in prepayments since February 2009 and was 28.4 percent higher than in December 2013. The gain was particularly pronounced among loans with credit scores over 720 which increased by 30 percent, newer loans, and those held in portfolio which went up by 40 percent. Most curious was the increase of 38 percent among loans originated in 2014.
The Monitor's monthly review of performance metrics noted a decline of 7.21 percent in the national delinquency rate since November to 5.64 percent of all homes with a mortgage. The rate has dropped by 12.72 percent since December 2013. There were 2.87 million loans that were 30 days or more past due but not yet in foreclosure in December, down 220,000 from November and 375,000 from one year earlier. Of those 1.13 million were seriously delinquent (90 days or more) but not yet in foreclosure, a decrease of 31,000 from November and 148,000 from a year earlier.
The pre-sale inventory, the number of mortgages for which foreclosures have commenced, fell by 9,000 from November to a total of 820,000, 1.61 percent of all mortgages. The inventory in December of 2013 numbered approximately 1.24 million loans.
There were 89,400 foreclosure starts in December, an increase of 20.97 percent month over month but down 14.69 percent compared to one year earlier.
Black Knight found that 53 percent of the mortgages that become 30 days past due in November cured in December. An additional 32 percent remained at 30 days while 13 percent rolled into the 60-day bucket. This cure rate was about 5 percentage points higher than the average of the previous several months while the roll into greater delinquency was 2 to 4 points lower.
Finally the Monitor updated the situation with home equity lines of credit (HELOCs), a concern to lenders and regulators as large numbers approach their end-of-draw (EOD) period and begin to amortize. This will likely result in significant upticks in monthly payments. As the chart below shows, only 20 percent of active HELOCs have begun to amortize with by far the largest numbers of loans reaching that EOD period this year and the two years that follow. These loans are also those with the highest incidence of negative equity which overall affects 17 percent of HELOCs.
Historical data shows a jump in delinquencies as each year's vintage of HELOCs have reached EOD. Delinquency rates tend to level off some months after the loans enter the amortization period, however they do remain elevated. The 2004 vintage, most of which reached EOD last year, has higher rates of delinquency compared to earlier years, however that vintage of loan generally has higher delinquency rates at the 10 year mark.
