Massachusetts Foreclosure Trend Report by the Division of Banks (DOB)

A new report from the Massachusetts Division of Banks (DOB) shows that the state’s new 150-day right-to-cure law helped send foreclosure petitions plummeting last year – but it’s less clear how it’s impacting foreclosure timelines. 

The new law, which passed in early August 2010, extended the “right to cure” period which is the the time between when a lender notifies homeowner of its intent to foreclosure and when it actually does so – from 90 days to 150 days. The report states that foreclosure petitions, the first step in the foreclosure process, dropped from 487 in July 2010 to 153 in August 2010, and didn’t exceed 100 per month for the rest of the year.

DOB Deputy commission Mayte Rivera is unrealistic at best when saying the extended petition period “is helping consumers have more time to catch up, and gives them an opportunity to modify the loan. It’s good to see that there’s an effort on the lending side and the servicer’s side to work with the borrowers.”  

Such a large decline might not have been expected, since the law contained a provision allowing lenders to foreclose in 90 days if they could show they made a good-faith effort to contact the borrower and modify the loan. It was hoped this might encourage modifications.

But lenders often haven’t used that provision, opting instead to simply wait out the 150 days, according to bankers and regulators.

“Banks were required to file an affidavit that might expose them to liability, and they were reluctant to take that step,” said Kevin Kiley, chief operating officer for the Massachusetts Bankers Association. “Notwithstanding that, I think banks are reaching out aggressively to borrowers to help keep them in their homes. It’s in the borrower’s interest and the lender’s interest to keep the loan current and to keep people in their homes.”

Consumer advocates agreed that simply having more time to get a modification done is a benefit to homeowners.  To a degree that may be true, but most lenders take considerably longer that 150 days to review a mortgagor for a modification.

“Going from 90 [days] to 150 allows more time for homeowners to fix their mortgages, which is a good thing, and there’s nothing in this report which contradicts that,” said Aaron Gornstein, executive director of the Citizen’s Housing and Planning Association (CHAPA). The fact that banks weren’t taking advantage of the law’s incentives to reduce the timeline, he said, “doesn’t mean the law isn’t working.”  It also doesn't mean it is working.

Effect of the Robo Signing Scandel

I disagree with Deputy Commissioner Rivera and I question how much the new law has contributed to the drop.  Initially it makes sense that their would be a large drop, but once the initial time lag had passed, it would seem the the banks would be back on the same schedule.  I believe that the largest factor contributing to the drop was the nationwide robo-signing scandal, which caused several large national banks to stop issuing foreclosures last fall.  They have begun to realize that they must have their paperwork in order BEFORE they start the foreclosure process, thanks to some landmark cases such as the Ibanez case in Massachusetts. A potentially influential ruling issued by the U.S. District Court in Boston this week both endorsed the Mortgage Electronic Registration System (MERS) while at the same time supported the notion that in order to properly foreclose the lender or its servicers MUST POSSESS both the mortgage and the note.  The question remains as to whether the Supreme Judicial Court will agree with him in its upcoming ruling in Eaton vs Fannie Mae.  

A Long Process

Other data in the report suggests that the banks’ own slowness in disposing of distressed properties may mean that most foreclosures had been taking far more than 150 days to work through in any case and that the new law isn't likely having any further impact. 

To begin with, in the vast majority of cases lenders wait months before beginning foreclosure proceedings in the first place. Loans delinquent between two and five months accounted for 63.3 percent of the notifications sent in 2010, with an additional 31.4 percent more than five months behind before the lender sent a right to cure notice, according to the report.

And the time between the bank notifying the homeowner of its intent to foreclose and actually foreclosing is stretching out, too. Prior to the passage of the 150-day law last summer, lenders could begin foreclosure proceedings 90 days after notifying the homeowner, meaning that a notification issued at the beginning of May could have resulted in a petition being filed by the end of July. Even taking into account the adoption of the law, any notifications made in the first half of the year could have resulted in a petition by its end.

But data in the report shows that 11,922 petitions filed in 2010 – 53.7 percent of the total – dealt with properties whose owners had been notified in 2009 of a possible foreclosure. A further 3,947 petitions filed last year were for properties whose owners had been notified in 2007 and 2008.

Such lengthy timelines may, in part, reflect owners who had caught up for a period and then re-defaulted, or lenders re-foreclosing on properties which had had their titles clouded by the Ibanez decision, said Kiley.

Stuck In The Middle

The report also shows that middle-income homeowners are the most impacted by the foreclosure crisis, with loan amounts between $150,000 and $300,000 representing the majority of those eventually transferred into the foreclosure process.

Worcester County had the largest number of notices sent in 2010, with 1,155 – 17.4 percent of the total. It also had the largest number of foreclosure sales, with 1,737. Worcester County makes up only 12 percent of the state’s population, according to U.S. Census figures.

Eight communities – Boston, Worcester, Brockton, Lynn, Lowell, Lawrence, Plymouth, and Fitchburg – account for almost one quarter of the state’s foreclosure notices, with a combined total of 1,545, or 23 percent.

To those looking for a bright spot, those numbers do provide encouragement that the regulatory agency is aiming its efforts at helping homeowners at the right places, Rivera said.

“It’s consistent with where we’ve focused a lot of our attention statewide, with foreclosure counseling,” she said. “The division is really focusing with our foreclosure assistance services on helping those communities.”

Nearly two-thirds, or 64.2 percent, of last year’s foreclosure notices were for fixed-rate loans, while 30.9 percent were for adjustable-rate mortgages. More than 66 percent of the loans had interest rates higher than 6 percent.