REOMAC® TECHNOLOGY AND WELLNESS EXPO WRAP-UP

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EDITORIAL NOTE: Comments do not necessarily represent the opinions of <strong>REOMAC®</strong>, its officers, directors or committee chairs. A Partial Solution to our Housing Crisis By Lynn Effinger As a veteran of nearly four decades within the housing and mortgage default servicing industries, I have grown somnolent of hearing and reading the opinions of “experts” in print and other media who talk or write about the housing and mortgage industry crisis. While offering their solutions to “cure” it, almost none of them have actually worked within this important sector. Having served as Vice President-REO Manager for Great Western Bank, Washington Mutual Bank, and Citifinancial, as well as holding other key positions in the trenches of this important business for over 16 years, I believe I have a better perspective on how we might begin to resolve a major portion of the crisis. A great deal of angst has been created within the Obama Administration over the past three years by their trying to figure out how government can further “help” resolve the lingering housing crisis. To begin with, this position assumes that the government has helped much at all. As the saying goes, “assume nothing.” Like the dismal economy and dreadful jobs picture, the only common-sense solution to reverse the housing malaise and improve the unemployment situation, thus improving our overall economy, is for government to stop trying to help. As President Reagan so eloquently once said, “Government is not the solution to our problems, government is the problem.” It was government intervention and pressure on the lending community in the late 1970s, early 1990s, and thereafter that set up the housing bubble in the first place. Presidents Carter, Clinton and Bush-43 demanded that more and more Americans have access to the American Dream of home ownership, only to see lenders devise sub-prime loan programs that would ultimately hurt the very citizens (mostly citizens) who they ostensibly wished to help, turning their dreams into nightmares. As time marched on and the easy money policies caught on, there emerged enough greed by some within the lending, real estate, and investor communities to drive up demand for housing across the country. This in turn caused ever-higher demand and what appeared to be a shortage of available housing to satisfy this growing demand. The resulting increase in sales prices and perceived “equity” due to this demand fueled misguided, short-term decisions by many homeowners to refinance their homes, using them as quasi-ATMs. While not all homeowners were greedy in this continued on page 37 36 NOvEMbER / DEcEMbER 2011 REOMAC ® update tm
Opinion – continued from page 36 regard, many became real estate investors and they bought additional properties, which further exacerbated rising demand. As if that wasn’t enough, investment firms created mortgage-backed securities and derivatives on sub-prime mortgages that turned out to be mostly worthless, as these firms and their investors woke up to the reality of time-tested physics; what goes up, must come down. And don’t forget, Fannie and Freddie, backed by the government’s Triple-A Rating (oh, the good-old days), encouraged lenders to securitize subprime loans. The disastrous burst of the housing bubble was inevitable. Many of us in the mortgage default servicing industry predicted this calamity back in 2003 when the Bush Administration announced their plans to make home ownership more affordable to even more Americans while certain members of Congress gladly opened the floodgates for Fannie Mae and Freddie Mac to expand their reach far beyond what was prudent or even slightly resembled sound business judgment. We instinctively knew that these policies would create “REO heaven.” While none of this information is new, it is important to review how we got here to better understand how we must proceed to get ourselves out. And by “ourselves,” I specifically mean the private sector. The government has proven, once again, that they are not experienced enough nor even competent enough to solve this lingering, painful problem. Without solving it, there can be no real, rather than artificiallycreated, recovery in our overall economy. As the Obama Administration took over in 2009, recognizing that mortgage defaults and subsequent foreclosure activity was rising at a feverish pace, they decided in their infinite wisdom that foreclosure moratoria was the way to not only slow the drop in housing values, but the compassionate thing to do for homeowners who found themselves unable or unwilling to pay their mortgage payments. And, it is true that in almost every case it is more desirable to have homes occupied that are in default than have them become vacant. So the government, led by Treasury REOMAC ® update tm Secretary Tim Guitner, devised one of their perceived solutions in addition to the moratoria. The Home Affordable Modification Program, or HAMP, was born. This program was designed to slow the foreclosure process by requiring lenders and servicers (especially those who took bailout money from the TARP program), to offer borrowers loan modification programs to hopefully forestall or eliminate foreclosure proceedings. This program ultimately failed so miserably that Treasury introduced a new companion program called the Home Affordable Foreclosure Alternative program (HAFA) to ostensibly streamline the short sale process. You guessed it, another failure. Only the federal government would study a situation, form committees, focus groups, task forces, and blue-ribbon panels to develop programs supposedly designed to “help” Americans, only to discover that the programs don’t work ... then turn to each other and say, with a straight face, “Let’s do more of it.” Unfortunately, most lenders and servicers who were “encouraged” to offer borrowers these potential loan modifications were not prepared to handle the increasing volume of defaults that needed to be evaluated and put into the modification process. In addition, in truth, many large lenders who shall go nameless here, did not hire enough qualified people to staff up their modification units, nor did they train them well enough to be effective. The result was a rapidly growing backlog of defaults under consideration for modifications, very poor customer service, protracted foreclosure process time periods (numerous borrowers were able to remain in their homes for up to two years or longer while the process stumbled and staggered along, which is quadruple the normal time when pursuing foreclosure). As if that wasn’t bad enough, it was determined that many borrowers did not qualify for loan modifications for financial reasons. In addition, the recidivism rate on loans ultimately modified was a remarkable 70 percent and higher, which meant many loans were recycled back into the default/foreclosure process. Many times this occurred after the borrowers failed to make even the first payment under the modification agreement. And this doesn’t even take into consideration the rising tide of short sales and “strategic defaults." There is moral hazard involved with this that deserves closer scrutiny with respect to the increase in short sale activity; activity that in prior decades would not have been tolerated because of the contractual obligations of borrowers to their lenders. Bad government policies have spawned this situation and are exacerbating it. These factors, in addition to others, like banks not having to take right-downs as early in the foreclosure process as in previous eras, caused many lenders to hold off on foreclosure in order to keep these bad loans from becoming non-performing real estate assets that would negatively impact their bottom line on their balance sheets. Thus, the “shadow inventory” was born ... and continues to grow. The shadow inventory that began to grow in 2009 created a situation where there were more potential home buyers than there were available properties to purchase. This sparked an uptick in theoretical real estate values in many markets. On the surface it appeared to many real estate “experts” and supposedly learned economists that the bottom had been reached and we were now in recovery as prices slowly began to rise. And they felt confident in saying so publicly, despite their lack of hands-on experience in the trenches that would have clearly indicated that the fictional recovery was an illusion; an illusion that was created by government intervention into the private sector. Real estate professionals and asset managers knew better. There can be little doubt that had the private sector been left alone and normal cycles ruled the day we would have experienced a more painful, deeper recession. BUT, and this is a very BIG but, Fat Albert-sized in fact, we would have already entered a real, sustainable recovery in the housing market that would have jump-started the overall economy as it has so many times continued on page 38 NOvEMbER / DEcEMbER 2011 37
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