Banks' REO Inventories Down by 17%

Banks held about 476,000 homes that they repossessed from delinquent mortgage borrowers as of the end of July, according to Barclays Capital. That tally represents a 17 percent contraction from 574,000 REOs on the books just 10 months earlier, in September of 2010, just as the robo-signing scandal began grabbing headlines. At the same time, the research firm estimates there were 1.57 million home loans 90-plus days delinquent but not yet in foreclosure at the end of July of this year, and another 1.91 million already in the foreclosure process. Barclays says the rise in processing times has been driven almost entirely by the time that loans spend in delinquency and foreclosure. The average period that loans spend in REO has risen only modestly since 2007, suggesting that any lengthening in disposition timelines has been a function of weaker demand for homes than of processing delays, Barclays explained. While processing timeframes have been trending up since 2007 as a result of the industry’s modification efforts and the deluge of delinquent loans, the research firm notes that timelines increased even more dramatically once mortgage documentation issues were uncovered in late 2010. According to Barclays’ analysis, the average number of months a loan has spent in foreclosure has climbed from around 10 months just before October 2010 to more than 12 months today. The firm’s analysts point out that whether a loan is located in a judicial or non-judicial state has a “considerable impact” on the amount of time the loan is likely to remain in the foreclosure process. Still, even within the judicial state population, loans in certain areas are showing much longer processing delays. For example, Barclays’ research shows that among the judicial foreclosure states, New York, New Jersey, and Florida all display longer-than-average foreclosure delays, with defaulted borrowers in New York currently remaining in the foreclosure bucket for an average of around 17 months. Although most non-judicial states process foreclosures relatively quickly because servicers are not required to obtain court approval before re-possessing delinquent properties, Barclays says even here, there is significant variation in processing times. The company’s report points to Massachusetts and Washington, D.C. as exhibiting extended processing delays. In particular, subprime loans in Massachusetts currently remain in the foreclosure bucket for an average of over 10 months. Barclays also found that servicers are more likely to offer loan modifications in traditionally slow foreclosure states, and empirical evidence indicates that servicers are a little more generous in their loan modification terms in slow foreclosure states. The company says debt forgiveness modifications have historically been slightly more prevalent in states where the foreclosure timeline has extended. “We found that 4-5 percent of loan modifications executed in slow foreclosure states in 2011 have involved some level of principal forgiveness, compared with 2-3 percent in fast foreclosure states,” Barclays said in its report. Barclays notes that another external factor that has historically driven processing delays on delinquent loans has been the servicer managing the loan. The company’s analysis shows that Ocwen and Wells Fargo have experienced a much more modest rise in their processing times relative to other servicers, particularly when it comes to servicing subprime and Alt-A loans. Barclays says it is also notable that prior to 2008, there was very little difference in foreclosure processing times between servicers as fewer distressed loans needed to be serviced. “With the large number of borrowers that have become delinquent in the past few years, some servicers have likely been overwhelmed with the volume of problem loans they have had to manage,” according to the research firm’s analysts. Although timelines have significantly increased for all states and sectors, Barclays says some servicers appear to have implemented improvements to their foreclosure processes recently. Notably, loans serviced by Countrywide and Citigroup have recently shown a pickup in delinquency to foreclosure roll rates, according to Barclays. “Although there may be a lag in the timing of when different servicers and states start to see improvements in timeline rolls, we hope to see further improvements from other servicers in the coming months,” the research firm said.