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Foreclosure activity is falling as the government encourages servicers to pursue other options
The Federal Government has taken numerous steps to reduce foreclosures, starting with loan modification programs and also encouraging servicers to pursue other means of dealing with a delinquent borrower. The loan servicer handles the day-to-day management of the loan pool for the ultimate investor. The servicer is responsible for collecting mortgage payments, forwarding the interest and principal to MBS holders, and handling delinquent borrowers.
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There has been a bit of a conflict between the government, the servicer, and the investor. The servicer is supposed to work for the investor and act in the investor’s best interest. What happened, especially early in the decline, was that the government instructed servicers to modify loans instead of foreclosing, telling them it was in the lender’s best interest to do so. Given that most of these modified loans quickly re-defaulted, it was definitely not in the lender’s best interest to hold on to defaulting loans when collateral values were falling.
The most common alternative is the short sale, where the homeowner sells the property for less than the outstanding mortgage and the remaining debt is forgiven. The other type of disposition is called deed in lieu, where the lender offers the borrower money in exchange for the keys. Foreclosures aren’t cheap, and the lender would like to skip the foreclosure process if at all possible.
Foreclosure completions have been steadily declining for a year now, and finished in June at 54,000. This is a 27% decline from a year ago and up slightly from the May number, 54% lower than the peak in 2010. The states with the highest foreclosure percentages are judicial states, like Florida, New Jersey, and New York. Non-judicial states, like California and Arizona, have largely worked through their foreclosure pipelines. This explains the disparity in home price appreciation by geographic area. The inventory of foreclosed properties fell by 29% from a year ago to 1.0 million homes.
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