New law may be reason why foreclosures down sharply

(Foreclosure Monitor is an effort by MHP to help public officials determine how best to use their resources to help homeowners and neighborhoods hard-hit by foreclosure).

By Tim Davis and Rus Lodi

BOSTON, May 31, 2013 --- A 2012 law that requires banks to notify borrowers of their rights to pursue a loan modification before foreclosing may be a factor in the precipitous drop in foreclosures in the first quarter of 2013.

Recent news reports trumpeted year-over-year drops in completed foreclosures (75 percent in March, 71 percent in the first quarter of 2013) as evidence that the foreclosure crisis is over. And while rising home sale prices provide hope that the state's housing market has turned a corner, the steep drop may have more to do with banks slowing down their foreclosure processing, which is similar to what happened in 2008 and 2010 when processing slowdowns by banks caused foreclosure rates to fall dramatically.

In August 2012, Gov. Deval Patrick signed into law "An Act Preventing Unlawful and Unnecessary Foreclosures." This law amended Chapter. 244, Sections 35B and 35C of the Massachusetts General Laws, and requires lenders to notify eligible borrowers of their rights to pursue a modified mortgage loan. The Attorney General's HomeCorps web page has a clear explanation of Ch. 244.

The law took effect on Nov. 1, 2012, but lenders have been slow to integrate this step into their foreclosure procedures, partly because of a delay by state banking regulators in finalizing standardized notification forms. As a result, many feel that the lenders have stopped or scaled back the initiation of foreclosures until proper procedures are established. This would be especially true among large lenders, who are more likely to be holding mortgages that require new affidavits and notices.

Banks 'recalibrating' foreclosure processes

An expert at one of the state agencies that monitors bank activities agreed that the slowdown may be due to loan servicers putting the brakes on the foreclosure process. "Since the mortgage modification law, banks are recalibrating their internal policies," said the source, who asked not to be identified.

Eloise Lawrence, a staff attorney at the Harvard Legal Aid Bureau who specializes in representing owners and tenants who are being evicted due to foreclosure, agrees. "The drop off is so dramatic that there is no way that this is just because the market's better," said Lawrence.

Lawrence said her load of eviction cases due to foreclosures is down by almost half from a year ago, a sure sign that foreclosures have slowed. But she said most of her active cases involve foreclosures that occurred in 2012.

"Banks aren't starting new foreclosures because they haven't figured out and finalized the form that tells people they have a right to modify under the new law," Lawrence said. "I haven't seen a (final form) yet, but I expect that once the banks iron out the details, the foreclosures and the resulting evictions will rise dramatically."

Jon Skarin, senior vice-president for legislative and regulatory policy at the Massachusetts Bankers Association acknowledges that a stronger real estate market may account for some of the drop in foreclosures but added that that the slowdown is "somewhat artificial."

"It's true that more people are being helped and maybe because of these efforts, the lender hasn't taken the final step of filing a foreclosure," said Skarin. "But I think in reality what you're seeing is a slowdown because big and small banks are digesting the (modification law). Banks are being cautious because they don't want to do something now and find out later that what they did was wrong because they used documents that weren't yet finalized."

Big banks digesting 'lots of stuff'

Lawrence, Skarin and other sources Foreclosure Monitor spoke to believe some of the state's smaller banks are doing foreclosures and are notifying borrowers of their right to modify but that bigger banks have slowed down their foreclosure processing. Recent statistics back this up: the number of foreclosure petitions filed by Wells Fargo, Bank of America, and JP Morgan Chase declined 85 percent from Feb. 2013 to March 2013.

More recently, the Los Angeles Times reported that Wells Fargo, JP Morgan Chase and CitiGroup had halted almost all of their foreclosures on May 6 to ensure that their procedures comply with revised minimum standards issued by the Office of the Comptroller of the Currency (OCC). JP Morgan Chase has since resumed foreclosing.

"The big banks are digesting a lot of stuff," said Skarin. "They are dealing with new rules from the (national) attorney general's settlement, the OCC and in Massachusetts, the modification law. Right now, everybody's being cautious. Once the final regulations are in place and the forms are finalized, foreclosure processing will speed up a bit."

Similar to processing slowdowns in 2008, 2010

Those who say the dip in foreclosures isn't just market driven have history on their side. Similar deep declines occurred from April to May 2008 (-88 percent) and Sept. to Oct. 2010 (-52 percent). In each case, foreclosure activity slowed due to legal and servicing conditions, not market improvements.

In 2008, a new state law instituted a 90-day period in which struggling homeowners could try to save their homes (known as a "right to cure" period). This created a temporary slow-down in foreclosure activity. In the fall of 2010, lenders/servicers slowed their foreclosure actions in response to the "robo-signing" scandal. Foreclosure activity then increased again in the spring of 2011.

The reason why the 2012 law is just now having an impact on foreclosure stats is because of the legally required "right to cure" period, which is now 150 days. That's why the slowdown in foreclosure petitions wasn't visible until March 2013.

Recent delinquency statistics are also sobering. According to data from the Mortgage Bankers Association, Massachusetts 90+ day mortgage delinquencies increased from 3.51 percent to 3.67 percent of outstanding mortgage loans from March 31, 2012 to March 31, 2013, and Massachusetts' delinquency rate was fifth highest among U.S. states.

The raw numbers on the MBA stats: There were 740,997 loans serviced as of March 31, 2013 in the state, with 27,194 90+ days past due. On March 31, 2012, there were 786,356 loans serviced, with 27,601 were 90+ past due.

As long as the foreclosure hangover is with us, Foreclosure Monitor will continue to use data to analyze where the trouble spots are so that policy makers can focus their resources where it's needed most. Earlier this year, Foreclosure Monitor altered its original format to focus more gateway communities, gateway community census tracts, City of Boston census tracts, and suburban/rural/higher-income urban communities. This is being done to give policy makers and local leaders a look at what areas are still struggling relative to the state as a whole.

Note that Foreclosure Monitor defines distressed properties as all those properties where a foreclosure petition has been filed or an auction scheduled in the previous year, or are bank held (up to two years).

Gateway cities continue to be hit hard

Massachusetts' 24 so-called gateway cities continue to suffer an inordinate amount of distress relative to the state as a whole. While these 24 communities represent just 25 percent of the state's housing units, they account for 39 percent of the state's foreclosure distress and have an overall distress rate that is 54 percent higher than the state's.

Brockton had the highest levels of foreclosure distress as of April 1, 2013, both among the gateway communities and all Massachusetts municipalities. Fitchburg had the second highest rate of distress among gateway communities, while Springfield, which was the second most distressed in January, has dropped to third place.

Gateway city census tracts show hot spots

Since the number of housing units in each gateway city can vary dramatically, it's useful to analyze distress by census tracts, which generally range from 1,000 to 3,000 units. This helps provide state and local leaders with a better idea of exactly where property distress and neighborhood destabilization may be occurring and where public resources and efforts like receivership and first-time homebuyer programs may have the most impact.

According to our analysis as of April 1, 2013, the 30 most distressed census tracts in the state's gateway cities were confined to just six cities. Twenty-eight of these tracts were among the state's 30 most distressed census tracts.

Among the facts this chart shows are:
-Brockton had the highest number of census tracts (12), up from 11 tracts the year before. Springfield contained seven of the top 30 tracts, down from eight in Apr. 2012.
-The biggest increase in distress was Springfield's tract 8005, where distress increased 30.3 percent since a year ago. Brockton's tract 5104 was next, with a 28.9 percent increase. The biggest decline in distress was in Lynn's tract 2063 (-29.8 percent).

Boston: Distress continues to decline; hot spots remain

The overall distress rate in Boston as of April 1, 2013 was 6.7 units per 1,000 housing units, below the statewide rate of 8.8 per 1,000 units. Since Jan. 1, 2013, Boston's distress rate has declined 6.9 percent, and, compared to a year ago, Boston's distress rate has declined by a healthy 18.3 percent. Despite this decline in distress, there are neighborhoods to watch, and Boston continues to have the largest number of units in foreclosure distress (1,825) than any other Massachusetts city.

Table 3 below provides detailed information on the 30 most distressed tracts in Boston. By planning district, the breakdown of these tracts by neighborhood was: nine tracts in Dorchester, eight tracts in Mattapan, five tracts each in Hyde Park and Roxbury, two in East Boston, and one in Roslindale.

Roxbury's tract 904 was the most distressed Boston tract in both Jan. and Apr. 2013, though it ranked 13th a year ago. Given the small size of a census tract, a small increase in the number of distressed properties can lead to a large increase in the distress rate. In addition to this tract, only Mattapan's 1011.02 is in the statewide list of top 30 distressed census tracts.

Distress in suburban/rural/higher-income urban communities

While the Foreclosure Monitor focuses on Massachusetts' most distressed urban neighborhoods, it is also important to note areas of distress elsewhere in the state, both in less urban areas (municipalities with a population of less than 35,000), and among Massachusetts' larger urban municipalities with higher median household incomes such as Arlington, Newton and Weymouth, Cambridge and Somerville.

Back in Oct. 2010, Foreclosure Monitor reported that for the first time, suburban/rural/higher-income urban communities had a higher percentage of the state's distressed units than the urban gateway communities and Boston (50.6 to 49.4 percent). That gap continued to widen slowly until July 2012, to 53.8-46.2 percent. Over the last nine months, the percent of the state's distressed units in suburban/rural/higher-income urban communities has remained stable, and were 53.7 percent of all distressed units in Massachusetts as of April 1, 2013, virtually unchanged from the 53.9 percent of distressed units as of Jan. 1, 2013.

Of these suburban/rural/higher-income urban municipalities, the 30 most distressed are presented in Table 4, below. Of these top 30 most distressed, 13 had an increase in distress from Apr. 1, 2012 to Apr. 1, 2013. Distress declined in 14 communities and remained unchanged in three communities. Overall, distress declined 2.2 percent in these communities, compared to a statewide decline of 10.4 percent.

Other trends in real estate, foreclosures

The following links are provided for readers to directly access regular sources of foreclosure and real estate trends:

• Foreclosure data: The Warren Group most recently released foreclosure data for the month of March 2013. The number of foreclosure deeds filed in March 2013 (227) was 75 percent lower than the 899 filed in March 2012. This year-over-year decline was the tenth straight month of year-over-year declines, and was the fifth month with less than 300 foreclosure deeds; before this time, Massachusetts has not had less than 300 foreclosures in a month since Dec. 2006. Foreclosure petitions (the first step in the legal process to complete a foreclosure) also declined from March 2012 to March 2013 (-67 percent). Nationally, foreclosure activity (as reported by RealtyTrac) declined 23 percent from March 2012 to March 2013, and is now at levels not seen since the second quarter of 2007.
• Real estate sales data: The Warren Group and the Massachusetts Association of Realtors (MAR) recently released their monthly real estate sales figures. The two use somewhat different data sets for analysis. The Warren Group reported a one percent decline in the number of single family sales from April 2012 to April 2013, but a 13.8 increase in median single family sales prices, while the Mass. Association of Realtors reported a 1.2 percent decline in single family sales and a 10.5 percent increase in median single family sales prices. Both report that the decline in sales is due to low inventories of for-sale properties. MAR reported an increase in listings during Apr. Increasing prices may be inducing some sellers who have been sitting on the sidelines to place their properties on the market, which could help to alleviate the current inventory shortage.
• The S&P Case-Schiller Price Index recently released its March 2013 data. Prices continue to rise nationally, at a 10.9 percent increase from March 2012 to March 2013, for its 20-city composite. Prices increased in all 20 cities, and prices increased 6.7 percent in Greater Boston, placing Boston 18th of the 20 cities measured. Only Cleveland (4.8 percent) and New York (2.6 percent) had smaller price increases. The biggest annual price increases were in Phoenix (22.5 percent) and San Francisco (22 percent). While Boston had a smaller increase in prices, many of the cities with the largest increases in prices are also cities that experienced the biggest decline in prices during the recession and still have a long way to do before they see the same prices as before the recession. For example, Boston prices (seasonally adjusted) are currently 11 percent lower than the market peak of Nov. 2005, but Las Vegas and Miami prices remain 54 percent and 44 percent lower, respectively, than their market peaks in the spring of 2006, despite double-digit price increases from March 2012 to March 2013.

(Tim Davis is an independent research consultant commissioned by MHP to do foreclosure analysis and the Foreclosure Monitor. Rus Lodi is the director of public affairs for MHP).