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 H. Davis
BOSTON, February 10, 2011 --- In the fall of 2010, the so-called "robo-signing" scandal broke. Lenders and servicers had signed thousands of legal documents with little attention to details and legal requirements. In response, lenders slowed foreclosure activity to a near standstill, and all 50 state attorneys general have opened a coordinated investigation. As a result, foreclosure activity has fallen, if only temporarily, while lenders re-examine their procedures. The entire real estate industry is left wondering if thousands of foreclosures will be thrown into doubt, creating a paperwork nightmare and making title insurance scarce. In Massachusetts, this question has been further complicated by the January 2011 ruling by the state's Supreme Judicial Court (known as the "Ibanez decision"), invalidating two foreclosures.
Just how many foreclosures are at risk? In a January 14th Boston Globe op-ed, Paul McMorrow used a sample of mortgages to suggest that all 44,000 Massachusetts foreclosures from 2006 to 2010 are, "suddenly subject to new scrutiny." Yes, all 44,000 should be scrutinized, but the problems with these foreclosures vary due to state foreclosure requirements, the date of the foreclosure and the type of lender/servicer.
Massachusetts Foreclosure Requirements: At the height of the robo-signing controversy, lenders such as Bank of America halted their foreclosure activity in the 23 states with a judicial foreclosure process, and then in all states. According to David Grossman, Managing Attorney and Faculty Director at the Harvard Legal Aid Bureau, "The problem of robo-signing is largely tied to the signing of affidavits needed for judicial foreclosure proceedings. As Massachusetts does not have judicial foreclosure proceedings, robo-signing does not have the same implications as it does in 23 other states, although negligently and even fraudulently signed documents appear to be prevalent in Massachusetts foreclosures as well." In other words, the problem may not be as significant in Massachusetts as in some other states.
The Date of Foreclosure: More important is the date of the foreclosure. While the Supreme Judicial Court's Ibanez decision was made on January 7, 2011, the initial ruling in Land Court on this case was made on March 26, 1999. The Ibanez case centers on the fact that when a mortgage is securitized and sold, ownership may change hands many times. In each case, a mortgage assignment should be filed with the Registry of Deeds to confirm the owner of the mortgage. Responding to the 1999 Ibanez ruling, Massachusetts attorneys representing mortgage lenders/servicers have stepped up efforts to insure that the necessary assignments have been filed before foreclosure proceedings begin. This effort has also included properties where foreclosure proceedings had already begun. According to an MHP analysis of distressed property data, new foreclosure petitions were filed on 5,319 properties from 4/1/2009 to 1/1/2011 where a petition had already been filed. While 17 of these properties were bank-owned, the remainder of these restarts was on properties where the foreclosure had not been completed. For this reason, foreclosures completed after the March 1999 Ibanez decision are less likely to be in question, and the Patrick administration has put forth proposed regulatory and legislative changes that will clarify and clean up the assignment process going forward. We should be most concerned about the foreclosures completed before the initial Ibanez ruling, as there is no evidence that lenders have put forth the effort to clean-up all but a hand full of earlier foreclosures, numbering 25,979 in Massachusetts from January 2006 through March 2009.
Lender Type: Mortgages held by local banks (known as "portfolio loans") are most likely to have the cleanest foreclosure process, but given that the earliest foreclosures were rooted in the sub-prime lending crises, the paperwork problems will haunt the bulk of foreclosure. In addition, while it may be presumed that foreclosures involving Fannie Mae (FNMA), Freddie Mac (FHLM) and the Federal Housing Administration (FHA) may also be cleaner, it is not clear that the problem with assignments does not extend to Fannie and Freddie, where mortgages are also securitized. Taking a look at bank-owner properties at the time of the 1999 Ibanez ruling (April 1, 2009), 2 percent clearly had FHA involvement (HUD was involved in the foreclosure), and 12.6 percent had Fannie Mae or Freddie Mac involvement. Of the remaining 85.4 percent, it is unclear how many of these properties were portfolio loans, and how many had been securitized, and are therefore at risk under the Ibanez decision.
Foreclosures likely to exceed 2010 number in 2011
The Warren Group recently announced that there were 12,233 foreclosure deeds (completed foreclosures) in Massachusetts during 2010, a 32 percent increase from 2009, and only 1.6 percent fewer than the record set in 2008. How many foreclosure deeds can we expect to see in 2011? From the distressed property data, it is difficult to estimate the exact number of foreclosure deeds, but it is easier to estimate the number of properties lost to a combination of foreclosure deeds and short sales. First of all, the time it takes to complete a foreclosure is long. For example, of the distressed properties resolved by a short sale or a foreclosure deed during Q4 2010, the median number of days between the filing of the initial foreclosure petition and the resolution of the foreclosure was 235 days. In this regard, an estimate can be based on the number of properties already in the foreclosure process. Of petitions filed during 2009, 48 percent (13,405) were resolved in 2010 with the homeowner losing the property, either through a foreclosure deed or a short sale. An additional 37 percent (10,341) were still in the foreclosure process. If 48 percent of these remaining properties from 2009 and the new petitions filed in 2010 (23,933) result in a foreclosure or a short sale, 15,890 homeowners would lose their homes in 2011.
In addition, the pipeline for future foreclosures is deep (also known as "shadow inventory"). The Federal Reserve Bank of New York recently released October 2010 mortgage delinquency data. For Massachusetts, the Fed identified 29,178 90+ day mortgage delinquencies. Given the data coverage available to the Fed, the number of delinquent loans ranges from 47,000 to almost 57,000 loans. The good news is that the number of delinquent mortgages declined 8 percent from July 2010 to October 2010.
Community snapshot: Distressed properties down in urban areas, up in Worcester County towns
Each quarter, the Foreclosure Monitor takes the foreclosure temperature in Massachusetts communities. The November 2010 edition of the Foreclosure Monitor highlighted the long term trend from urban to rural and suburban communities. This trend continued from October 2010 to January 2011, as the number of distressed units outside of Massachusetts' 24 Gateway cities and Boston increased from 51 to 52 percent. A look at distressed properties by community also illustrates this suburban/rural shift. For the first time since the April 2010 Foreclosure Monitor, Brockton has dropped from the top spot in our table of the municipalities with the most distressed units. There was a 25 percent decline in distressed units in Brockton from January 1, 2010 to January 1, 2011. Of the top 20 municipalities, Chelsea and Fitchburg both had similar declines in distress (-25 to -26 percent), distress declined 28 percent in Springfield, 37 percent in Lynn and 43 percent in Lawrence. Among the these 20 municipalities, distress increased only in a handful of Worcester Country towns, including Winchendon (2 percent), Barre (20 percent), Warren (27 percent) Blackstone (27 percent) and Ashburnham (37 percent). Winchendon ranked as the most distressed as of January 1, 2011, up from eighth the year before. Of the municipalities ranked as the most distressed in January 2010, Marlborough has improved its position the most, falling from 18th in January 2010 to 71st in January 2011, with a 37 decline in the number of distressed units. Of all municipalities with at least 1,000 housing units, Cambridge had the lowest rate of distress, at 1.5 units per thousand.
Ten of the top 20 communities are located in Worcester County. While a small number of properties can account for large changes in these smaller communities, the pattern of continued distress across Worcester County is a cause for concern that has been further explored recently by the Boston Globe.
Tracking distress by zip code highlights shift to rural areas as well as continued urban distress
Continuing the trend away from urban areas to more suburban and rural areas, as of January 1, 2011, 12 of the top 20 distressed zip codes were in dense, urban areas, compared to 17 in January 2010. While nine of these zip codes are in Worcester Country, three of these are urban areas in Worcester. In addition, Boston has a citywide rate of distress of 10.6 units per thousand housing units, but two zip codes in the Boston's Dorchester neighborhood exceed 25 units/thousand (02122 and 02124). There was a decline in distress in 16 of these zip codes, led by a 41 percent decline in Springfield's 01108, contributing to its movement from 2nd most distressed to 10th. Of the four zip codes with an increase in distress, Ashburnham's 01430 had the largest increase, of 37 percent.
Census tract analysis notes improvement in Springfield
While the number of housing units in a zip code can range from dozens to more than 20,000, the number of units in a census tract generally ranges from a 1,000 to 3,000, providing a smaller area for analysis.
At the census tract level, all of the 20 most distressed census tracts are in dense, urban areas. Boston tracts in Dorchester and Roxbury occupy five of the top 20 tracts, including the most distressed census tract in the state, Roxbury's 090400. Both Lynn and Worcester contain four of the 20 most distressed census tracts, with three in Brockton, two in Springfield (down from four tracts a year ago), and one each in Lawrence (down from three tracts a year ago) and New Bedford. From one year ago, there has been an increase in distress in 11 of the tracts, declines in eight and one tract has held steady. This mixed outcome highlights that while some of the hardest hit neighborhoods are improving, deterioration continues in other urban neighborhoods.
What does this mean for policy makers?
The current slow-down in foreclosures is only a pause in the action, and foreclosure activity will resume as lenders clean-up their foreclosure paperwork process. This pause may give some homeowners some breathing room, but thousands more Massachusetts homeowners are destined to lose their homes. As outlined in the last Foreclosure Monitor, policy makers should focus on efforts that help homeowners in economic stress, regardless of where they live, as well as the urban communities with the largest concentration of foreclosures.
For more information: Links to foreclosure and real estate trends (has been updated)
The following links are provided for readers to directly access regular sources of foreclosure and real estate trends, some of which are mentioned in the proceeding analysis:
Foreclosure data: The Warren Group released Dec. 2010 foreclosure deed and petition data for Massachusetts, showing a 44 percent decline in the number of foreclosure deeds over Dec. 2009 and a 43 percent decline in the number of foreclosure petitions. While promising news, much of this decline is likely due to the increase of the wait-time between default and the filing of a foreclosure petition from 90 days to 150 days (passed by the Massachusetts legislature in August, 2010), as well as a general slow-down in the foreclosure process due to Massachusetts legal rulings and questions raised about lenders' paperwork. The question about paperwork is a national problem, reflected in RealtyTrac's report that foreclosure activity declined 14 percent nationally from November 2009 to November 2010.
Real estate sales data: At the end of December, The Warren Group and the Massachusetts Association of Realtors (MAR) reported a 30 to 32 percent decline in single-family sales volumes and a healthy five to seven percent increase in median sales prices from Nov. 2009 to Nov. 2010. The drop in volume can be tied in part to the late 2009 rush to access the federal first-time homebuyer credit, clouding our ability to understand the true market trends. S&P/Case-Schiller Price Index shows that housing markets across the country are weak, with only four cities of the 20 measured seeing an increase in home prices from Oct. 2009 to Oct. 2010. These cities include three California cities recovering from very deep price drops, as well as Washington, DC. Of the remaining 16 cities, Boston had the smallest price decline, 0.2 percent.