Mortage Insurers Could Help with Foreclosures

The latest delinquency survey from the Mortgage Bankers’ Association re-states the story that everyone has know for some time – that late payments and foreclosures are still high and that many of them are for prime loans made to borrowers that are now unemployed.

The New York Times read the report, which states the both delinquencies and foreclosures dropped by a matter of a few basis points, and concludes that “Foreclosures Fall, but Rise in Delinquencies Causes Some Concern.” True enough, there is a rise in delinquent loans relative to one year ago, but we’re off by 21 bps from last quarter.

More than a few people have told me that banks are putting off on putting loans into foreclosure. This could be attributed to a number of things. Most often, I hear that both outcomes of foreclosure are onerous. It takes a long time, and a lot of staffing, to work through a loan modification. It also takes a lot of time to buy a home and then sell it as an REO. Banks don’t want to own homes, and they would appear to feel equally adverse to permanent loan modifications.

A midwestern portfolio analyst believes that part of the problem is apital gains taxes. He says that the market expects that capital gains taxes will go up next year. All kinds of investors are trying to take gains before the end of the year. On the other hand, they’re can see that losses will be more valuable in the future. Acknowledging that accounting will expect banks to write down loans in non-accrual status, it still seems possible that anyone holding loans in the grey area will think twice. There is no “rush to foreclosure.”

A New Idea

The mortgage insurers are caught up in this as well. In an instance when they are insuring a loan that is going to go bad, they are looking at paying claims. They would not have to pay all of the outstanding debt, but they will still share in some of the losses. Mortgage insurers can still choose to buy a home rather than make the claim payment. That is an interesting possibility for a new actor to play a role in the foreclosure market, at least in markets where homes are not under water.

Consider this scenario: an MI company is facing a $30,000 claim on a home worth $10,000 and outstanding debt of $80,000. If the MI company buys the house for the outstanding debt, they’re still ahead $10,000.

Resale is tricky, but even then, the MI has an advantage. MI companies could throw in insurance on homes that they are trying to sell. If they sell that house for $80,000 and include mortgage insurance, a new lender can see that new buyer in a safer light.  It is the kind of thing that could work, particularly if it was done at scale, and if it could take advantage of non-profit organizations.

Who wins here:

• The consumer avoids foreclosure.
• The mortgage insurer saves money. Again, this idea only works when a homeowner has some equity, so it won’t appeal to a MI unless the home has retained some value. It probably won’t have appeal at all in Arizona, Michigan, or Nevada, but it could work in places like North Carolina and Vermont.
• The bank doesn’t have to sell a property through REO.
• Neighbors don’t feel as much collateral damage. The comp for the post-MI purchase sale is going to be higher than either the bank sale or the subsequent sale out of foreclosure.