Are Lenders Deliberately Stalling on Foreclosures?

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

I was enjoying a nice lunch with some friendly title company representatives and we were talking about foreclosure numbers and the massive build-up of the “NOD [Notice of Default] list” that title companies prepare for lenders each and every week. A few years ago the “NOD list” in Orange County was maybe one or two homes a week, and sometimes you wouldn’t see a new NOD listing for a month. No longer the case – the NOD list has been growing as foreclosures have doubled year-over-year.

As we were talking about the NOD list we started trading some stories about people we know that are in foreclosure (and there are a lot of folks in the mortgage and real estate industries who drank the kool aid and bought at the top – who now can’t make their house payment) who are going on 6 months with out making a mortgage payment and are NOT getting their Notice of Defaults.

Typically Notice of Defaults are issued between 90 and 120 days. After 3 missed payments when a fourth payment goes by unpaid the NOD is quick to follow. But in our clearly non-scientific survey, we were amazed at the number of people who were in their homes for 6 or more months, living for free, with out receiving the Notice of Default from their lender.

The easy answer is that with foreclosures doubling over the last two years lenders are simply overwhelmed by the sheer number of NOD’s they must process to begin the foreclosure process. No doubt, the only safe jobs in mortgage companies these days are in the loss mitigation and REO (Real Estate Owned) departments; and they are hiring there almost as fast as they are firing on the origination side.

The more interesting answer is that REO properties and Notice of Default filings are public information and bad publicity for mortgage lenders. Not just from a “I can’t believe the evil mortgage company is taking people’s homes” publicity angle but from the “We need to keep our portfolio default percentage low to keep our stock price up” angle. Is this too much of a conspiracy for you to swallow? Maybe so. But we know that each REO property on the lender’s books does two things: 1. it hurts their loan portfolio performance which threatens further downgrades from ratings agencies and 2. comes back on the company balance sheet, potentially requiring an increase in their loan loss reserve (and a drop in liquidity).

In the reactionary market that we have had in recent weeks news of downgrades or increases in loan loss provisions have sent plenty of mortgage stocks tumbling. It is not inconceivable that mortgage companies have decided to take a laggard approach to filing and reporting notice of defaults and taking on REO property to mitigate the losses commensurate with those filings.

What do you think? Too unlikely a scenario or just about right?