The government-sponsored enterprise notified servicers Tuesday that it will begin monitoring them to determine why there are delays in moving delinquent loans into foreclosure. If servicers cannot properly account for the holdups, it will perform on-site reviews and assess fees to give servicers “a financial incentive to comply with Fannie Mae policies and improve the overall quality of their performance.”
All year, the so-called shadow inventory of home loans that are delinquent but not yet in foreclosure has been growing. The buildup has been widely interpreted as a sign that banks and servicers are intentionally delaying foreclosures, in part to avoid taking losses on loans that they hold.
About 2.9 million homes have been repossessed by banks or are in the foreclosure process, according to Lender Processing Services. But 4.5 million borrowers are at least 30 days delinquent on their mortgage.
With the economic recovery stalled and housing prices expected to fall further, Fannie appears to be making the first move.
“This is a shot across the bow that servicers have to start paying attention,” said Kevin Kanouff, a founder of Statebridge Co., a Denver special servicer. “Now they’re going to put their feet to the fire and expect to move these loans along as opposed to throwing them in a program and just collecting the fees.”
Holding servicers accountable for unwarranted delays is not a new concept, Fannie spokeswoman Janis Smith said. The potential for such fines has long been in Fannie’s servicing guide.
But delays have been commonplace in the past few years because of federal, state and industry efforts to facilitate modifications and other foreclosure alternatives.
While Fannie said legitimate efforts to work out such arrangements as well as unavoidable delays will not be punished, the timing of the guidance suggests the GSE believes the process has grown unaccountably sluggish.
“I think it’s fair to say that considering the volume of delinquency activity, and the volume of loans at some stages of this process, it was appropriate to issue this reminder,” Smith said.
The Federal Housing Finance Agency, Fannie’s conservator, would not discuss the issue.
Fannie’s inventory of repossessed homes doubled from a year earlier to 129,310 properties at the end of the second quarter. The assets had a carrying value of $13 billion.
Repossessing a property can be expensive for a servicer, because it then must front property taxes and maintenance expenses until the home is disposed of. Homeowner association dues, grass-cutting and winterizing can run an average of $6,000 a month while a property sits on the market waiting to be sold.
Conventional servicers “are responding to incentives that encourage minimizing servicing costs,” said Steven Horne, the president of Wingspan Portfolio Advisors, a specialty servicer in Carrollton, Texas.
But delays force Fannie to incur bigger losses — the longer it takes to foreclose, the worse shape the property may be in.
“What you’re seeing is a tremendous level of frustration at Fannie, because the servicer is not pursuing foreclosure,” Horne said.
In its second-quarter filing with the Securities and Exchange Commission, Fannie said, “We have seen an increase in the percentage of our properties that we are unable to market for sale in the first half of 2010 compared with the first half of 2009.”
Another potential disincentive for servicers to foreclose is that the four largest ones also are the largest holders of second liens. Many big banks have been unwilling to take losses on second liens even though a significant percentage of borrowers are underwater and the second liens are essentially worthless, critics have said.
“It does pose an accounting problem for the banks because they don’t want to write those [second liens] down,” Horne said.
Not everyone is certain that Fannie’s announcement amounts to big news.
Vicki Vidal, vice president of public policy at the Mortgage Bankers Association, said the delays in foreclosure can be explained by external factors like state and local regulation and court delays. “I don’t think they’ll apply it across the board for minor infractions,” Vidal said of Fannie and its “compensatory” penalty fees.
Greg Hebner, the president of MOS Group Inc., an Irvine, Calif., company that contacts troubled borrowers on behalf of lenders and servicers, said the move by Fannie was an indication that servicers have been dragging their feet. “You have so many loans in workout and in limbo that the servicers are probably pretty far behind,” Hebner said.
He said he expects an increase in both notices of default and of foreclosure. “It’s a good tactic by Fannie because it will bring more borrowers to the negotiating table,” Hebner said