Sept. 18 (SOurce: By Eric Wolff, North County Times, Escondido, Calif.) - When it comes to foreclosing, lenders see some delinquent homeowners as more equal than others.
Mortgage debt of more than a half-million dollars seems to get lenders to look the other way for an extra month compared with those who owe far less, according to a North County Times analysis of foreclosure records.
“The banks are more aggressive on these people (with less debt),” said Sidney Kutchuk, a Temecula broker who often deals with clients in foreclosure. “They’re punishing the little people because they can.”
Between March 2009 and last month, borrowers in North San Diego and Southwest Riverside counties who owed a median of $510,000 on their property got a month longer to try and work out a short sale or other agreement with banks than those who owed a median of $210,000.
None of the analysts reached for this article thought lenders were deliberately going after borrowers who owed less, at least not by strategic policy. Instead, market and legal forces pushed the individual asset managers who make the foreclosure decisions into focusing on the smaller loans.
“Just like any other business, when you have larger losses, you’re going to be more cautious when you make any decisions than with a smaller loss,” said Dustin Hobbs, a spokesman for the California Mortgage Bankers Association, an industry group. “There’s no policy in place at any of the servicers I talked to — not anything top down.”
Individual mortgages are often packaged and sold to investors. Big banks such as Bank of America often have a portfolio of mortgages they own, but they service payments and correspondence on a much larger group of mortgages on behalf of investors.
In this region, 58,567 borrowers saw their houses and condos taken back by banks or sold at auction between July 2006 and July 2011, according to county records collected by data firm ForeclosureRadar.
For the first three years of that period, lenders treated all borrowers the same, regardless of the amount of debt. The median number of days between getting a notice of default, which starts the foreclosure process, and a foreclosure auction, which ends it, was 119 days, or about four months.
Beginning in May 2009, lenders became more lenient toward people with more debt, allowing them more time to make a short sale or work out a loan modification. Between that month and August 2011, lenders took a median of 29 days longer to foreclose on borrowers with more than $417,000 in debt — the conforming loan limit — than those with less.
Banks give no explanation
Lenders offered no explanations for the divide.
“As a mortgage servicer, we service loans for our customers based (on) the guidelines of the investors who own the loan and in accordance with the legal requirements of the state or county in which the property is located,” wrote Bank of America spokeswoman Jumana Bauwens in an email.
Bank of America, the nation’s largest mortgage servicer, managed 24 percent of all loans in some stage of foreclosure in North San Diego and Southwest Riverside counties in 2010.
Spokespersons for CitiBank and JPMorgan Chase Co. did not return calls for comment. A Wells Fargo & Co. spokeswoman said she didn’t know why the gap emerged.
Change in accounting rules
Banks started treating their debtors differently just as a significant change in government accounting rules took effect. Before 2009, lenders had to revalue all their assets on a regular basis, and changes in value affected their bottom lines. In accounting-speak, this is called “mark to market.”
But during the late 2008 financial panic, the Bush administration suggested the mark to market rule be dropped, and by early 2009 it had been repealed. After the change, lenders could continue to claim houses were worth the same as what they’d been purchased for, and they didn’t have to change the value until the property was sold or foreclosed.
Lenders handed out many of the most troubled loans from 2004 to 2006, according to government lender Fannie Mae. This period coincides with a peak in house prices. According to county records, the median house price is down 35 percent from its peak in North San Diego County, and 55 percent from its peak in Southwest Riverside County. Lenders don’t have to account for those losses until the house is sold or foreclosed.
Sean O’Toole, founder of ForeclosureRadar, figured out how to show that banks were going easier on bigger borrowers when he analyzed all California foreclosures. He said the change in accounting policy caused banks to be tougher on people with the smallest loans. He said banks avoided taking losses on big loans the longer they delayed foreclosures.
“I think, once those rules start, you can see it in the stats,” said Hobbs, of the industry association.
Hot market in low-priced houses
In addition to the change in accounting regulation, 2009 also saw a modest rebound in house prices, mainly among the least-expensive houses.
Buyers who’d been blocked from the housing market for the previous decade discovered they could buy a median-priced house in North County for $390,000, and investors flooded in, buying up bank-owned properties, fixing them up, and selling to the new buyers as ready for move-in.
In 2009 and 2010, property priced below $306,687 rose in value consistently, even as the prices of more expensive homes stagnated, according to Standard & Poor’s Case-Shiller Home Price Index. Although low demand has hurt prices for all houses, even today, cheaper houses attract multiple bids.
That means lower-priced houses, which are also ones with smaller mortgage debts, make tempting targets for foreclosure, because asset managers can expect to sell them easily, said Norm Miller, a professor at the Burnham-Moores Center for Real Estate at the University of San Diego. Higher-priced homes may languish unsold for months longer.
“They’re much easier to sell,” Miller said of the lower-priced homes.
Agents see a difference
Real estate agents said they’ve noticed that lenders treat borrowers with big loans differently, too. Agents typically come into contact with the foreclosure process either when the bank is looking for someone to sell a house after foreclosure, or when borrowers — often after receiving a notice of default — want to sell a property for less than they owe, called a short sale.
Lenders think these borrowers might be less sophisticated, and less able to hire lawyers to throw roadblocks in front of the foreclosure process, said Sidney Kutchuk, the Temecula agent.
Melissa Zavala, a high-volume short-sale broker in Escondido, said she noticed that lender employees working on short sales with high balances on the loans were often far more careful, and sometimes they needed more signatures from executives before they could take a big loss.
Miller, the USD professor, said asset managers at the big lenders might think it’s easier to process many smaller loans instead of a few bigger ones.
“I would speculate that part of it is simply a spinning the numbers game,” he said. “If I have 10,000 loans in trouble, I can deal with 6,000 of them, then I can say I dealt with 6,000 of the loans.”
Call staff writer Eric Wolff at 760-303-1927 or follow him on Twitter at NCTRealEstate.
(c)2011 the North County Times (Escondido, Calif.)
Visit the North County Times (Escondido, Calif.) at www.nctimes.com
Distributed by MCT Information Services
SOurce: By Eric Wolff, North County Times, Escondido, Calif.
A service of YellowBrix, Inc. Publication date: 2011-09-18