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Banks feeling the most pain in clearing out foreclosure pipeline

Large bank servicers have paid a bigger toll than nonbanks in the cleanup of bubble-era loans stuck in the foreclosure process, according to Moody’s Investors Service.

Bank servicers have suffered significantly more losses on each loan – known as the ‘loss severity’ – compared to the nonbanks, Moody’s reported. The bank loans also have remained in legal limbo years longer than nonbank loans, the company said. 

Moody’s evaluated the large-bank and nonbank-serviced loans in Florida, New York and New Jersey, three states with an arduous judicial foreclosure process and states that account for about 42 percent of all subprime loans in private-label mortgage-backed securities.  

William Fricke, vice president and senior credit officer at Moody’s, said the banks faced much more initial regulatory scrutiny at the beginning of the foreclosure crisis.

In some states, several large banks halted their foreclosure proceedings after the robo-signing scandal in 2010, which revealed widespread practices of the banks producing unverified documents in foreclosures.  

Consequently, the banks were left with a greater backlog of unresolved foreclosures in the courts, a fact that has extended foreclosure timelines by years and drove up expenses to maintain the properties in trust.

“What happened is that they had to essentially stop the foreclosure process and put everything on hold until they could get their shops in order," Fricke said. "What that did was it essentially extended the timeline for the banks.”  

Fricke said nonbank services, such as Ocwen Financial and Nationstar, initially got a free pass from regulators. Moody's report noted, however, that the nonbanks eventually did come under greater scrutiny from the Consumer Financial Protection Bureau and the adoption of national servicing standards. This heightened scrutiny on the nonbanks has also extended the timelines on nonbank-serviced foreclosures. 

The differences in losses and timelines, though, remain significant. 

In Florida, the loss severity – or loss on the original principal amount – for a bank servicer has averaged 95 percent, whereas the nonbank-loan loss was 81 percent. In New Jersey, the banks lost 98 percent of the principal amount, while nonbanks lost 85 percent. In New York, banks lost 94 percent and non-banks, 74 percent.

The foreclosure timelines also show dramatic differences.

In Florida, for example, a bank loan has taken an average of 1,077 days from the time of the referral to foreclosure to the liquidation, whereas it averaged 571 days for a  nonbank-serviced loan. In New York and New Jersey, it has taken 1,309 days and 1,217 days, respectively, for a loan to clear through the pipeline.

Fricke said that although newer originated loans are moving through the pipeline faster, these bubble-era loans are complicated and will take at least one year to clear through the process.

“It takes a very long time to get through the pipe,” Fricke said. “The rules have been put into place, but the banks are still dealing with a heightened scrutiny that is probably going to continue.”  


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