Home > Uncategorized > Foreclosure Problems in Judicial States (Illinois) Caused GMAC Moratorium?

Foreclosure Problems in Judicial States (Illinois) Caused GMAC Moratorium?

Barclays’ View On The GMAC Scandal Underscores The Perceived Fall-Out Severity In Judicial States

Originally posted at zerohedge.com

From Barclays’ Jasraj Vaidya, who states: “At this stage, we are unable to ascertain what that exact issue might be. What is certain is that foreclosure timelines in those states for GMAC loans will be extend further, potentially adversely affecting their eventual severity” which echoes verbatim what Zero Hedge suggested a week ago on the Florida Judge news: “The implications for the REO and foreclosures track for banks could be dire as a result of this ruling, as this could severely impact the ongoing attempt by banks to hide as much excess inventory in their books in the quietest way possible.” Jasraj also notes: “Using publicly available data from HUD and RealtyTrac, we have created a list of judicial foreclosure states. These are states where judicial foreclosures are most common and in which the lender has to appear before a judge and obtain a court order before initiating foreclosure proceedings against the delinquent borrower. Such states tend to have much longer foreclosure timelines than non-judicial states. What is striking about the list of states in the GMAC announcement is that all but one (North Carolina) are judicial states. Also, all judicial states in the country but one (Delaware) are in the GMAC list. This would hint at some potential issues with judicial states that is driving the GMAC directive.” In the meantime, class actions lawyers across the country will not be sleeping for days.

Full Barclays report:

It was reported on Bloomberg today that GMAC has sent a memo to all brokers suspending all foreclosure activity against delinquent borrowers in 23 states. Further action has also been frozen on all properties for which foreclosure has already been implemented. Any buyers of those properties face an extension of the closing date by 30 days and have the option to cancel the agreement to purchase.

Most likely an issue with judicial states

Using publicly available data from HUD and RealtyTrac, we have created a list of judicial foreclosure states. These are states where judicial foreclosures are most common and in which the lender has to appear before a judge and obtain a court order before initiating foreclosure proceedings against the delinquent borrower. Such states tend to have much longer foreclosure timelines than non-judicial states. What is striking about the list of states in the GMAC announcement is that all but one (North Carolina) are judicial states. Also, all judicial states in the country but one (Delaware) are in the GMAC listThis would hint at some potential issues with judicial states that is driving the GMAC directive.

A recent news report provided some hints at the type of issues with judicial foreclosures that servicers may look to avoid before it become a larger issue. The Florida Attorney General recently announced an investigation of the three largest foreclosure law firms in the state. These firms represent the lenders, and there have been question about claims of note ownership put forth by these firms during foreclosure proceedings. A clean record of note ownership is lost or hazy in many cases, due to multiple transfers of the notes. The moratorium can be an attempt on the part of RFC to ensure that the process does not have significant flaws that can leave it open to legal action in the future.

At this stage, we are unable to ascertain what that exact issue might be. What is certain is that foreclosure timelines in those states for GMAC loans will be extend further, potentially adversely affecting their eventual severity.

Can it also be a lawsuit in the making?

Given that the directive spans multiple states, and given previous experience with Countrywide, there is always the possibility of some multi-state settlement in the works for various disclosure issues with lending practices. However, we found some major omissions when we compared the list of states in the GMAC announcement with those involved in the Countrywide announcement. California, Nevada and Michigan – three states with significant mortgage volume, as well as distressed mortgages – are missing from the announcement. This makes us a little skeptical whether this is indeed a class action lawsuit in the making on the lines of the Countrywide one. On the other hand, the Countrywide list ballooned from 11 states initially to 42 states and DC finally, so one cannot yet rule out multi-state action. However, given greater evidence about judicial states, we still believe that to be the primary driver of this directive.

GMAC volumes in the non-agency securitized space

We used LoanPerformance to get a quick estimate of the volume of GMAC serviced loans in each of these states. Overall, we find that about 30% of the outstanding balance of GMAC-serviced loans falls within these 23 states. However, the share of delinquent loans within these states is higher: about 40% of GMAC delinquent loans falls within these states, with a higher concentration in alt-A and subprime.

Effect on housing

Implementation of this foreclosure moratorium, depending on its length and extent, could be a mild positive in the near term. A reduction in REO supply and foreclosure sales by GMAC would take out some distressed supply from the market. The effect of this announcement is similar to what we have earlier described for various loan modification efforts. It prevents more REOs from hitting the market and, thus, artificially skews the mix of distressed properties in the sales metrics. Reduction in the share of REO sales in overall sales has the effect of a stronger reading on the home price indices. However, this comes at the cost of a larger shadow inventory of non-performing loans, which continues to create pressure on home prices for an extended period.

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