Barclays Capital researchers examined the effects of GMAC's foreclosure moratorium announcement in a report released today.
Bloomberg reported today that GMAC sent a memo to all brokers that suspends in 23 states all foreclosure activity against delinquent borrowers. Further action was also stopped on all properties where foreclosure has already been implemented. Purchasers of the affected properties will have a 30-day extension of the closing date and were also given the option to cancel the purchase agreement.
According to Barclays analysts, depending on its length and extent, GMAC's moratorium on foreclosures could serve as a mild positive in the near term. Reducing GMAC's REO supply and foreclosure sales would take out some distressed supply from the market.
This announcement's impact is similar to what analysts have previously described for different loan modification efforts. Although a move like this prevents additional REOs from hitting the market, it also "artificially skews" the distressed property mix in the sales metrics.
Limiting the share of REO sales in overall sales, Barclays analysts said, makes for a stronger reading on the home price indices.
But, this would also mean a bigger shadow inventory of nonperforming loans, which would still create pressure on home prices for an extended time period, they said.
Analysts utilized LoanPerformance data to get a quick volume estimate of GMAC-serviced loans in each of the states.
Generally, they found that approximately 30% of the outstanding balance of GMAC-serviced loans falls within these 23 states. But, the share of delinquent loans within these states is higher. Around 40% of GMAC delinquent loans falls within these states, with a higher Alt-A and subprime concentration.
Judicial States Issue
Using publicly available data from the Department of Housing and Urban Development (HUD) and RealtyTrac, Barclays analysts created a list of judicial foreclosure states. These are states, according to Barclays researchers, where judicial foreclosures are the most common and where the lender has to appear before a judge to get a court order prior to initiating foreclosure proceedings against the delinquent borrower. These states usually have much longer foreclosure timelines than non-judicial states, Barclays said.
Analysts added that it is notable that in the list of states contained in the GMAC announcement, all except North Carolina were judicial states. All judicial states in the country except Delaware were also in the GMAC list. This would imply that there are some potential issues with judicial states that is behind the GMAC directive, Barclays analysts said.
A recent news report offered some hints at the type of issues with judicial foreclosures that servicers might look to avoid prior to them becoming more significant. T
he Florida Attorney General recently said that there will be an investigation of the three biggest foreclosure law firms in the state, which represent the lenders. There have been questions regarding the claims of note ownership brought by these firms in terms of foreclosure proceedings.
A clean note ownership record is lost or hazy in many instances as a result of multiple note transfers. The moratorium can be Residential Funding Corp.'s way of making sure that the process does not have considerable flaws that can leave it open to legal action in the future.
At this stage, analysts cannot ascertain what that exact issue might be. What is certain is that foreclosure timelines in those states for GMAC loans will further extend, which could eventually adversely affect their eventual severity.
Considering that GMAC's directive spans multiple states, and since the market's prior experience with Countrywide Financial Corp., there is always the chance of some multi-state settlement in the works for the different disclosure issues with lending practices, Barclays analysts said.
However, analysts found some major omissions when they compared the list of states in the GMAC announcement with those involved in the Countrywide announcement.
California, Nevada and Michigan, which are three of the states with considerable mortgage and distressed mortgage volume, are missing from GMAC's announcement.
This has made analysts somewhat skeptical as to whether this is indeed a class action lawsuit in the making like that of Countrywide's. But, it should be noted that the Countrywide list ballooned to 42 states and DC from 11 states at first, so multi-state action cannot really be ruled out in GMAC's case.
However, considering more evidence regarding the judicial states, Barclays analysts still think that to be the directive's primary driver.